I’m going to let you in on a little secret: I freaking loved American Gladiators. I don’t have many memories of my early-90’s childhood, but this epic game show will forever be seared in my soul. Nitro, Viper, Turbo, Blaze. These were my heroes. At the end of every episode, the contestants would face off in The Eliminator, a grueling obstacle course where contestants had to complete a series of physical feats before moving on to the next obstacle. Here it is in all its 90’s glory:
So how does the American Gladiators obstacle course relate to personal finance? I actually have very little idea — I just wanted to post that video. But we are going to lay out where we put our money in sequential order before moving on to subsequent challenges on the financial “obstacle course” of life.
This money funnel is ordered in a way that tries to maximize interest rates, risk, tax advantages, and time considerations. In most cases, we don’t move on to the next “obstacle” until we’ve completed the one prior, but there have been occasions where it’s made sense to put money toward multiple items at the same time. So let’s jump right in.
DISCLAIMER: While this funnel works for us, it might not be right for you. So please consider this a starting point and adapt the order of these items however you see fit for your circumstances. Also, we are not responsible for any eyeballs that were harmed by leotards and mullets in the preceding video.
1. Emergency fund
There’s no use putting money toward anything else if you can’t cover an unexpected repair or job loss or medical need. We started with about three months’ worth of living expenses before doing anything else with our money. After that, we kept putting away a little each month until we reached six months of living expenses. Any time a major life event occurs (like having a little human or moving — so basically every couple months, hah), we make sure that our emergency fund still covers our current cost-of-living. Obviously we contributed quite a bit more to our fund while we lived in NYC.
2. Credit card debt
If you’ve read Our Debt Story, you’ll know that we only briefly danced with credit card debt. And by briefly, I mean less than a month. We consider ourselves fortunate to have avoided this obstacle, but if you find yourself battling this Debt Monster, stay the course until it’s slayed. There are few, if any, investments you could make with your money that will offer a better “return.” The sooner those money-sucking high-interest rates are dead, the sooner you can put that money to work to build your wealth.
Extra reading on the blog: Our Credit Card Rules
3. Employer-matched 401k
My first job out of college introduced me to this strange, foreign-sounding thing called a 401k and told me that the company would match money I put into the account. Despite still facing student loan debt AND having no clue what I was doing, I started contributing the 3% of my paycheck that my employer offered to match. And we’d do it again in a heartbeat. Why? Because it’s free money folks! Don’t leave it on the table (unless you’ve got a really, really good reason to ignore it).
4. Student loans and other non-mortgage debt
Ahhh, student loans — the bane of our newlywed existence. After catching the Dave Ramsey fire, we went after these hard. We’re still big proponents of battling the Debt Monster before tackling other financial to-dos. There are few things you can do with your money that will be more psychologically and emotionally liberating. If you have a fairly low interest rate, this might be one money bucket where you straddle stages and divert some of your funds to starting to save for retirement. And while we’ve always paid for our cars with cash, auto loans would also fall in this step.
Extra reading on the blog: Paying Back Student Loans
5. Tax-advantaged retirement savings
This is like getting to the tennis ball cannon obstacle on American Gladiators (read: fun!). This is where we finally felt like our money was pulling its weight and actually doing some work for us. While retirement might be a ways off, we’ve come to grips with how important it is to start young. And where better to put that hard-earned dough than (mostly) out of the reach of Uncle Sam. We’ve put our money in 401ks (beyond the employer match), 403bs (a public-employer version of 401ks), Roth IRAs, and HSAs (if unused by retirement age), but there’s also traditional IRAs, SEP IRAs (ideal for self-employed), and other tax-advantaged options.
6. Children’s education fund
While retirement might be a good 30 years out, Sally is only 14 years away from making college plans — excuse me while I go curl up and sob in her crib. So while there are other goals that seem like better places to put our money right now, time is of the essence if we want to give compounding interest sufficient time to make money babies for our babies’ schooling. Right now, we’re frontloading 529 plans (which are also tax advantaged) for both Sally and Wynn. We’re hoping to check off this to-do item with another two or three hefty contributions to their funds.
7. Short- and long-term goals
Now we’re really getting to the good stuff. We’ve only reached this part of the “obstacle course” within the last few years. This is where we put any extra savings that isn’t already claimed by step 5 or 6. Most of this money currently sits in a interest-earning savings account, but you can also consider parking it in CDs, I-Bonds, and other modestly higher interest earning vehicles. We had been saving for a mortgage for the last few years, but we opted to rename that fund our “Self-Employment Runway” a few months ago. We’re hoping to replenish our mortgage fund and transfer most of that money back to its original home in the near future, but for now its allowing me to be my own boss, set my own hours and pursue our side hobby/business, Letterfolk.
8. Investments/savings/mortgage debt
While this definitely isn’t the awesome paper wall finish line on American Gladiator that you bust through like the Kool-Aid Man, things are looking pretty good if you’ve satisfied obstacles #1-7. And to be clear, we’re definitely not here yet. This is where pure wealth-building is happening. You’ve tapped out your tax-advantaged accounts, you’re making regular and full contributions to retirement and your children’s education, and there are no pressing goals that need to be funded. So why not use those extra savings to attack your mortgage, invest in taxable brokerage accounts, donate to your favorite causes, purchase rental properties, start a business, etc.
Extra reading on the blog: Rollerblade Every Day for the Rest of Your Life
So that’s how our money flows out of each paycheck. There have been moments when we’ve moved backwards a step or two, but the important thing for us is always knowing the roadmap and what our next goal is.
How do these stages and their respective order differ for you? We’d love to hear where we’re on the same page and where we differ from some of you.