Our Money Funnel (Where Our Money Goes)

Our Money Funnel

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.

Extra reading on the blog: How to Calculate Your Emergency Fund // What’s an “Emergency”?

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).

Extra reading on the blog: Why You Should Invest in a 401k // 401ks Made Easy

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.

Extra reading on the blog: Why & How to Start a Roth IRA // Why We Max Out Our Roth IRA

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.

Extra reading on the blog: Pros and Cons of 529s // How We Calculated Our 529s // Cheating Our 529s

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.

Extra reading on the blog: How to Set Financial Goals I & II // How to Save for a Home

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.

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  • Reply Tasha November 4, 2015 at 8:44 am

    It’s probably really really bad, but we don’t have an emergency fund yet. It’s certainly on our radar but it’s not something near the top of our funnel the way it is for you. Our funnel looks something like:
    1. Employer 401k match.
    2. High Interest Credit Card Debt
    3. Maxing out tax advantaged retirement accounts
    4. Other non-student loan debt
    5. Emergency Fund & College Savings
    Compound interest is so valuable that the hubs and I couldn’t help but prioritize saving for retirement–especially when it means lowering our current tax burden and student loan payments. Speaking of student loans, that’s were we do the opposite of what everyone in the personal finance world says to do: we pay the absolute minimum we can manage to get away with. We have a combined 400k plus in student loans so there’s no way just tightening our belts and plugging away at it would work. Instead, we’ve both opted to take advantage of the income-based repayment programs and the public service student loan forgiveness program offered for federal loans. Our loans balances will be forgiven in 5 (him) & 8 (me) more years and we will have only made $122k in payments between the both of us. It’s a pretty sweet deal that allows us to also tackle our other financial goals at the same time.

  • Reply Stacie November 4, 2015 at 9:34 am

    This all seems so overwhelming to me. I live paycheck to paycheck, have no savings and no idea how to buy new tires for my car. Each year I think this will be the year but I’m always behind. Love reading the blog – it gives me hope.

  • Reply Courtney November 4, 2015 at 10:14 am

    This past year we purchased our first home (with 20% down) and it feels like forever that we were saving up for that down payment! Expenses with moving in and some of the remodeling we needed to do (we bought a foreclosed fixer-upper) ate into our emergency fund more than we anticipated. So right now we contribute the biggest chunk of our money to rebuilding a good emergency fund (we’ve probably got 4 months of expenses in there, and we’d prefer to have 6). We contribute 6% to my husband’s 401K (matched) and then we throw a small chunk of change to each of our kids college funds (just $20 a month per kid right now- it’s not much, but we figure it’s better than nothing at all). We have a possible promotion/raise coming up in the next year and our plan is to put 15% of our income into retirement savings (Roth and 401k) and more into the kids 529 plans. I feel a little overwhelmed, because while we are saving, it definitely feels like we should be saving more and doing better, but I keep telling myself that doing SOMETHING, even if it’s not much, is better than doing nothing.

  • Reply Anna Kristina November 4, 2015 at 11:12 am

    Our money funnel looks pretty similar, minus saving for kids’ education (since they’re just hypothetical at the moment), and our mortgage payment is currently high priority. We talked to a Dave Ramsey financial coach while we were in the middle of down payment savings, and decided in our situation (a decent amount in retirement and debts gone, and looking in the expensive Boston-area market) we’d pull the trigger on home ownership with 10% down, and then aggressively pay down (while still saving for retirement) until we can get rid of PMI. It made sense for us given our commitment to the area + rate of rent increases. And for the record, after years of hard work to save towards that down payment goal, it’s so exciting to finally make it happen!

  • Reply Kenzie November 4, 2015 at 5:02 pm

    Love American Gladiators!!!!

    Also love the idea of a “money funnel”

    Our current funnel looks like this:
    1 – Max out employer matched 401k
    2 – Emergency Fund/House Savings.
    3 – Student loans, we have a (hopefully) 3 year plan for paying them off for good! Any extra income at the end of the month gets pushed here.
    4-Roth IRA, at this point it just gets a small amount.

  • Reply Jen November 5, 2015 at 10:58 am

    Our money funnel looks similar to yours, except I still have some low interest loans left from graduate school. We decided to prioritize other life events over paying off that last loan (I’ve already paid off over $95,000 of student loans in 8 years by myself). Our Emergency fund is finally funded for 6 months (just completed last month), so our new priorities are below:
    1. Employer 401K match
    2. Total of 15% of our gross income in to 401K (each)
    3. Roth IRA max
    4. Credit card debt (we usually pay in full every month, but since we got married this summer and had a no interest promotional period so we gave ourselves a couple months to pay one off, it will be paid off in Nov).
    5. Student loan (currently paying close to triple the minimum payment)
    6. House down payment savings, aiming for 20%
    7. Savings for building our family (we want to try to save up a chunk of change prior to having a baby, so we know the first year’s costs, mainly childcare and income replacement for maternity leave, are covered)
    8. Short and Long term goals (major vacations, saving for a new car, etc)
    9. Life savings, investments

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