What Now? A Framework for Building Wealth

A question I commonly hear from professionals that have achieved financial stability is, “What Now?”. After working for a handful of years and getting the major pieces of your financial life in order:

• Balanced cash flow

• Emergency fund

• Saving in 401k and/or IRA

• Saving in HSA

What do you do now?

Everyone’s situation is different, but from a general perspective I believe there is progression to follow when it comes to building your wealth. The way I think about saving to these different areas is going from 0➔1 is much harder than from 1➔2. Setting up your foundation (getting accounts setup and starting automatic contributions, regardless of size), makes it much easier to scale when you are ready.

Too often I hear, “I can’t afford to do that”, but there are very few people who can’t make room for $25 or $50 a month. It doesn’t matter if you need to start small. Get your system in place as soon as possible, and then let it compound for you over time.

Fundamentals

The following are the fundamentals of where to allocate your savings. If you are reading this, you probably are already doing all of this, but in order to be thorough, I figured they were worth mentioning.

1. Get an emergency fund up and running

1. Initially that could be 1 month of living expenses, then 2 then 3

2. Ultimately I think having 3-6 months of living expenses readily available is a strong position to be in. You can certainly go further than this, it all depends on what the rest of your financial picture looks like as well as your comfort level and income reliability

2. Contribute up to your 401k match if you have one

1. Taking your employer’s match is a no brainer. That is additional income from your overall compensation package. Don’t neglect it just because your take-home pay declines.

3. Contribute to your HSA

1. A health savings account is the most tax advantaged account out there. Tax free in, tax free growth, and tax free out (for medical expenses). 

2. Everyone will have medical expenses at some point. Being ready for these by having money stashed up in an HSA is an easy way to eliminate the stress that can come from surprise medical bills.

4. General Savings

1. Want to take a trip to Fiji? Or buy a new set of skis? Or buy your spouse a nice gift for their birthday? Plan ahead!

2. You don’t have to know exactly what you are saving for to know that you should save. Many expenses exceed your regular monthly cash flow. Put yourself in a position to be able to make large expenses when you want to.

Maxing Out

After the fundamentals, you can start to max out the limits of some of these types of accounts.

1. Max out your HSA

1. This is a relatively easy one to hit. Current (2023) maximum contributions are $3,850 for an individual and $7,750 for a couple. That is either ~$320 or ~$645 per month.

2. Max out your IRA contribution

1. Personally, I prefer IRAs over 401k. They have significantly more investment options and are more flexible. They also have a lower contribution limit which makes them easier to max out (which is a nice feeling).

2. Current (2023) maximum contributions are $6,500 per individual. That is ~$540 per month.

3. Contribute to a taxable brokerage account

1. By now you should have a solid emergency fund, HSA, and retirement accounts. At this point it makes sense to start building up a general investment account. This account will have a lot of flexibility and can be used for just about anything. I use this account for a 2-10 year timeline.

2. At a certain point it doesn’t make sense to just have everything in a savings account. If you don’t have a specific or immediate need, invest it so it can grow.

3. You will want to invest it according to your time horizon which should be shorter than your retirement accounts.

4. Specific savings goals

1. Looking at buying a house? Rental property? Large vacation?

2. Set up an additional savings account for those big purchases

5. Max out your 401k

1. If you still have money leftover, max out that 401k. If the government is going to reduce your taxes to save for your future, you might as well take advantage of it.

2. Current (2023) maximum contributions are $22,500 per individual. That is $1,875 per month.

3. One thing to note, this maximum does not include your employer’s match, it only impacts what you contribute. So technically, you can contribute more than that limit from your employer’s contribution.

Having Fun

If you have made it to this point, you have set yourself up well. You are putting money into all the right places and are fully taking advantage of government incentives. What now? How about having some fun!

1. Cryptocurrency, Real Estate, and other Alternatives

1. There are a lot of alternative investments out there. If you are still looking to stash cash and build your wealth, start diving into these other areas. 

2. Maybe you want to be a partner in an exploratory oil and gas partnership. 

3. Or you want to become a VC and invest in small businesses. 

4. What about becoming a real estate mogul?

2. Live that life!

1. At this point, you are most likely saving well beyond your means. At a certain point, it doesn’t really make sense to save more. If you are on track to hit all your financial goals and still have income left over, start expanding your dreams.

2. Taking an extended sailing trip.

3. Buying that ranch.

4. Having a private plane.

3. Charity

1. Not saying this has to wait until this point to start contributing to charity. But if you weren’t already, now is a good time to share the love. 

2. Find some causes that interest you and you believe are impactful.

3. If you need an extra boost, there can be significant tax deductions that come along with charitable giving.

What Now?

By now, hopefully you have figured out what to do with that extra cash burning a hole in your pocket. Keep in mind this is an outline meant to provide a general framework for how to think about the progression of saving and not specific advice. There are infinite ways to spend your money (many of which we did not discuss here), and depending on your priorities and goals the order could look different for you.

Best of luck on your savings journey!