The Smart Money Hierarchy: Where to Put Your Next Dollar (Ranked)

You just got a raise or bonus. Where should that money go? Pay off your car loan? Max out your 401k? Build an emergency fund? Invest in stocks?

The answer isn't one-size-fits-all, but there is a priority order that maximizes your financial benefit. This guide ranks investment strategies from highest to lowest priority, based on guaranteed returns, tax advantages, and risk-adjusted growth potential.

Follow this hierarchy and you'll build wealth faster than 90% of Americans.

1. Pay Off High-Interest Debt First (Guaranteed 15-30% Return)

Priority: HIGHEST

This isn't even a close call. Paying off high-interest debt gives you a guaranteed return equal to the interest rate—and that return is often higher than any investment you'll find.

Why This Comes First

Consider a credit card charging 25% APR. Every dollar you use to pay down that balance "earns" you a guaranteed 25% return by avoiding interest charges. Compare that to:

• Stock market: ~10% average annual return (with significant volatility)
• High-yield savings: 4-5%
• Bonds: 4-6%

No investment matches a guaranteed 25% return. It's mathematically impossible to justify investing while carrying high-interest debt.

What Qualifies as "High Interest"?

• Credit card debt: 15-30% APR - PAY THIS IMMEDIATELY
• Personal loans: 10-20% APR - High priority
• Payday loans: 300-400%+ APR - Emergency, pay these first
• Car loans: 5-10% APR - Moderate priority (see below)
• Student loans: 3-7% APR - Lower priority, may invest instead
• Mortgage: 3-7% APR - Usually invest instead

Rule of thumb: If the interest rate is above 7-8%, pay it off before investing.

Example: Credit Card Debt

Sarah has $10,000 in credit card debt at 24% APR. If she pays only the minimum ($250/month), she'll pay $6,923 in interest over 6 years.

If she aggressively pays $500/month instead, she'll pay $1,927 in interest over 2 years—saving almost $5,000.

That $5,000 savings is a guaranteed return better than almost any investment.

Bottom line: Eliminate high-interest debt before any other financial goal (except an emergency fund—see below).

2. Employer 401k Match (Instant 50-100% Return)

Priority: SECOND (after high-interest debt above ~15%)

If your employer offers a 401k match, contribute enough to get the full match before doing anything else. This is literally free money.

Why the Match Is Unbeatable

Most employers match 50-100% of your contributions up to a certain percentage of your salary. Common formulas:

• 50% match up to 6%: If you contribute 6% of your salary, your employer adds 3%
• 100% match up to 3%: If you contribute 3%, your employer adds 3%
• Dollar-for-dollar up to $X: Some employers have flat dollar caps

This is an instant 50-100% return on your money before any investment growth. You cannot beat this anywhere.

Example: Missing the Match

Alex earns $80,000/year. His employer offers a 50% match up to 6% of salary.

If Alex contributes 6% ($4,800/year):

• Alex's contribution: $4,800
• Employer match: $2,400
• Total retirement savings: $7,200
• Instant 50% return on his money

If Alex contributes nothing:

• He forfeits $2,400 in free money every year
• Over 30 years at 7% growth, that's $227,000 left on the table

Don't skip the match. It's the single biggest financial mistake you can make.

401k Plan Types

After paying off high-interest debt and getting your employer match, consider maximizing your 401k contributions. There are two main types:

Traditional 401k (Pre-Tax)

• Contributions reduce your taxable income now
• Taxes paid upon withdrawal in retirement
• Best if you're in a high tax bracket now and expect lower taxes in retirement
• Immediate tax savings

Example: Contribute $10,000 to traditional 401k in the 24% tax bracket = $2,400 immediate tax savings

Roth 401k (After-Tax)

• Contributions made with after-tax dollars (no immediate tax benefit)
• All withdrawals in retirement are tax-free, including gains
• Best if you're early in your career or expect higher taxes in retirement
• Tax-free growth forever

Example: Contribute $10,000 to Roth 401k. It grows to $100,000 over 30 years. Withdraw $100,000 tax-free in retirement.

2023 Contribution Limits

• Employee contribution: $22,500/year ($30,000 if age 50+)
• Total limit (including employer match): $66,000/year ($73,500 if age 50+)

You can split contributions between Traditional and Roth, but the total cannot exceed $22,500.

Read more about Traditional vs. Roth 401k differences

Advanced Strategies for High Earners

If you've maxed out the standard $22,500 contribution, consider these additional strategies:

Backdoor Roth 401k

For high earners who want Roth benefits but are above income limits:

1. Contribute to traditional 401k
2. Convert to Roth 401k within the same plan
3. Pay taxes on the conversion

Mega Backdoor Roth 401k

Allows massive additional retirement savings:

• Make after-tax contributions beyond the $22,500 limit (up to $66,000 total)
• Immediately convert to Roth 401k or roll to Roth IRA
• Results in tax-free growth on amounts far exceeding normal limits

Example: High earner contributes $22,500 (pre-tax) + $20,000 (employer match) + $23,500 (after-tax mega backdoor) = $66,000 total

Important: Not all 401k plans support these strategies. Check with your plan administrator.

Learn more about mega backdoor Roth conversions

3. Health Savings Account (HSA) - The Triple Tax Advantage

Priority: THIRD (after employer match, before maxing 401k)

If you have a high-deductible health plan (HDHP), an HSA is arguably the best tax-advantaged account in existence—even better than a 401k.

The Triple Tax Advantage

HSAs are the only account with three tax benefits:

1. Contributions are tax-deductible (reduces taxable income)
2. Growth is tax-free (no taxes on investment gains)
3. Withdrawals are tax-free for qualified medical expenses

No other account offers all three benefits. Even Roth 401ks only offer two.

2023 Contribution Limits

• Individual coverage: $3,850/year
• Family coverage: $7,750/year
• Age 55+ catch-up: Additional $1,000/year

Why HSAs Are Incredible for Retirement

Strategy: Max out your HSA annually, invest the funds, and pay current medical expenses out-of-pocket. Let your HSA grow tax-free for decades.

In retirement:

• Use HSA for medical expenses (tax-free withdrawals)
• Or use for any expense after age 65 (taxed like traditional IRA, but no penalty)

Real numbers: $3,850 contributed annually for 30 years at 7% growth = $388,511 tax-free for medical expenses in retirement.

Healthcare costs average $315,000 per couple in retirement. An HSA covers this entirely, tax-free.

HSA Investment Options

Don't let your HSA sit in cash earning 0.01%. Most HSA providers (Fidelity, Lively, etc.) allow you to invest in:

• Index funds
• ETFs
• Individual stocks
• Target-date funds

Treat your HSA like a retirement account, not a checking account.

Non-Medical Use After Retirement

After age 65, you can withdraw HSA funds for non-medical expenses without penalty (but you'll pay income tax, like a traditional IRA).

This gives you incredible flexibility: tax-free for medical expenses, or taxed for anything else.

Learn more about HSA non-medical withdrawals

4. Emergency Fund (3-6 Months of Expenses)

Priority: FOURTH (after HSA, before taxable investing)

Before investing aggressively, build a cash cushion for emergencies. This prevents you from going into debt when unexpected expenses arise.

How Much to Save

• Minimum: 3 months of essential expenses
• Recommended: 6 months of expenses
• High stability job: 3-4 months might suffice
• Variable income/self-employed: 6-12 months

Where to Keep It

Don't invest your emergency fund in stocks. You need instant access without market risk.

Best options:

• High-yield savings account (HYSA): 4-5% APY, FDIC-insured, instant access
• Money market account: Similar to HYSA
• Treasury bills (short-term): Slightly higher yield, minimal risk

[Popular HYSAs: Marcus by Goldman Sachs, Ally Bank, American Express Personal Savings]

5. Max Out Retirement Accounts (401k, IRA)

Priority: FIFTH (after emergency fund)

Once you have the employer match and an emergency fund, maximize retirement contributions for tax-advantaged growth.

Beyond the Match: Full 401k Contributions

Contribute up to the $22,500 annual limit (2023) to your 401k for maximum tax benefits and compound growth.

IRA Contributions

If you've maxed your 401k or want more investment options:

Traditional IRA:

• $6,500/year limit ($7,500 if age 50+)
• Tax-deductible contributions (if income qualifies)
• Taxed upon withdrawal

Roth IRA:

• $6,500/year limit ($7,500 if age 50+)
• After-tax contributions, tax-free withdrawals
• Income limits: $153,000 (single), $228,000 (married)

Backdoor Roth IRA: If you exceed income limits, contribute to traditional IRA then immediately convert to Roth.

6. Real Estate Investment

Priority: SIXTH (after maxing retirement accounts)

Real estate can generate passive income and build wealth, but it requires significant capital and active management.

Pros:

• Rental income provides cash flow
• Property appreciation builds equity
• Tax benefits (depreciation, deductions)
• Leverage multiplies returns

Cons:

• Requires large down payment (typically 20-25%)
• Active management (tenants, repairs, vacancies)
• Illiquid—can't sell quickly if needed
• Market risk and location dependency

Requirements for Success

Make sure:

• Rental income covers mortgage, taxes, insurance, maintenance, and vacancies
• You have 6+ months emergency fund separately
• You're comfortable being a landlord (or paying a property manager)

Alternative: REITs (Real Estate Investment Trusts)

Don't want to manage properties? Invest in REITs through a brokerage account:

• Trade like stocks
• Receive dividends from rental income
• No direct property management
• Lower barrier to entry

Explore different real estate investment methods

7. Taxable Brokerage Account (Index Funds & ETFs)

Priority: SEVENTH (after maxing all retirement accounts)

Once you've maxed retirement accounts, invest in a taxable brokerage account for additional wealth building.

Why Index Funds Beat Individual Stocks

Don't pick individual stocks unless you:

• Have significant investing experience
• Can handle 30-50% volatility
• Have time to research companies thoroughly
• Can afford to lose the money

Instead, invest in low-cost index funds:

• Instant diversification across hundreds/thousands of companies
• Lower risk than individual stocks
• Lower fees (0.03-0.10% vs. active funds at 1%+)
• Historically outperform 90% of actively managed funds

Popular index funds:

• S&P 500 index (VOO, SPY): 500 largest U.S. companies
• Total stock market (VTI): Entire U.S. stock market
• Total world index (VT): Global diversification including international

Expected returns: ~10% average annual return (historically), with significant year-to-year volatility

Learn basic investment strategies before buying individual stocks

8. Bonds and Conservative Investments

Priority: EIGHTH (for specific needs or older investors)

Bonds provide lower returns but lower risk—useful for:

• Older investors approaching retirement
• Conservative portfolios needing stability
• Diversification from stocks

Types of Bonds

Treasury bonds: U.S. government-backed, virtually risk-free, 4-5% yields

Corporate bonds: Higher yields (5-7%), moderate risk

Municipal bonds: Tax-free interest, good for high earners

Expected returns: 4-6% annually, with much lower volatility than stocks

When to use bonds:

• Within 5-10 years of retirement
• You can't stomach stock market volatility
• You need predictable income

9. Certificates of Deposit (CDs)

Priority: NINTH (for short-term savings goals)

CDs offer fixed returns for locking up money for a set period.

Current rates: 4.5-5.5% for 1-year CDs

Use CDs for:

• House down payment savings (1-3 years out)
• Short-term goals with specific timelines
• Risk-averse savers who want guaranteed returns

Downsides:

• Money locked up until maturity (or pay penalty)
• Returns barely keep up with inflation
• Opportunity cost vs. stock market returns

The Money Hierarchy Summary

Here's where your next dollar should go, in order:

1. High-interest debt (15%+ APR) - Guaranteed high return
2. 401k employer match - Free money, instant 50-100% return
3. HSA max contribution - Triple tax advantage
4. Emergency fund (3-6 months) - Financial security
5. Max 401k ($22,500) - Tax-advantaged retirement
6. Max IRA ($6,500) - Additional retirement savings
7. Pay off moderate debt (7-15% APR) - Good guaranteed return
8. Taxable brokerage (index funds) - Long-term wealth building
9. Real estate - If you have capital and desire
10. Individual stocks - Only if experienced
11. Bonds/CDs - Conservative goals

Calculate Your Strategy

Use our federal tax calculator to see how much you save with pre-tax 401k and HSA contributions. Small changes in contribution strategies can save you thousands in taxes.

Start at the top of this list and work your way down. Every dollar invested strategically compounds into significant wealth over time.

Related Resources

• How Federal Income Tax Works - Understand how tax-advantaged accounts save you money
• How to Invest During a Bear Market - Investing strategies during downturns