Where Should Your Next Dollar Go?

When you have extra money, the hardest question usually isn’t whether you should do something with it. It’s what you should do first. Pay down the mortgage? Add to savings? Invest more? Pay off the credit card?

There are plenty of good answers. The challenge is figuring out which makes the most sense for you.

That’s where I like to think about the “money stack.” Not because there’s one perfect order for everyone, but because some financial decisions tend to make more sense before others.

Start with the free money. If your employer offers a retirement plan match, make sure you’re taking full advantage of it. It’s hard to beat money your employer contributes simply because you contributed, too.

Next, build your cash cushion. An emergency fund may not be exciting, but its purpose isn’t to maximize returns. It’s to help you handle a broken air conditioner, an unexpected medical bill, or a job change without taking on credit-card debt or selling investments at the wrong time.

Once you have a reasonable cash reserve, look at high-interest debt. Carrying credit-card balances while trying to build wealth can be difficult to justify. Sometimes, your next dollar belongs on the balance sheet rather than in the market.

With those basics in place, consider where you can save and invest most effectively. That might mean increasing your 401(k) contributions, funding an IRA or Roth IRA, or using other tax-advantaged accounts available to you. The tax benefits matter, but so does the habit of investing consistently. Money invested automatically from each paycheck is money you’re less likely to spend simply because it’s sitting in your checking account.

Don’t overlook protection, either. Life and disability insurance, property and casualty coverage, and an appropriate estate plan may not feel like investing, but they’re essential parts of a healthy financial plan. Building wealth and protecting wealth are two different jobs.

Eventually, you may reach a point where your emergency savings are in place, expensive debt is under control, you’re taking advantage of tax benefits, and your protection needs are covered. That’s when the question gets more interesting: Where should the next dollar go?

Maybe it goes toward retirement, a taxable investment account, or paying down your mortgage. Maybe it gets spent.

That last option deserves a place in the conversation. Financial planning isn’t about accumulating the largest possible investment account. Money is a tool, and at some point, it should help you do something meaningful with your life. That might mean taking a family vacation, starting a business, helping a child, giving to a cause you care about, or simply having the freedom to say yes to something without worrying about whether you can afford it.

There’s no universal money stack because there’s no universal financial life. A young family with a new mortgage may have different priorities than someone approaching retirement. Someone with variable income may need a larger cash reserve, while someone carrying student loans may need a different approach than someone who is debt-free.

That’s why I’m less interested in finding the perfect order than in making sure the important pieces aren’t being overlooked.

Your next dollar doesn’t have to be a perfect decision. It just needs to move you in the right direction. When you have a plan for where it goes, you spend less time wondering what you should be doing and more time making intentional decisions about what matters to you.

Source Material: Adapted from The Money Stack: Where Should Your Next Dollar Go? — Visual Insights newsletter.

Jonathan Horst is a CERTIFIED FINANCIAL PLANNER™ and Registered Life Planner® at The Horst Group, a fee-based financial planning firm serving women, LGBTQ+ individuals, and young professionals. To start a conversation about building a financial plan around the life you actually want, schedule a free consultation.