Before I start, it’s important to remember as you read this that this is my own personal way of doing it, and that we are different people with different lives. My hope is that this can contribute to a framework that you can use to build your own habits and the life that you want to live. 

I’m 32, and live in the San Francisco Bay Area. I’m employed as a marketer at a fantastic startup, own a home with my wonderful girlfriend, parent four dogs, and spend most of my money on our home and food. For the purposes of this post, I am not considering our home as part of my investment strategy.

So here’s how I manage my assets right now. This section is written is in order of how my allocation strategy is prioritized. Think of it as a cascade, as you complete/build one habit, any surplus money goes into the next vehicle on the list. Of course, investing habits are reliant on smart budget management, since you need to be earning more than you’re spending to create savings.

Quick note for those just getting started (congrats!), it could not be easier to open these accounts. You can go to your bank website (I’m a Chase customer and recommend their YouInvest accounts which have no fees) and in just 5-10 minutes open these accounts. Funding is as simple as initiating a transfer.

1. Cash

I try to keep at least two months of living expenses in cash. I’ve seen rules of thumb as high as 6 months, but I have an emergency fund plan that I’m comfortable with should something unexpected happen with regards to my job, health, etc.

2. 401(k)

My first investing goal each year is to max my 401k. The tax benefits of a 401k are phenomenal and I wrote more about that here. My 401k is allocated 100% into an S&P 500 index fund.

One thing that I like to do is to try and max it out early. I view the market as always going up and so I front load my contributions each year. Some companies allow you to allocate as much as 90% of your paycheck to a 401(k), so it’s actually possible to max this in just a few pay periods.

Traditional 401(k) vs ROTH 401(k)

I have most of my 401(k) historically in traditional 401(k) accounts so I am currently trying to balance that out by allocating my contributions now into a ROTH 401(k).

3. ROTH IRA + Traditional IRA

 I’ve combined these two as they have a combined cap of $6,000 ($7,000 if you’re over 50). Between the two I prefer the ROTH, as the funds contributed (and the gains!) can be withdrawn tax free when I retire. That said, the ability to contribute to a ROTH IRA has some limitations.

Regardless of your situation, if you’re able to nail down your emergency fund and max your 401(k), maxing your contributions to one or both of these accounts has huge benefits.

I have reached a stage in my investing journey where I’m comfortable investing in individual stocks, and so my ROTH and Traditional IRA are 100% invested in individual companies. If you’re new to investing I would recommend building a foundation of an S&P 500 index fund to start. 

Because the ROTH isn’t taxed upon withdrawal, it can be an excellent place to store dividend generating investments (you then don’t pay taxes on the dividends). You can also trade more liberally here as there are no capital gains associated with the purchase and sale of assets in this account.

Finally, I tend to open riskier positions that I believe have higher upside in this account – again the idea being that if a position in this account goes up 10x or more, the capital gains tax savings can be incredible.

4. Health Savings Account (HSA)

 I am a HUGE fan of the HSA plan, if an HSA is right for you. With an HSA, your contributions are yours to keep (unlike an FSA) forever. The money can only be spent on healthcare related costs (which can include some awesome preventative or maintenance items like chiropractic).

Like a ROTH, you can invest your contributions in the stock market so that they grow. With my current company plan, I max my HSA contribution and invest it in an S&P 500 index fund.

With the HSA from my previous company, I am able to actually invest in individual stocks. I treat that account exactly like a ROTH (store dividend generating investments, trade more liberally, and open riskier positions). 

Best of all, there is no statute of limitations for you to take your reimbursement for your healthcare related costs. What this means is that you can spend your money on a service today, and delay your reimbursement as long as you want, giving it time to grow substantially.

In practice, what I do is take a picture of any receipts for services incurred and save them to a Dropbox folder. I don’t plan on cashing these in for reimbursement until I retire, but this is also an asset class that can be liquidated tax free if needed for my emergency fund.

5. Brokerage Investment Account

This is where things get fun for me. After I have maxed my contributions to the accounts above, the rest of my money goes into this account. As I mentioned before, I focus on individual stocks, so my allocation here is once again entirely stocks. In part two of this post I’ll talk about how I choose stocks and some key habits (like tax loss harvesting)

A dollar invested in the S&P 500 returns on average 8% per year. That means that an investment in the S&P 500 doubles every 9 years. Start that 9 year clock now with as much of your money as you are able to comfortably invest!

Summary

So from a behavioral perspective, that’s it. I have five simple, key habits for saving and investing. What works about this cascading strategy is that it is so simple that I don’t really have to think about it. If the foundation for generating wealth is to save more than you spend, the first bricks are to build consistent habits, and to stick with them for the long run.

If you’re able to build just these five habits, and invest simply in a low fee S&P 500 index fund, you are putting yourself in a wonderful position. Sadly, 42% of Americans reported that they had less than $10,000 saved, and 14% of them reported having no savings at all. Don’t be a part of that statistic.

Let me know what questions or suggestions you have! Where are you in your journey? If you found this useful, let me know!