Chris’ Money Allocation Framework: 10 Steps to Build Your Wealth
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If you've ever found yourself wondering, what should I do with my money right now? Well, then you are going to love this episode because today I'm sharing the step-by-step framework I've built and use myself to bring structure to how you allocate any extra money you have, whether it's from a paycheck, a bonus, or it's just cash sitting in your account.

And to be clear, this isn't just about paying off debt and building an emergency fund. I'm also going to cover more nuanced and sometimes contrarian strategies I use to go beyond the basics, including some advanced tactics for investing, managing liquidity, and building financial flexibility. I'm Chris Hutchins. If you enjoyed this episode, please share it with a friend or leave a comment or review. And if you want to keep upgrading your life, money, and travel, click follow or subscribe. Now let's get into it right after this.

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I am really excited for this episode because in a way, I've been working on it for over a decade. Back when I ran my financial planning firm, we helped clients figure out how to allocate their savings and prioritize their financial decisions. And over the years, I've refined that process into something that is much more personal and much more practical. I'm considering it my personal money allocation framework, and I've been using it for years, if not more, to make decisions about my own finances. So,

So just to be clear, this is not a budget and it's not about how to spend your money day to day, whether you should buy a latte or anything like that.

What I'm going to try to lay out is a clear step-by-step sequence that I follow to decide what to do with every incremental dollar, whether that's from a paycheck, a bonus, a tax refund, or really just extra cash you find sitting around in your account that you weren't sure what to do with. And my hope is that this framework will give you clarity, competence, and structure around your own money decisions, especially when there are so many competing priorities that keep pulling you in different directions.

Also, just to state the obvious, even though I'm no longer a financial advisor, these are just my personal opinions and this is not investment advice. Finally, for many of you listening, you might already have a few of these steps done. You might be further along, so you're welcome to look at the timestamps in the show notes and skip ahead. But I have tried hard to think about different perspectives each step of the way that you might find interesting. And the sequencing here is also important. And since everyone's not at the same place of the journey, I'm going to start at the

to some advanced tactics at the end that you can layer in to optimize even further. So the first step in how I allocate money is what I'll call operating cash, which involves making sure you have one to two months of your regular expenses sitting in cash, right in your checking account. Or for those of you who listen to episode 177 on the best bank account setup,

I actually think the best accounts are ones that you can earn interest on. And in most cases, those are actually savings or cash management accounts that function like a checking account. So go check out that episode if you want my recommendations for where to put this money. But this is not an emergency fund. This is not a giant amount of money to solve all these problems. It's your cash flow buffer for each month to smooth over the gap between

between the fact that sometimes you have bills that are due before your income hits and you want to make sure you're not having to go borrow money, transfer money when that happens. It also means because it's one to two months that there is a small buffer for some urgent thing like a high health insurance deductible, a sudden car repair. You want to be able to cover those things without having to dip into your savings or borrow money. So this is your pay your bills. Don't get caught off guard fund. It's simple. It's boring, but it's probably the most practical and

essential piece of your framework for how you allocate your money. So if you don't currently have one to two months in an account, this is where I would prioritize putting those funds. And just to be clear, if you're not doing this exactly like me, that's okay. If you already have money in other places, I'm not saying go ahead quickly and sell off your stocks or withdraw the money from your retirement fund to follow this order. But I do think that as you have incremental savings, this is the order in which I'm

I would prioritize putting my own money in different places before I start saving and investing. Okay, after that cash buffer is in place, the next absolute priority, in my opinion, is the employer match. If your company is matching your retirement contributions, whether that's in a 401k, a 403b, or any type of account, even if they're only matching some amount of investment and not the entire amount, right? Sometimes

They might match the first $1,000 of your 401k contributions. If you're getting 100% match, meaning you put in $1,000 and the employer puts in $1,000, that's a guaranteed 100% return on your investment. And it's immediate. You don't have to wait a period of time. There is no debt payoff, no investment, no savings account that can compete with doubling your money instantly. This is also true if they match your HSA contribution or your FSA contributions or anything like that.

And really the only time I'd skip this employer match is if you have really crushing high interest debt, like 15, 20, 25, 30%, and your match is really small that it's not worth focusing on until you can get that debt paid off. Otherwise, skipping an employer match is like saying no thanks to free money, which if you've listened long enough, I would never want to say. All right, once you've got your match set up, if you have it, right? I work for myself. I don't have an employer match. So I skip number two.

Then I like to allocate money towards what I'll call urgent debt payoff, which is generally paying down any high interest debt, typically above around 8%. Now, why do I pick 8%? Well, that's roughly the long-term after-tax return of the stock market.

you might decide that this number for you is 7% or 9%. You can tweak it as you see fit, and it may fluctuate a little bit with interest rates or your current situation. But if you're carrying credit card balances, have personal loans, medical loans, or some older student loans that are in really high interest rates, paying them off is like getting a market level return, except you don't have the risk of the market. So instead of accumulating on average 8% in the stock market, you're actually going to not pay 8% interest,

But in the stock market, that money might not make 8%. It might go down this year. This is guaranteed because you're paying that debt off and you're stopping the interest payments immediately.

Now, if you're juggling multiple debts that are at this amount, there are a few different ways to decide the order to pay them off. I care much less about which one and more that you pick one, stay with it, and then move on to the next one. I personally like what I think is called the avalanche method, which is you start with the highest interest first. It's going to reduce the amount of interest you pay the fastest. But there's an alternative method called the snowball method where you start with the smallest balance first. I know that's more motivating for some people, but like I said,

Whatever works for you is great, but I'd much prefer to be paying off high interest debt than investing my money because I'm going to get a better ROI with more certainty. Now that the urgent stuff is handled, it's time to build your safety net.

I know this is often called an emergency fund. I've called it that in the past, but I think it's for a lot more things than just emergencies. So that's why I like to call it a safety net and think of it as a broader thing. No matter what you call it, it is usually an extra three to nine months of your monthly expenses, could be more. And I want to put those somewhere that earns in today's interest rates at least 4% with very little risk. Could be high yield savings, it could be a brokerage account in treasuries, something similar. But

somewhere where there's no risk and you're earning interest. Now, this is your cushion for any big life disruptions. Could be a layoff, could be a health crisis, could be a major home repair or car repair. I don't know what it is in your circumstance, but you want to make sure you have something to cover it. Now, how much you need depends on a few key things. First, do you have any dependents? If so, I like to increase my safety net.

Job stability. Depending on how stable your income is or how volatile the industry you work in is, you might want to increase or decrease your safety net accordingly. I know some people that have jobs where they feel like they are certain forever. They have very little risk that they'd ever lose them. Maybe you're a tenured professor, and so they feel a lot more comfortable. Other people might work at a startup or work in an industry that's getting quickly disrupted. In that case, I'd want a much bigger safety net.

Similarly, when it comes to income replacement, you want to consider how hard it might be to replace your income. If you're in a highly specialized field or you're in a really senior or executive role, even though that industry might be working and it's not necessarily a volatile industry, it might take you a longer time to find a new job because you want to find the right place. You want to find the right fit. You might have to move. You might have to talk to lots of companies. You might have to wait for those roles to open up.

And so I'd like to have more of a safety net in those circumstances. Next is how many sources of income you have in your household. If you're a single income household, I'd skew on the higher end of a safety net. If you have two or three or more sources of income for your house, your family, you could probably go a lot lower. And then last is your risk tolerance. That matters because if you sleep better at night, knowing that you have a bigger safety net, that's a totally valid reason to increase it.

So in summary, if you had no dependents, a very stable job that would be easy to replace, and in your household, there's two or three different sources of income, and you have a lot of risk tolerance, maybe three months is fine. Maybe you don't need a big safety net. But if you have

All those things, dependence, unstable job, volatile industry, hard to replace your income and only one source of income in your household. And maybe a risk averse, I would be skewing towards nine, 12, or maybe even more months of expenses as a safety net. And if you're the kind of person that would really like a formula to figure out the exact number, Brian Feraldi, one of my past guests actually has a framework for this that has a series of questions to help you arrive at a number. I'll put a link to that in the show notes.

For someone like us, we've got two kids, both of us are self-employed at the same company,

I'm probably skewing a little bit more towards nine or 12 months with our safety net right now. And keep in mind, if after hearing this, you realize you don't have the safety net you want, you don't necessarily need to get there overnight. Sure, if you already have these funds set aside, that would be great. But I wouldn't say go sell retirement accounts and pay penalties to do it. If you're actively saving, this can be a goal that you save for over time. And if you're thinking, wow, so you want me to do all of this before investing any of my money into my 401k or brokerage account?

That is correct. I know that seems crazy to some, but my rationale here is that if you're going to need these funds in case you lose your job, you don't want to have to sell your investments or pay penalties to withdraw them to do it, especially if the market's down when that happens, which unfortunately often happens around the same time as many companies do layoffs. So yes, I am saying that I like to set up this safety net before I'm in a situation where I'm saving for the long term.

Okay, next up is a short-term goals fund. Now, this is different from your emergency fund because it's for expected expenses, but like your emergency fund, I keep it in the same type of liquid and low-risk investments. And I say investments, but more often than not, it's a high-yield savings account or it's in a brokerage account, but stored in something like

a treasury money market fund or actually buying treasuries or a treasury ETF or just something low fee, easy liquidity, but still earning four or more percent right now in today's market. I'm recording this at the end of June. Who knows what happens in the future?

Now, why did I say five years? You could invest this money in the stock market. That would be totally fine. The long-term expected returns are going to be greater than you're going to get from a high-yield savings account. However, the market drops. That's just something that happens. And you don't want to be in a situation where you're saving up for a down payment. And the point in time you want to buy your home, the market's down 20% or 30%. And that's the time you need to take your money out.

So I like to keep this money in a place that is separate from my long-term investing. That said, if my goals were 10, 20 years from now, you want a down payment someday, but it hasn't really entered in that next five-year window. Absolutely. I'd be investing that in a different way, but for short-term goals, the

This is what I'm doing. Also, you want to consider the cost of not having this cash, right? So let's say you're trying to make a down payment and you don't have this accessible. You might be paying PMI, which is a type of insurance that you have to pay if your down payment is too small, or you might have to borrow at really high interest rates. Sometimes the best way you can earn on your money is actually avoiding debt in the future, which is why I like to make sure I have all my short-term goals funded and saved in cash before they happen.

Okay, after your goals are covered, I think it's time to do what I'll call a debt review. And the target right now for what I typically would think about paying off is in that 6% to 8% range. And it's a little tricky because the rates are a little borderline. They're higher than what you typically earn on your cash, probably close to what you'd earn on investing, maybe a little less. And there's some other factors that might apply. So here's my rule of thumb.

If the debt isn't tax deductible, right? So there are certain types of debt like mortgages or maybe investment interest, maybe even related to student loans, where you're actually going to get a tax savings for the interest you pay on that debt. So I think you should look at the interest rates on that.

I'll call it like a tax adjusted basis, right? If you have a 6% mortgage, but that mortgage interest is tax deductible and you live in a high tax state and you make a lot of money, it might really be more like 3% or 4%. You have to do your own math related to your own tax brackets. But if you have a loan and it's at, let's call it 7.5%, we'll call it a used car loan.

I would lean towards paying that off at this point. Now, when you look at paying off this debt and you compare it to some of the short-term goals I talked about in the previous step, I think you could make a case, depending on the timeframe of how soon they are, that it might make sense to pay off the debt first. You're obviously going to be earning more by paying off 7.5% debt than by putting money aside, earning 4%.

But depending on the type of loan that you have, it might be very difficult for you to be able to get that money again if you need it. So for example, let's say you had a 7.5% student loan and you're trying to make a down payment and you want to set aside some money. Well, yes, you could pay that student loan off and you'd effectively be getting a 7.5% return. Let's assume there's no deductibility on the interest.

But now that you've paid it off, let's say you actually need that money for some other purpose, one of those short-term goals. Well, you might not be able to borrow at 7.5% now. Maybe you have to go take out a personal loan, or maybe you have to put it on a credit card with a 20% interest rate. And so you want to weigh how soon that goal is and what alternative ways you have to fund it or delay it if you pay that debt off first. Now, just to be clear, I'm not anti-debt. I don't think you should pay off all debt, but I am anti-debt when the math doesn't work out over other types of investments.

Okay, now let's talk about investing. We've got the high interest debt covered, we've got our safety net and short-term goals funded, and it's time to start building real long-term wealth. And the thing I like to start with here is tax-advantaged investing. Now, many of these things will be very dependent on your employer and what types of accounts you have access to, your current income tax bracket, and even your health insurance plan in the case of an HSA, so I can't give a one-size-fits-all answer. However, when I think about tax-advantaged, I

accounts. I'm thinking mostly about IRAs, 401ks, 403bs, but my favorite is probably the Roth IRA and the HSA. And that's because they offer a ton of flexibility, really low fees, because you can house them usually at a brokerage account of your choosing, and some of the best investment options. And on the HSA side, you've got the triple tax deduction of being able to put money in tax-free, being

being able to take it out tax-free, and being able to have it grow tax-free. So it's an amazing account. And on the Roth IRA side, I know many people don't think that they might be eligible because of their income or their workplace retirement plans. I'd encourage you to go look into a backdoor Roth IRA contribution, which is something that is kind of a workaround that the IRS has finally signed off on, if you will, and it's something I do every year. And so take a look at that as a way to be able to contribute to a Roth IRA, even if you're not directly eligible.

After the Roth IRA and the HSA, I'm looking at 401ks, 403bs, solo 401ks, maybe a SEP IRA. Anything that you have access to with low fees, good investment options is a really great place to start saving in a tax advantaged way. If you don't have good investment options or you have a 401k at work with really high fees, I'd probably make the argument that the tax savings aren't worth it after

After you've used an employer match, if you have one, it might be better to just put your money in a taxable brokerage account where you have a lot more control. And if you're a high earner and you're saving a lot of money each year, definitely look at your 401k plan if you have one and see if you have the ability to make after-tax contributions and roll them out into a Roth IRA. It's called a mega backdoor Roth contribution and actually has a limit each year of up to $70,000. So you can put a lot more money than you might be thinking

into your tax advantage retirement accounts.

If you want to go really deep on tax-advantaged accounts, this is not it. I did a really deep dive episode, number 144. Go check that out. The reason I give the numbers is because you can either scroll through until you find the number or just go to allthehacks.com slash 144 and it'll redirect you to the page, which has links to the episode in different podcast players and it should jump right to that episode. Now, the obvious downside of putting your money in these tax-advantaged accounts is that you're kind of locking your money up until

until retirement and to take it out early often comes with taxes and fees or penalties but the tax advantage really can add up over decades so it's important to make sure that you do have your money set aside for short-term goals before putting your money here because you don't want to have to pay those penalties and fees for a wedding down payment or any other major expenses because it will completely negate all the tax advantage of putting money in that said if

Even if you knew you were going to have to take all your retirement money out and your employer was offering a match, I would still take advantage of that match, putting no regard to whether you're going to leave that money in forever because it's still going to make up for any fees you'll pay taking the money out. This episode is brought to you by Gelt. When it comes to building wealth, taxes are such a big part of the strategy. And as tax time gets closer, getting prepared is so important. And now that I'm working with Gelt, I finally feel like I have a partner I can trust to handle everything for my personal and business taxes.

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This episode is brought to you by Copilot. And if you're looking to get your finances organized this year, you have to check out Copilot. It's one of my all-time favorite apps, and I check it almost every day because it makes it so seamless and easy to manage your money and track your spending, which for us has resulted in a huge boost to our savings.

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Once your tax advantaged accounts are full, your emergency fund solid, all your debts behind you, your taxable brokerage accounts are going to be the default destination for every new dollar you save and invest. They're incredibly flexible. There's no contribution limits. You're not forced to pick a specific brokerage with specific investment options or fees. There's no penalties to withdraw it. You get long-term capital gains if you hold your money long enough.

and the right investments. There's no early withdrawal penalties, income phase-outs, or really anything. You can use the money for anything also. You can use it for early retirement, travel, sabbatical, whatever you want. Although I would say if those things are in the next five years, it's probably not the best idea to invest them given that the market can go down.

As for how to invest the money in your taxable brokerage account, I don't think it has to be fancy. You can build really serious wealth by just investing passively in low-cost index funds or ETFs. I'm not trying to beat the market. I'm not trying to time the market. The majority of my money is in index funds, just trying to match the market performance. I do personally like to be diversified across sectors and geographies, so some

of those are international. Some of those are US-based. The majority is US-based because that's where I live, but I do have a bit of diversification in a couple different index funds. I also like to align the portfolio I have, and I would recommend everyone think about their own level of risk tolerance and how much they're willing to stomach a drop if the market changes, because that's an important thing that if you haven't experienced it before, it can be a little bit

tough to experience. And then I would just really avoid over-trading unnecessary complexity. I don't like to spend a lot of time in my brokerage account thinking about it at all. In fact, most of mine is automated and it's not something I check on a daily basis. I actually went really deep on

everything when it comes to building a portfolio with my old co-founder from the financial planning firm I ran. It's in episode 168. But beyond that, taxable brokerage accounts are really powerful for long-term investing when it comes to tax efficiency. So a few reasons. One, you get access to long-term capital gains rate.

The tax rate you pay at the federal level on long-term investments that are held for more than a year where you have gains is lower than the income tax rate for a similar level of income. So you're getting preferable tax treatment on long-term investments, which is fantastic. And you can take advantage of tax loss harvesting, meaning if you have an investment that is down below the price you paid, you can sell that investment and

and capture those losses and use them to offset other gains, whether it's long or short-term gains, or you can offset up to $3,000 of income a year. Now, when you do that, when you sell that asset, you're not still holding it. So if your intent is to keep that investment, then you can rebuy that investment. However, either you need to wait 30 days to avoid what the IRS calls a wash sale, where you actually...

aren't able to capture those losses, or you can buy something very similar. So if you're holding an S&P 500 fund, you could maybe buy a US total stock market fund, and that would not be the exact same investment. So you could sell the S&P 500 fund when it's down,

buy the total stock market fund at that same level. And then as the market rises, you would have a lower cost basis, meaning someday in the future when you sell, you will likely owe more taxes. Though if those investments do happen to end up being donated to charity, which I'll talk to you about in a second, or if those investments are passed down to your children, there might be a step up and they won't actually have taxes due. But in general, if you were to sell them and use those proceeds yourself, you would have taxes owed.

but they would come at that long-term capital gains rate. So if you're able to use those captured tax losses now to offset your tax today, especially if it's your actual short-term cap gains or income tax rates, it could be pretty advantageous. It's a lot to think about,

And so I personally like to use an investment platform that does this for me. Full disclosure, I worked at Wealthfront. I'm a shareholder of Wealthfront. I use Wealthfront. I do pay fees at Wealthfront because I'm no longer an employee. And so I use them to automate all my investing, tax loss harvesting, rebalancing. I think that the benefit of tax loss harvesting far outweighs the 0.25% fee I pay to have it managed. So...

There are other solutions if you're not interested. You can do tax loss harvesting yourself. It can just be a little bit more complicated and you want to keep track of things in a better way than if you outsource it to software that is doing all that for you.

You can also donate appreciated assets to charity. So I like to say, if you're donating any amount of money ever, any year to charity, I would encourage you to, instead of donating cash, donate any appreciated securities and ideally the most appreciated securities, the ones that have the highest baked in gains. Because when you donate those securities to charity,

The charity gets the full amount of the donation, but you don't have to pay any income taxes for selling those securities or capital gains taxes or any taxes, but you get the full tax deduction as if you gave the total amount, which you did.

And then you could take whatever money you were otherwise going to use to donate to charity. And then you could just rebuy that same investment. The wash sale rule doesn't apply here because you didn't actually sell the security. You donated it. So anytime anyone's donated to charity, I like to say, always donate your securities, the most appreciated ones. However, I will make one exception, which is

If you do what I do and what a lot of other people do is set up a donor advised fund, then you can separate these decisions and make it a little simpler. Because if you wanted to make a hundred dollar donation to a charity, having to coordinate transferring stocks to their accounts, it's too much work. But if you set up a donor advised fund, what you can do is you can donate all those securities to one fund that you manage. And you can get the tax deduction when you donate the securities or cash or crypto to that fund.

And then later, could be a day later, could be a month, a year, a decade, you can donate that money at different amounts to any charity you want. And that charity will get the full contribution, but they usually get that in the form of a check. So they don't have to deal with managing those securities like you did when you transferred them into your donor advised fund. Now, another full disclosure,

I've used Daffy long before they became a partner of the show, but they are a sponsor and a partner of the show. So I just want to give that disclosure out there. They're who I use for my donor advised fund. If you want to check them out, allthehacks.com slash Daffy, D-A-F-F-Y. And I think right now you'll still get a $25 contribution to your fund and the charity of your choice when you sign up as a new user. So I think that's a great option to automate all of your charitable giving if you want to really focus on optimizing for the most tax advantaged way to do it.

If you want a few more strategies for tax optimized investing, I'll give you a couple things to go do a little bit of research on. One is called direct indexing, which instead of buying, let's say the S&P 500 as an index fund, you could buy all 500 stocks in the S&P 500. Now that a lot of brokerages offer fractional shares, that makes it a little easier to do, but I would absolutely

absolutely not try to do this yourself. I would find some brokerage firm that supports direct indexing to manage it for you and understand that

If you were to ever leave that brokerage firm, you would be stuck with 500 individual stocks if you were trying to match the S&P 500. The advantage of doing this is you can tax loss harvest at the security level instead of the fund level. So on any given day, it's not that likely that the S&P 500 is down because typically it goes up over time. But any individual security, I would go out and say that

almost any day one of the shares of the S&P 500, one of the securities there has gone down. So it gives you the advantage of more tax loss harvesting opportunities. Another thing you can look at is asset location, which would be to take really tax efficient investments and put them in your taxable brokerage account, put really tax inefficient investments in your tax advantage retirement accounts and view your portfolio across all of your different accounts.

I find that this is really hard to manage and there aren't any automated solutions I'm aware of to do it. So I found that the juice isn't worth the squeeze. So to summarize,

Brokerage investing gives you both growth and flexibility. You're not constrained by any limits or penalties. And over time, I think it's going to be the biggest part of your financial life. And it's something you can keep adding to constantly as your income grows. In many ways, your taxable brokerage account kind of becomes your future freedom fund. It quietly compounds in the background. You continue contributing to it. And it will give you options in the future that you might not even know you need right now. Next, before we get to the final step, I want to talk about education.

about education investing, and specifically where I think 529 plans fit into this framework to save for the cost of college for your children, or maybe yourself, here's my general philosophy. You shouldn't put your child's education ahead of your own financial future. You can borrow for college, often at reasonable rates, but you can't easily borrow for your own retirement. So that's why I put education investing after your own investing in a taxable brokerage account.

529s do offer tax-free growth for qualified education expenses, and they can be a really great tool if you know you are going to save to pay for college. However, I like to think about those as secondary to saving for myself, but there are a few exceptions. If you are in a high-income household and you're already on track to fund your future and you know you're going to get there, you could absolutely make the case to move some of your 529 contributions up earlier in this framework.

or if you live in a state that offers really generous state income tax deductions or credits for 529s, which California sadly doesn't, then it could make sense to prioritize this a little earlier as well. Finally, we come to our last step, number 10, which is to look at your optional debt. These are things that are below 6%. Like for us, we have a 30-year mortgage we got in 2020. We probably won't ever make another payment here other than what's required. But for some people,

These decisions aren't necessarily about optimizing their returns, and it's more about a psychological win. If the thought of being debt-free really gives you the peace of mind you need to sleep well, the flexibility you need for your life, go for it. If you'd rather invest that money because the returns are better, F.

that is fine too. You've earned the right to choose based on what matters to you, not just what's optimal on paper. And I know some really smart people who have the means and are aware of the financial trade-offs and still choose to pay down their debt, pay down their mortgage, even if the interest rates are low, because it makes them sleep better at night. Okay, so that wraps up the core framework. Those are the 10 steps I use to decide exactly where every new dollar I save goes.

And before I talk about a couple advanced strategies, hopefully you can see how this sequence will build from stability to flexibility and finally to long-term growth. You don't need to follow it perfectly, but I think it's really helpful to have some kind of structure to help cut through the noise and eliminate some decision fatigue, especially when you've got competing priorities like saving, investing, debt, and really big life goals. So,

Feel free to adapt it to your own and turn it into whatever you need to make your life a little bit more simple. But I also want to talk about two different perspectives or kind of advanced strategies that might be worth considering that I didn't include above. So the first is an increased focus on liquidity. Now, I feel like we are always being told to max out our retirement accounts.

But what if you need that money before retirement and it wasn't something you planned three to five years in advance like I talked about? Could be wanting to take a sabbatical, start a business, buy a home, retire early. Locking everything into their retirement accounts could backfire on you because you've got to pay penalties and fees, right? The case for prioritizing liquidity, meaning putting money in your taxable brokerage account before your retirement accounts would avoid

those 10% penalties, ordinary income tax on those retirement contributions. Now, one argument I often get is, well, you can take a loan from your 401k, and that's true. While the interest payments do accrue to you, the money is no longer invested. And if you lose your job, a lot of time those loans need to get paid back pretty quickly. Taxable brokerage accounts, on the other hand, you can access anytime. Long-term capital gains tax rates, tax loss harvesting, step-up basis if you end up leaving that money to heirs.

And so, yes, you may miss out on some tax savings if you focus first on your taxable brokerage account investing, but you gain a lot of flexibility. And sometimes that's worth more than the returns or tax efficiency you get for your retirement accounts. So one way you might approach this is to say, I think I want a little bit more flexibility. Let's just equally invest. You could say, let's prioritize...

Half of our savings goes to brokerage investing. Half goes to tax advantaged accounts in our retirement accounts. You can choose how you want to do this, but I just want to flag that there is a benefit to liquidity. For every person, it's really hard to quantify. And so sometimes you might think, oh, it's easier to just put it all in my pre-tax account. That's more efficient in the long run. But if you ever do need access to the money, and I would say the most recurring theme I hear from people that think about money and have been around for a while, you never know you need the money ever.

until you need the money. So making sure you have enough money to cover whatever goals you have in the next three to five years, that short-term savings fund, that's important, but sometimes it's unexpected. And so prioritizing a little bit more brokerage investing if you have the ability before your retirement accounts can totally make sense if you want a little bit more liquidity.

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Another contrarian take I often have here is that...

that if you have a strong credit score or a large investment portfolio, you might be able to reduce the amount of cash savings you have. And that could be cash savings for a safety net, or that could be cash savings for short-term goals. And this is especially true during low interest rate environments where putting money in cash doesn't earn the four or more percent it does right now,

I remember a handful of years ago when your savings account was earning 1% or less. It felt really painful for me to keep money in cash knowing it was earning so little. Also knowing that because interest rates were little, borrowing money was actually a lot more accessible in terms of the interest rate you would pay to do it. So here are a few strategies to potentially pair with keeping less cash for your safety net or your short-term goals.

So one is 0% APR credit cards. Some credit cards offer 12 to 18 months of no interest on purchases, sometimes on balance transfers. Usually you're going to make a minimum payment, but you're not going to have to make the full payment. And so this could be a great backup emergency buffer for circumstances where you all of a sudden need some cash and you don't want to have to sell your investment accounts. You could take advantage of 0% APR credit cards. Now,

There's no guarantee that they will be around when you need them. There's no guarantee you will get approved for them. And so obviously these strategies are advanced because they come with some risk, but it is something that I know people have been able to take advantage of in those circumstances where they wanted to avoid selling from their taxable brokerage account. The next one could be a home equity line of credit or a HELOC. And so for homeowners, if you have equity in your home beyond your down payment amount, usually, you can access that equity by borrowing against your home with a HELOC.

Typically, the rates here are lower than a lot of personal loans or credit cards, so that can make it advantageous. Also, in a low interest rate environment, the HELOC rates are also low. So if you have home equity and you need access to funds, you can effectively borrow from the bank with your home as collateral, and that allows you to have access to low-cost borrowing that in certain interest rate environments might be really compelling as an alternative to keeping money in cash.

So you could take that money that you would have kept in cash and put it in the stock market. Similarly, you could do what's called a PLOC, which is a portfolio line of credit, or I think there's some other version of it that's a security line of credit or a security backed loan. And that lets you borrow against your taxable investments without having to sell them. So obviously the pros here are you can access your taxable investments without triggering capital gains.

Depending on the platform, you can get them in as little as a day, maybe even same day sometimes. And they're pretty flexible on how long you need to repay them. But they do come with some risks and cons. So one, the rates on those loans are typically variable. And so in a low interest rate environment, they can be really compelling, so much so that you might think, well, this makes a lot more sense than keeping money in cash earning nothing.

But the biggest challenge here is that if your portfolio drops in value, you may face what's called a margin call. Now, I'm not going to do a deep dive here on the nuance of how this would happen and what happens. But the high level here is your brokerage firm is going to be able to loan you money as a percentage of your balance of the eligible securities. So let's say you had $100,000. They might be willing to loan you half of that. So $50,000.

But if your portfolio drops from 100 because the market crashes to $80,000, they might only be willing to loan you $40,000 and you might need to make a margin call or a deposit to close that gap.

So this is not for people who are really risk averse, unless you do what I've done in the past, which is just keep that amount small. The amount that might trigger a margin call might be 60 or 70% of the loan to the portfolio value. So if you were to borrow only 10% of your portfolio, the risk that your portfolio drops so much that 10% you borrowed now becomes 70%,

is really a catastrophic situation where the markets crashed by more than 50%. And so some programs, I know at Wealthfront, we did this where you couldn't borrow more than 30% of your portfolio. And the primary reason is that we really didn't want to let people get into a situation where they were having to make these margin calls. So if you manage this appropriately and you borrow a smaller percentage of your portfolio such that even a 50% crash in the market is not going to require you to make immediate payments,

Because by the way, in that 50% crash scenario is probably the last time you want to be able to make payments because maybe you lost your job. Maybe there's all kinds of stuff happening. And so if you can manage it appropriately, I think it could be a really interesting alternative to keeping money in cash. So let's say you decide your safety net should be $100,000 and you have a million dollars in your taxable brokerage account. Well, in the worst case that you need to borrow that $100,000, you're gonna be able to borrow it

and it's only gonna be 10% of your portfolio. So I feel like that is a very low risk circumstance. Whereas if you only had $100,000 in your taxable brokerage account and you needed to borrow $80,000 or $100,000 for a safety net, it would not be a scenario I'd wanna rely on.

And this might also vary depending on the interest rates. Right now, with high interest rates, both to borrow and to earn on cash, you might just be willing to keep your money in cash to make things simpler. But if things change, it might make sense to invest that money and rely on being able to borrow from your portfolio. So that setup would let you keep your money working in the markets, but give you access to liquidity when you need it. But obviously, it comes with some risks. So please go do some research before you take advantage of it.

So that's the full picture from the foundational steps to some more advanced moves that I've been thinking about and using for years. So whether you're just starting out or you're fine tuning a little bit more of a complex financial life, I really hope this helps you feel more confident about what you do with your money. And now that we've gone through it, I want to switch gears and answer a few questions I got from listeners because hearing how this applies in real life is where sometimes it really starts to click. So first question is for Matthew.

just moved to a new state for a new job and is selling his house and is gonna bank a few hundred thousand dollars. And they decided they're gonna rent for a year while they figure out the market and wants to know what to do with that money that's come in. And he said, do I pay off debt? I've got some student loans. I have a car loan at 5.24%. Do I put it in high yield savings?

Right now, he said he has emergency funds of about $10,000 for three kids and wants to know what he should start doing. And so first off, congrats on the new job. You're in a great position. You're debt conscious and you've got this windfall coming, which is awesome. As for what to do with this windfall, obviously you could just follow the steps I mentioned, but I'm going to walk through my thoughts. So you said you've got about a $10,000 emergency fund right now with three kids and a new job. I personally would want a bit more of a safety net.

I don't know how much you spend each month, but I'm guessing $10,000 isn't going to cover three to six months of monthly expenses. So that would be the first place I prioritize with the money from selling your house.

Obviously, before that, I would prioritize setting aside any money you're going to owe for taxes. But assuming that you lived in the house for long enough, that first $250,000 if you're not married, $500,000 if you're married should be tax-free on gains from a primary residence. So hopefully you don't have any taxes to set aside money for. But anytime anyone is thinking about a windfall, I would make sure that if you're going to owe taxes on that windfall, you set that aside first.

Next, I'd go through that debt review process. You mentioned you have $50,000 of student loans, but you said right now 40,000 of them are on hold without any interest owed. And so I don't know the percent on that other 10,000. And you mentioned a car loan at 5.24%.

So the loans you don't know interest on, I wouldn't pay them off. That doesn't make any sense. The car loan at 5.24%, that's pretty close to the breakeven point, right? It's going to probably not be as much as you earn on cash, but it'd be pretty hard to borrow at 5.24% right now. You're probably going to do better in the market in the long run based on historical averages. So if it feels like a mental burden, you could pay it off. I probably wouldn't personally pay it off right now. After debt, I'd be thinking about your short-term goals. And you

you mentioned you're going to rent for a year. If you're thinking of buying a home after that, I would want to set aside money in cash, something safe and liquid for that down payment. And if that down payment is...

is going to take the full amount of money you're having, then that's what I would do. That's where I would stop. But if that amount of money you're getting from your home sale is actually way more than you'd need for a down payment, then any excess, I would probably put in either a tax-advantaged or taxable brokerage account, depending on how you want to think about liquidity and what types of retirement accounts you have access to. And as I'm saying that, I realized I didn't mention the employer match. Obviously, if your employer has a match, I would do that first. I would max that out and then come back to everything I just said. And

And if you aren't thinking of a down payment because you're not thinking of buying a home and you decide you want to rent forever and you have no short-term goals, then great, I would invest all the money once you've maxed out your safety net. And so that's what I would be thinking about. So hopefully that's helpful. You don't have to make every decision now. You can let the money sit and think about it, but let it sit somewhere where it's earning interest and try not to let it

look at you and convince you to spend it and turn into lifestyle inflation. I'd encourage you to be intentional with every dollar and you'll keep winning like it seems like you have.

Next is a question from Chris. He says he's currently using SoFi as a brokerage account and they offer 1% back with all of his investment contributions. And then he's converting that 1% into cash and reinvesting it. And he mentioned that I've talked about tax loss harvesting. I've talked about Wealthfront. Curious if that's better than the 1% cash back he's getting on all his investments. And also curious if he should be donating securities with the highest capital gains to a donor advised fund like Daffy to try and further optimize.

And so first off, I love that you're already thinking about automation. This is great.

Now, if you compare these, SoFi right now, according to what he said, is giving him a 1% guaranteed return on every contribution. It's clean, it's simple, it's pretty rare. And then Wealthfront's got tax loss harvesting, which research often shows over time can add half to 1% in after-tax return. So if you're just comparing apples to apples right there, I'd take the 1% on every contribution every day. Now, I don't know how long you have to leave that money in there, but if

you had, let's say, $50,000 saved and you're only adding $100 a month, you're only getting that 1% on the contribution versus on the tax loss harvesting side, whatever amount you prescribe, whether that's half a percent or 1%, is going to apply to the whole portfolio value. That said, over time, as the market increases in value, the real opportunities for tax loss harvesting are going to be the new contributions that have lower cost bases. So

In theory, I think the tax loss harvesting could outperform Zofi. But right now, if the bulk of your investments are coming from regular contributions and you're not sitting on a really large pool of investments, I would keep doing that. If Zofi gets rid of that, then I could make an argument that tax loss harvesting could outperform not tax loss harvesting. But you could also do that on your own in your brokerage account. You don't have to automate it and you don't have to necessarily do it on a daily basis or even weekly basis.

I think that in the last few years, 90% of the benefit of tax loss harvesting for me happened right after the pandemic. But you do have to have the ability and mental capacity to act when things are down, which can be super stressful, which is why I like to automate it. On to the question about appreciated assets. Absolutely. If you're donating to charity, donate appreciated assets. If you don't want to donate the appreciated assets directly to charity, donate it to a donor advised fund.

The only exception I'll say here is in his question, Chris mentioned, should I move to Wealthfront and do that? And I will say no, because Wealthfront, at least as of the last time I asked, does not let you partially transfer out securities. You have to transfer the entire account. So if you had an account with $100,000 of securities and you wanted to donate $1,000 to a charity in the form of one of those securities, you would actually have to transfer all your brokerage account to another brokerage account.

transfer the securities that you want to a charity or to your donor advised fund, and then move all of those securities back to Wealthfront. So I would say if your goal is to regularly donate appreciated assets from your brokerage account, Wealthfront is not a great option. However, if you're managing individual stock positions, maybe at one brokerage account, and you're managing your diversified low cost index funds at Wealthfront, then you could use that other brokerage account as the place you make a lot of your contributions to your donor advised fund. That's

That's what I do. My brokerage account for my individual stocks is separate. And then my brokerage account at Wealthfront is long-term investing where I'm not making contributions from that account to my donor advised fund.

All right, two more. Next one's a great question. I'm 38. I have a wife and a couple of young kids, seven and four. And my portfolio has been long time managed by my father's friend, who's a financial advisor at Morgan Stanley. And a few years back, we learned we're paying 1.25% in fees, which we negotiated down to 0.75. But when I'm looking at the returns and investment options, my net returns are not great.

However, I'm in a lot of individual stocks and I know that if I transition to the portfolio I want, I'm going to be paying a lot of taxes because I'm going to have to sell all those stocks and buy index funds.

This is a loaded question, and I really appreciate you sending it in. It's a lot more common than you think that people have just inherited their parents' financial advisor and haven't really thought about it for too long. So high fee management can really eat away at your portfolio. A 0.75% fee over 15 years is a really big deal, especially if the funds that you're being invested in are also high fee themselves or not exactly what you want. In this person's case, they said they're an individual stock, so there's probably not a lot of fees there. But

Another thing I often see is that you've got high management fees plus proprietary funds with their own high fees, and that can really eat at the value of the portfolio.

So the good news is you don't have to sell everything all at once. So if this were me, I would pretty quickly move all of those investments into a brokerage account that is self-directed and not managed by a financial advisor. And that'll eliminate the 0.75% fee. And then I would, over time, start to transition out this portfolio. You could start to look at it. Some of the things you're invested in might not have a lot of baked-in capital gains. Those will be easier to sell now.

Each year you can sell up to the top of your current capital gains bracket is one option. You kind of decide at what level you're willing to realize those gains today to be able to get into a portfolio you really want. I don't envy this situation. I was actually in a similar situation for a different reason. And so one of the great things about tax loss harvesting was that during the pandemic a few years ago, we harvested a lot of tax losses and

And then I use those to be able to get out of this situation. Obviously, I'm not hoping that the market crashes so you can capture a lot of losses. But in a circumstance where the market did crash and you could capture losses, this is a great opportunity to use them and remove the psychological barrier of trying to sell your positions you're not happy about, knowing you're going to have to realize capital gains.

Now, another couple of things to keep in mind. One, if you have dividend reinvesting on, immediately you can turn that off so you're not rebuying these positions. Sometimes that's part of your portfolio and the way it's set up.

One other thing, depending on what kinds of stocks you have, you might be able to incorporate them into a portfolio. So I actually had a handful of individual stocks, mostly Apple and Facebook and Google, and I wanted to start doing more index fund investing. And so I set up direct indexing at Wealthfront and I actually transferred in those stocks and Wealthfront incorporated them into the direct indexing portfolio. So if

So if you look at the S&P 500 or you look at the total U.S. stock market, no individual stock is more than 6% or 7%.

and that's the high end, right? That's the Microsofts, the NVIDIAs. But let's say you had $100,000 and in that $100,000, $5,000 was Google or Facebook or Apple or Microsoft or NVIDIA, and you wanted to do a direct indexing strategy with someone like Wealthfront or someone else that offers that, you might be able to transfer those positions in and have the strategy built around it. I know there's a company called Freck that does

direct indexing. I got to know the founder. I think it's a really cool product. They might actually be able to incorporate these as well. And so taking a look at incorporating your existing positions into something you don't have to manage at a much lower fee could make a lot of sense. Now, obviously, I don't know your portfolio. I don't know what those stocks are. I don't know what the Morgan Stanley advisor picked. So I can't really speak to that in

in much detail. As we mentioned before on charitable giving, if you're regularly donating money to charity, then I think you could use your appreciated stocks to donate to charity, take the money you otherwise would have donated to charity and buy the investments you actually want. And so that's another great strategy. So I know that's a lot. You don't have to do it all at once. Come up with a plan and a transition timeline and slowly chip away at it over time. I think you'll get there soon enough and it'll feel really good to not be paying those advisory fees.

So last question was a quick one, which was, what are your thoughts on financial advisors? Great question. Let me be clear. I don't think financial advisors are bad. I was one in a previous life. I ran a firm for them in a previous life. I do think the industry needs to evolve. Many advisors are charging a high percentage of your portfolio just to manage a few investments that software can do a great job of. So I'm not a fan of paying 1%, 0.75% for someone to manage my portfolio. I'd much rather do that

on an automated basis with software. However, if your financial advisor is doing financial planning, tax planning, estate strategy, helping you with complicated decisions in your family or with the equity you have in a company you work at, those are great reasons to be getting help for your financial life. And those are things that you should pay a professional for. Personally, I prefer to pay a flat fee on an hourly, monthly, annual basis than

for advice and then pay for my investments either as part of that fee or as a percentage that is much, much lower. And there are a lot of financial planners out there you can take a look at that are fiduciary only, fee-based and not focused on a percentage of assets. So that is something I would like to do. So I think advisors still matter. I still think they're helpful, but I wanna make sure you're getting real value relative to how much you're paying for them. So I really hope it was helpful for you guys to hear those four questions and how I think about them.

and walk through my entire money allocation framework. The goal was for this to be a helpful way for you guys to think about money and how to allocate money and hear my perspective on how I think about it as someone who's probably spent decades thinking about this exact topic and helping other clients do it.

If you have other questions similar to this or on any topic, I always love to hear them. And I'm trying to find ways to incorporate them in future episodes. And in many ways, the questions you guys have that aren't necessarily answered in any episode you've heard so far are great ways that I think about future content. So please send them over, podcast at allthehacks.com. I definitely read everything that comes in. That is it for this week. I will see you next week.