Next Best Dollar (5/22/2025)

The Recipe for Financial Success 👩‍🍳

There’s a common question I hear when one of you receives a lump sum of cash - “What is the *best* thing for me to do with this money?” Spoiler alert: the answer is always “It depends.” 

Approaching your financial goals is a bit like baking a cake 🎂- you want to follow measured steps in a precise order for the best results. It’s really important that you preheat the oven before you put cake batter in, and you definitely want to let the cake cool before icing it. Skipping one of these steps can completely ruin all your effort! The same concept is true if you were to invest your paycheck before you’ve established a cash emergency fund, or pay off your low-interest student loan before contributing to your 401k. In baking and in finances, the sequence really matters.  

So what is the recipe that everyone should follow? Regardless of age, net worth or size of the cash windfall, you’ll want to proceed with allocating money in the following order:

1️⃣Establish a Rainy Day Fund  

Not a full emergency fund, but a small cash buffer. Target between $1,000 - 1 month’s worth of your essential expenses so you’re covered if you have an unexpected expense, like blowing a tire. 

2️⃣Obtain the full match on your employer retirement plan

If your employer offers a match on your 401(k) or 403(b), you’ll want to contribute as much as you need to maximize the match. If your employer matches 100% up to 4% of your salary, you’ll want to contribute 4%. 50% of the first 6%? Contribute 6%. These are equivalent to 50% or even 100% returns on your money and are much better than what you’d get from investing in the market. Don’t leave free money on the table! 

3️⃣Ensure you have baseline insurance in place

Obtaining a minimum of health, disability and life insurance is an often overlooked but vital step of the process. Mitigating the financial risk associated with your inability to work and earn income should be done before moving down the list. Often health and disability can be adequately obtained through an employer, but group life insurance is typically insufficient, especially if you own a home or have a spouse or children who rely on you financially.    

4️⃣Attack your bad debt

Bad Debts include credit card balances, unsecured lines of credit & personal loans, and any other debt charging 7% interest or higher. If you receive a cash windfall, the money should go towards eliminating this debt before being put into savings or investing. Carrying bad debt is not only expensive, it can also weigh down your credit score, causing future expenses to be more expensive. 

5️⃣Fully fund your Emergency Fund

A fully funded emergency fund is a cash balance equivalent to somewhere between 3-6 months worth of your essential expenses. You’ll want to keep this balance uninvested and easily accessible. If you need to tap into it for an emergency, it should be replenished before moving further down the list. So if your bills add up to $5k/month, you should have a minimum of $15,000-$30,000 in cash savings before investing.    

6️⃣Save 15% of your income towards retirement

Saving approximately 15% of your income over the course of your career should generate enough savings and appreciation for you to maintain a similar lifestyle in retirement. These funds should be allocated towards a tax-sheltered account like a 401k or IRA. 

7️⃣Save & Invest for other goals (home purchase, sabbatical, child’s education)

All your other financial goals can fall here. Saving and investing towards all the other items on your bucket list is where much of the fun of financial planning comes in. These goals, no matter how big or small, can all take priority over the last item below. Whether you save or invest should be dependent on how far into the future you want to accomplish the goal. Taking a sabbatical in the next 2 years? Keep cash savings. Putting money towards your forever home 5-10 years into the future? Invest. 

8️⃣Accelerate paying off your good debt 

Many people highly prioritize being “debt free”, but the reality is that not all debt is created equal. There are bad debts as described above, and good ones. Good debts are helpful for your credit and low cost. These typically include mortgages and student loans, sometimes car loans depending on your interest rate. Any debt charging 5% or less can fall into this category and can be prioritized after all your other goals. Accelerating paying off your good debt can cause unnecessary delays for other life goals. You don’t need to pay off a 4% student loan before saving to buy a home or eliminate your mortgage before saving in your child’s 529. 

You’ll want to follow this recipe with your regular income as well as any large lump sums that come your way. Whether you receive a larger-than-expected tax refund, a bonus at work, or a large inheritance, you should always be reflecting on which step of the recipe you’re on to help you decide what to do with the extra money.