This is where all this money talk gets tactical and we actually put money in specific places for specific reasons. Each account in your financial system serves a purpose like a piece in a puzzle. Done well, this runs quietly in the background and your attention stays elsewhere. A steward builds the plumbing once and then largely forgets about it.
I think most people could do everything with three core accounts that can be set up on your own without an employer sponsoring it: a checking account, a taxable brokerage, and a Roth IRA.
Employers and life situations may offer or necessitate more account types, but with those three you can cover most key functions. This also keeps it simple - if you have a credit card with the same bank as your checking account and use the same custodian for your brokerage and Roth IRA, this leaves you just two logins to manage the core of your financial system.
The guiding question to decide how much to put in each account is: how soon might I need this money and therefore how much risk can I stomach with it?
Keeping money in cash versus investing it is a balancing act. You need some cash quickly available to pay living expenses, cover emergencies, and save for short-term goals. Inflation quietly erodes the purchasing power of cash so beyond a certain amount, you want to put money in some kind of asset that will beat inflation in the long run.
Money you need now or soon: Cash and Cash Equivalents
Cash (physical, under the mattress type cash)
Purpose: True emergency backup
Keep at least a week’s worth of expenses in physical cash for power outages or system failures, as well as the old fashioned businesses that are cash-only.
Checking Account
Purpose: Your financial hub
This is where income lands and bills get paid. Set up direct deposit for paychecks, pay off credit card statements in full, and contribute to savings and investment accounts all from one central place. Automate transfers and payments to simplify your system and avoid missed due dates. Checking accounts earn negligible interest, so only keep enough here to cover the regular flow of expenses and prevent overdrafts.
Money Market Funds within a Taxable Brokerage
Purpose: part of your taxable brokerage account dedicated to flexibility fund and short-term goals
Earn higher interest than a checking account while keeping funds accessible. Ideal for 3-6 months of expenses or near-term goals like a car or down payment. Big firms like Fidelity, Vanguard, and Schwab all have money market funds that invest in low risk mutual funds that earn interest rates almost the exact same as high yield savings accounts.
Money invested in funds like SPAXX/FDLXX, VMFXX/VUSXX, or SWVXX/SNSX (Fidelity, Vanguard, and Schwab respectively) can be sold (liquidated) easily and transferred to a checking account, without touching other higher risk, higher potential return assets within the same taxable brokerage account. Technically you don’t get the same FDIC insurance on this money, but the odds of a big firm going belly up are so low I am willing to accept this risk to have less accounts and everything in one place. If there is a big market dip, I can just sell money market funds and buy index funds in the same account.
High Yield Savings Account (HYSA)
Purpose: another option for flexibility fund and short-term goals
Same concept as money market funds within a taxable brokerage, but its own independent account typically at an online bank. Adds another account to keep track of, but gives you federally backed insurance (FDIC) on your deposited money. Many banks will dangle elusive introductory interest rates to get you to put your money there, so check the terms and don’t waste too much time chasing fractions of a percentage.
FSA - Flexible Spending Account
Purpose: Tax-free spending for eligible healthcare or dependent care
Contribute pre-tax dollars through your employer, use for qualified expenses within the same year. Use it or lose it — only contribute what you’ll spend before year-end or leaving your job, otherwise you forfeit the balance back to the employer - ridiculous, but how it works.
Grow through investing
Once your cash systems are solid, you can invest the rest — accepting short-term swings are the price to pay for long-term growth.
There are different types of accounts based on 4 different types of tax treatment:
-
Tax-deferred
a. Funded with dollars you have not yet paid income taxes on yet, but will pay income taxes on when you withdraw
b. Examples: 401k, 403b, Traditional IRA -
After-tax
a. Funded with dollars you have already paid income taxes on, but future withdrawals are tax free
b. Examples: Roth IRA, 529, Roth 401k -
Triple Tax-Advantaged
a. Tax free dollars in, tax-free growth, tax-free withdrawals for qualified medical expenses
b. Examples: Health Savings Account (HSA) -
Brokerage Accounts
a. Funded with dollars you have already paid income taxes on, you also pay income taxes along the way on interest and dividends, as well as capital gains tax when you sell an investment position
Buckets 1-3 have special tax advantages and usually restrictions (contribution limits, withdrawal rules), while bucket 4 has complete flexibility but no tax benefits beyond capital gains being taxed at lower rates than income.
Whether you pay taxes now or later often comes down to the tax bracket you’re in now versus what you expect you’ll be in when you retire. If you’re in a high earning, high tax bracket period of your life, putting money into a 401k can help you defer taxes to later in life when you’re in a lower tax bracket. Nobody knows where tax brackets will be in 30 years but it’s hard to imagine them being lower, so many people also put money into a Roth IRA even in high earning years to hedge their bets. For a young person just starting out, it may be better to pay the taxes now and go the Roth route.
Common account types
401(k) or 403(b) or 457(b)
Purpose: Employer-sponsored retirement plan
Tax-deferred: contribute pre-tax, grow tax-deferred, pay taxes when withdrawing. Often limited investment choices, but always contribute at least the minimum to get your full employer match (free money!) 401k contributions are pre-tax and withdrawals later in life are taxed at whatever income tax bracket you are in at withdrawal. Money is hard to access until age 59½ without penalties, though there are ways to access it early like Roth Conversion Ladders and SEPP’s - if you are savvy enough to retire early you can figure that part out later.
Traditional IRA
Purpose: pre-tax, self-directed individual retirement account (IRA)
Similar tax benefits to a 401(k) (pre-tax in, taxed later), with more investment options but lower contribution limits and no employer match. Ideal for rolling over old 401(k)s to reduce fees and expand options.
Roth IRA
Purpose: after-tax, self-directed individual retirement account (IRA)
Funded with after-tax dollars, growth and withdrawals become tax free. Lower contribution limits than 401k, but an amazing account to hedge against potentially higher taxes in the future. In a pinch you can access the principal you contribute before retirement age (over age 59½) for things like house down payments or medical emergencies, but boy howdy would I do everything possible to leave this money alone to multiply on itself.
Above certain incomes contributing to a Roth IRA needs a workaround called the “Backdoor Roth”.
HSA - Health Savings Account
Purpose: triple tax advantage account for health-related expenses
The best tax-advantaged account that exists. It gets the unicorn triple tax advantage - money in, money growing, and money out all tax free - often with an employer match. To be eligible, you must have a high-deductible health plan (HDHP). If you can, invest the balance instead of spending it — then reimburse yourself later for qualified expenses using saved receipts. Think of it as a stealth retirement account for healthcare or a backup emergency fund.
529
Purpose: Education Savings
Funded with after-tax dollars, you get tax-free growth and withdrawals for qualified education expenses. Can be used for K-12, trade school, college tuition, textbooks, etc. The scope of what you can do with 529s keeps expanding - you can roll up to $35k of unused funds into a Roth IRA, or change the designated beneficiary to pass it on. Some states give a tax break on contributions.
Taxable Brokerage
Purpose: Flexible investing for any goal
A regular savings/investment account you fund with after-tax dollars, no contribution limits, no age withdrawal rules. Taxable brokerages offer ultimate flexibility in the sense that you can easily sell a position and get the money to your checking account. You’ll pay yearly taxes on dividends and interest even if you don’t sell anything, and taxes on capital gains if you do sell. Hold positions for over 1 year to qualify for lower long-term capital gains rates, potentially 0% if your income is below a threshold. I like using these accounts to kill two birds with one stone: emergency fund and also an investable savings account.
Which accounts to prioritize
There may be reasons where someone would skip the tax advantaged accounts to get access to more cash now - saving for a house, starting a business, etcetera. For someone planning for the far-out future, looking for the tax-optimized order of operations, the playbook is usually something like:
- Build $1,000 emergency fund
- Pay off debt with interest rates 8% and up
- Contribute enough to 401k to get full employer match
- Build 3-6 month emergency fund in HYSA or Brokerage money market fund (MMF)
- Max out HSA
- Max out Roth IRA or Trad IRA
- Max out 401k
- 529
- Taxable brokerage
- Low Interest Debt (ex: mortgage)
Again that is just an efficient order of operations in terms of tax treatment, but putting money into retirement accounts often locks it up in a way that makes it difficult/expensive to access before you turn 59.5 years old. There are many, many reasons to forgo perfect tax efficiency and come up with your own playbook.
Finishing Touches
If you have any or all of these investment accounts set up, amazing. Now finish the drill:
• Ensure money within investment accounts is actually invested (not sitting in cash within an account)
• Automate your transfers and investments
• Reinvest dividends and capital gains
• Add beneficiaries to all accounts
• Then? Stop checking your balances daily — let your systems work while you live your life
Setting up systems that quietly work in the background is its own form of stewardship. It frees your attention for the things that actually matter so you can get back to your life and do something more interesting than check investment accounts every day!
Bonus Concepts for further reading
Contribution Limits for each account type
Backdoor Roth Conversions
Roth Conversion Ladder
401k employer vesting schedule
401k RMDs (Required Minimum Distributions)
Step up cost basis at death for passing on taxable brokerage accounts