What should I do with my next dollar?

Read time: 7 minutes

You have lots of decisions to make in your financial life. A key one is what to do with the money you have on hand right now. Should you save more for retirement, invest in a taxable brokerage account, pay down debt, pay off student loans, build your emergency savings—or all of them? There are several things to keep in mind as you decide.

Know your options

Everyone’s financial situation and goals are different. So start by taking a moment to think about which ones are important to you. Be sure to consult with your tax or financial advisor too.

Here are some suggestions to get you started:

Invest for retirement.
Invest for non-retirement goals, like buying a house.
Pay off high-interest debt.
Build your emergency savings.
Save for college.

Consider tax advantaged accounts

Tax advantaged accounts offer ways to save toward specific goals—like retirement or college. And you generally get a tax break when you save in these accounts. A good place to start is usually your employer’s retirement plan—especially if your employer offers a match.

Once you save enough to meet the match, consider other ways to save for retirement. Looking to maximize your tax advantaged savings? Check out this article on building your savings in tax advantaged accounts.

Is college in the cards for you or a loved one? Learn more about saving for college and 529 plans.

TIP

Set your financial goals. Then align each goal with the type of account that best suits your needs.

Matching your objective with the right accounts

Account type	Best purpose
Employer retirement plan or IRA	Retirement
Health savings account (HSA)	Health expenses
529 plan	Education
Taxable account	General use

Source: Vanguard, adapted from Vanguard’s Guide to Financial Wellness. 2022.

Look at paying down high interest debt

Credit card debt can weigh you down. The average interest rate on credit cards was about 20% at the end of 2022.* That’s a good chunk added to the money you’ve already borrowed. So tackling high interest debt like this can be a smart move.

Here's why: If you have $5,000 and invest that money, what kind of return could you reasonably expect? Probably much less than 20%. But if you eliminated your high interest debt, you’d be saving the 20% you otherwise would have paid in interest. You can think of paying down debt as investing with a set return.

*FederalReserve.gov. Consumer Credit G.19. 2023.

Check your emergency savings

Do you have money set aside for unplanned expenses, like car repairs? Do you have savings for more costly emergencies, like a job loss? It pays to be prepared because you never know when an emergency will happen. And you’ll want the money to be in a place you can get to easily. Learn more about preparing for a financial emergency.

Think about when you'll need the money

How easily can you get your money in cash when you need it fast? Can you access the money for any purpose without paying a penalty? This is referred to as liquidity.

If your money’s in a retirement account, for example, you’d likely face taxes and penalties if you take the money out early. So if you might need the money soon, saving in a retirement account may not be the right choice for you.

On the other hand, you might have more flexibility if your money is in a taxable brokerage account. You could use the money at any time for any purpose, so this might make sense for your short term goals. But you’d lose the tax benefits of saving in a retirement account.

These are all things to consider when you’re deciding where to put your money.

An example: John's next dollar

John wants to accumulate wealth but also have money for medical emergencies. Where can John put his next dollar? He’s considering 3 options for his money:

Save more in his 401(k) plan at work.
Save more in his HSA.
Put more money in a savings account.

A few things about John's situation

John’s in his early 30s and married. He’s already saving enough to meet his company’s match in the 401(k). He’s relatively healthy and has saved $2,000 this year in his HSA. He also has an emergency savings account.

401(k) plan

John is doing great, since he’s already meeting his company’s match. Putting more money in his retirement account could make sense, since he’ll be getting the tax benefit. But John should be aware that if he needs this money he could face taxes and penalties for taking it out early.

Pros

Saving for retirement.
Tax break now on pre-tax contributions.
Money that can be invested in his retirement plan’s investments.

Cons

Potential taxes and penalties if the money is taken out early. Please note that withdrawals are subject to plan rules.
Limit on how much he can save each year.

HSA

John contributed $2,000 to his HSA, but he can contribute more—up to $7,750 for a family in 2023. Saving and investing in an HSA offers a triple tax advantage. John’s contributions are pre-tax, his money grows tax free, and he won’t pay taxes on money used for qualified medical expenses.** And since HSA balances carry over from year to year, John won’t lose what he doesn’t use.

Pros

Saving for health care costs.
Multiple tax breaks.
Money that can be invested in his HSA’s investment options.
Balance carries over from year to year.

Cons

Potential taxes and penalties if the money is taken out early or used for non qualified medical expenses.
Limit on how much he can save each year.

Emergency savings account

John has an emergency savings account, where he’s put aside nearly 6 months of expenses. He feels comfortable with the amount he’s already saved. He doesn’t get a tax break for saving here, but he can access the money any time for any purpose without penalty.

Pros

Can be used at any time.
No limit on how much he can save each year.

Cons

No tax break.
Potential low rate of return.

John's decision

After weighing his options and considering his goals, he decides that saving more and investing in his HSA makes sense for him, given the tax advantages and his desire to use the money for medical emergencies. Since he still has time this year to save and his plan allows it, John goes into his HSA and increases his contributions to the annual limit.

This is an example only.

**Taxes: You can only use your HSA for medical costs that are covered. Otherwise, you may have to pay income tax on the money you take out. And if you’re under age 65, you may also face a 20% federal penalty tax.

For more information, go to IRS Publication 969 and Publication 502.

Want to dig deeper?

Check out Vanguard’s research—What to do with your next dollar: A quantitative framework. You’ll get more examples and details on various approaches to maximizing your wealth.

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