🤑 My Money Allocation Framework: 10 Steps to Build Your Wealth

If you’ve ever asked yourself, “What should I be doing with my money right now?” this framework is what I built to answer that question. Whether it’s a paycheck, a bonus, a tax refund, or just some extra cash sitting in your account, this is the step-by-step system I use to decide where each dollar goes.

Regardless of where you are on your financial journey, I hope this helps bring some clarity to your own money decisions. At the end, I’ll also share a few advanced tactics I’ve used to optimize liquidity, invest smartly, and build long-term financial flexibility.

💸 Step 1: Operating Cash

Before anything else, I want 1–2 months of regular expenses easily accessible. This is my cash flow buffer, what I call my “pay your bills, don’t get caught off guard” fund. It's not a full emergency fund, but it ensures that bills due before your income hits don’t force you to transfer, sell, or borrow.

🤝 Step 2: Employer Match

If your employer offers a match on your 401(k), HSA, or FSA, take it. That’s an instant 100% return on your contributions. I don't have access to this, but if you do, free money is a no-brainer.

💳 Step 3: Urgent Debt Payoff

This means paying off high-interest debt, usually above ~8%. If you’re carrying credit card balances or expensive personal loans, this is where I’d allocate money next. It’s a guaranteed return that often beats the stock market and clears the path for better financial decisions ahead.

🛟 Step 4: Safety Net

This is like a traditional emergency fund, which is 3-12 months of expenses stored in something like a high-yield savings account or short-term treasuries. How much depends on job security, dependents, income stability, and your personal risk tolerance. For us, with two kids and both of us self-employed, we lean closer to 9-12 months. I like this framework for coming up an amount:

How big should your emergency fund be?

Here's one solution: pic.twitter.com/OB6YIAYSxz

— Brian Feroldi (@BrianFeroldi) July 15, 2023

🎯 Step 5: Short-Term Goals Fund

Do you have plans within the next five years, like a down payment for a house, a big trip, or a wedding? This is the cash you set aside in low-risk places (think high-yield savings or T-bills). I don't like to put these funds in the market, because the market could be down when I need them, and I'd hate to have to sell when the market is down. So I keep my short term goal savings separate from my long-term investing.

🔍 Step 6: Debt Review

This is where I revisit any remaining debt in the ~6-8% range. Not all debt is bad, especially if it’s tax-deductible like some mortgages or student loans. But I weigh the math and decide if it’s worth paying off versus investing. For something like a 7.5% car loan, I'd much rather pay off the loan than invest my  money.

📈 Step 7: Tax-Advantaged Investing

Once everything above is covered, I start maxing out tax-advantaged accounts. Roth IRAs and HSAs are my favorites because of their flexibility and tax benefits. From there, I look at 401(k), SEP IRAs, Solo 401(k)s, or mega backdoor Roth options, depending on your situation. Just make sure you’re not locking up money you might need in the short/medium term.

💼 Step 8: Brokerage Investing

This is where I invest most often. Taxable brokerage accounts offer full flexibility, no contribution limits, and access to long-term capital gains. I keep it simple with low-cost index funds, global diversification, and automation at Wealthfront (get $5k managed free), where I also get automated tax-loss harvesting, direct indexing and rebalancing.

🎓 Step 9: Education Savings

I don’t prioritize saving for your kids education unless you're confident your financial future is on track. After all, you can much more easily borrow for college than you can for retirement. That said, if you’re ahead on your own savings or live in a state with great 529 tax perks, this might move up in your personal framework.

🏡 Step 10: Optional Debt

This is low-interest debt under ~6% (e.g. our 30-year mortgage from 2020). The math says not to pay it off early, so we don't. However, if eliminating all your debt brings you a lot of peace of mind, go for it. By this point in the framework, you’ve earned the right to do what feels right, not just what’s optimal on paper.

🚀 Advanced Strategies 

Once you’ve nailed the basics, here are some advanced tactics to consider:

• Prioritizing Liquidity: Consider putting more money in taxable investment accounts and less in your retirement accounts to keep flexibility for unexpected opportunities or cash needs.

• Rely on Borrowing for a Safety Net

  • Use 0% APR credit cards as a buffer

  • Open a HELOC (Home Equity Line of Credit) if you own a home with equity

  • Use a Portfolio Line of Credit (PLOC) to access cash without needing to sell investments, but be very mindful of margin call risks

• Direct Indexing: For larger portfolios, buying individual stocks (via automated platforms) can allow for more tax-loss harvesting opportunities

• Asset Location: Put tax-efficient assets in taxable accounts and tax-inefficient ones in retirement accounts for better after-tax returns

I hope this gives you a clear roadmap to allocate your money. Remember, it’s not about following my plan perfectly; it’s about using this as a guide to simplify your own financial decisions and reduce the overwhelm.

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