Chris’ Money Allocation Framework- 10 Steps to Build Your Wealth

Skipping an employer match is like saying no thanks to free money.

— Chris Hutchins Transcript: Chris Hutchins So the first step in how I allocate money is what I’ll call operating cash, which involves making sure you have one to two months of your regular expenses sitting in cash, right in your Checking account. Or for those of you who listen to episode 177 on the best bank account setup, I actually think the best accounts are ones that you can earn interest on. And in most cases, those are actually savings or cash management accounts that function like a checking account. So go check out that episode if you want my recommendations for where to put this money. But this is not an emergency fund. This is not a giant amount of money to solve all these problems. It’s your cash flow buffer for each month to smooth over the gap between the fact that sometimes you have bills that are due before your income hits and you want to make sure you’re not Having to go borrow money, transfer money when that happens. It also means because it’s one to two months that there is a small buffer for some urgent thing like a high health insurance deductible, a sudden car repair. You want to be able to cover those things without having to dip into your savings or borrow money. So this is your pay your bills. Don’t get caught off guard fund. It’s simple. It’s boring, but it’s probably the most practical, essential piece of your framework for how you allocate your money. So if you don’t currently have one to two months in an account, this is where I would prioritize putting those funds. And just to be clear, if you’re not doing this exactly like me, that’s okay. If you already have money in other places, I’m not saying go ahead quickly and sell off your stocks or withdraw the money from your retirement fund to follow this order. But I do think that as you have incremental savings, this is the order in which I would prioritize putting my own money in different places before I start saving and investing. Okay. After that cash buffer is in place, the next absolute priority, in my opinion, is the employer match. If your company is matching your retirement contributions, whether that’s in a 401k, a 403b, or any type of account, even if they’re only matching some amount of investment and not The entire amount, right? Sometimes they might match the first thousand dollars of your 401k contributions. If you’re getting a hundred percent match, meaning you put in a thousand and the employer puts in a thousand, that’s a guaranteed 100% return on your investment. And it’s immediate. You don’t have to wait a period of time. There is no debt payoff, no investment, no savings account that can compete with doubling your money instantly. This is also true if they match your HSA contribution or your FSA contributions or anything like that. And really the only time I’d skip this employer match is if you have really crushing high interest debt, like 15, 20, 25, 30%, and your match is really small, that it’s not worth focusing On until you can get that debt paid off. Otherwise, skipping an employer match is like saying no thanks to free money, which if you’ve listened long enough, I would never want to say. All right, once you’ve got your match set up, if you have it, right, I work for myself, I don’t have an employer match, I skip number two. Then I like to allocate money towards what I’ll call urgent debt payoff, which is generally paying down any high interest debt, typically above around 8%. Now, why do I pick 8% Well, that’s roughly the long-term after-tax return of the stock market. You might decide that this number for you is 7% or 9%. You can tweak it as you see fit, and it may fluctuate a little bit with interest rates or your current situation. But if you’re carrying credit card balances, have personal loans, medical loans, or some older student loans that are in really high interest rates, paying them off is like getting A market level return, except you don’t have the risk of the market. So instead of accumulating on average 8% in the stock market, you’re actually going to not pay 8% interest. But in the stock market, that money might not make 8%. It might go down this year. This is guaranteed because you’re paying that debt off and you’re stopping the interest payments immediately. Now, if you’re juggling multiple debts that are at this amount, there are a few different ways to decide the order to pay them off. I care much less about which one and more that you pick one, stay with it, and then move on to the next one. I personally like what I think is called the avalanche method, which is you start with the highest interest first. It’s going to reduce the amount of interest you pay the fastest, but there’s an alternative method called the snowball method where you start with the smallest balance first. I know that’s more motivating for some people, but like I said, works for you is great, but I’d much prefer to be paying off high interest debt than investing my money because I’m going To get a better ROI with more certainty. (Time 0:03:37)