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The Personal Finance Waterfall: Take Steps to Financial Freedom

Published on

January 25, 2018

We’d all like to be financially independent, but fewer and fewer American adults feel confident in their knowledge of personal finance. OpenInvest’s favorite overview for taking the steps to financial freedom is the Personal Finance Waterfall.

Not sure how to get your finances where you want them? The Personal Finance Waterfall will help you focus your attention on the path to financial independence. Keep in mind, there is ton of information online and in books about each of these topics, and it will always pay to do your research!

Infographic showing how financial goals should be prioritized: emergency savings first, followed by company 401k contributions, paying off debt, retirement contributions to an IRA, and finally savings and investments.

1. Save Into an Emergency Fund

Say something happens – your car dies, you get hurt, or  you get laid off. Do you have enough money to sustain yourself if you lose your income? An emergency fund, usually 2-4 months worth of living expenses, is absolutely crucial for stabilizing your financial situation. Calculate how much you need to live on (rent, gas, food, necessary expenses) for a few months and start saving steadily to reach that goal.

2. Max Out Matched 401k Contributions

It’s incredibly important to start saving early – especially when the government gives you tax incentives to do so. If your employer offers a matching 401k program, meaning that they’ll put in as much as you do up to a certain amount, take advantage of that! It’s free money. No one will remind you to save for retirement, so it’s important to make contributions a regular calculation on your income.

3. Pay Off Debt

There are big loans and small loans, high interest loans and low interest loans. Many people advocate paying off high interest loans first, so that you can pay a lower sum total, but there’s often a psychological benefit to paying off small loans first. Only you can decide the best way for you to pay off debt, but the important thing is making a plan and sticking to it. There are calculators to see how long it would take to pay off debt, and apps and programs to help you track your progress and meet goals.

4. Contribute to an IRA

IRAs are another way to take advantage of tax benefits to save for your future. There are a few different types of IRAs, and you can contribute $5500 across any IRAs you own each year. Common wisdom suggests that you should save 10-15% of your income for retirement each year, so consider an IRA in addition to a 401k once you’ve maxed out your employer’s matching contribution.

5. Save and Invest

You’re working on paying off your debt and you’re preparing for retirement, so now is the time to start saving for future expenses. That might be a house, a child’s college expenses (tax advantaged with a 529 account!) or a second car. You can save your money in a low-interest (but more secure) savings account, or you can invest. Investing in the stock market is riskier, but can provide greater returns than the typical 1-2% interest you would get at a bank.   Investing is easier than ever too. You no longer need to keep a personal financial advisor on retainer, and pay out the nose to do so. Online robo advisors manage your assets and allow you to view them on your computer or phone. OpenInvest allows you to do all of that, all while staying true to your values. Investing often means giving money to companies you’d never support: oil pipeline builders, Big Tobacco, companies discriminating against women or the LGBTQ community, etc. But socially responsible investing, now available at low cost from OpenInvest, allows you to screen out the companies you don’t want a part of, and to purposefully fund the ones building the world you’d like to see. If you’re at the right stage in the Personal Finance Waterfall to start investing for retirement or for the future, sign up today to make an impact with your financial independence.

Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. One cannot invest directly in an Index. Any opinions, estimates and forecasts offered in this document constitute judgment as of the date of the materials and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information contained in this document to be reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and it is not intended to provide and should not be relied on for investment, accounting, legal or tax advice. OpenInvest may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information herein that has been provided or obtained by third parties.

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