Investment Allocation Strategy

Problem Statement

Many people funnel their money recklessly into taxable brokerage accounts without fully leveraging their tax-advantage investments first.

Don’t make the same mistake! Learn the allocation techniques and use them.

📌 Disclaimer: This is a general allocation framework; individual circumstances may warrant deviations.

Investment Allocation Priority Order

Below allocation guide is inspired by this timeless Boglehead thread, advices from other personal finance gurus.

#1 Build Emergency Cash Fund

📌 Before you start investing, you should have 6-9 months of emergency savings for sure. Single earners for families, self-employed should aim at the higher end of the range. Young professionals with lesser dependencies would do fine with 2-3 months.

👉 For optimal emergency savings plan, divide the emergency savings into 2 tiers:

Tier 1:
Use a high yield savings account to have immediate access to emergency funds. I would recommend Sofi for the same.

Tier 2:
Use extremely safe bond ETF which invests in treasuries. I use SGOV.

🧩 In case you are wondering, what is SGOV and how is that extremely safe?
Use this Bogleheads post which has everything you need to know about SGOV but in short – SGOV is a great way to park emergency funds as a second tier as it offers higher rate of return than cash, is liquid, low cost & you get state tax benefit on dividends & is extremely safe. Of course, it is not 100% safe as cash and it will take you couple of days to sell, settle and get cash but if world’s biggest economy defaults on their treasuries, even your bank’s FDIC insurance might be in question (it is backstopped by USA Treasury as well). And guess what, treasury bonds are what most of the banks use as well to get higher returns on the money you keep in your accounts.

#2 Fund 401K or equivalent plans to get full employer match

If your employer offers 401K contribution match (most do), please contribute adequately and take full advantage of it. Don’t leave money at the table.

#3 Pay off High Interest Debt or Personal Loan

If you have high-interest loans or credit card balances, that should be paid off next.

#4 HSA (Health Saving Account)

Contribute to HSA next.

👉 HSAs (Health Savings Accounts) are extremely underrated and are the only investment vehicle offering triple tax benefits – ability to contribute, grow and withdraw tax-free, as long as the money is used for eligible medical spending.

#5 Fund Roth

Fund Roth if you have a lower income, leading to a situation where your current marginal tax rate is lower than your expected future tax rate.

Be mindful of income limits for Roth.

❇️ For those who cannot contribute to Roth directly due to income limits, Backdoor Roth and Mega Backdoor Roth are great ways to contribute.

#6 Contribute Max 401K, 403(b) Limit

401K, 403(b) contributions should be next.

🧩 You might ask – why 401K prioritized over IRA?

If your 401(k) offers limited or high-fee fund options, consider prioritizing IRA contributions first for better investment flexibility.

#7 Contribute Max IRA Limit

IRA contributions should be next in your list. Watch out for the income limits. Main advantage of IRA is that you get wider pool of securities to invest than typical 401K, 403(b) plans.

#8 Put some in education funds/529, if applicable.

Every one who has kids aiming to go to college should leverage 529 plans.

👉 If you are in a state with tax incentives for college 529 plan, Illinois as an example offers 20K$/year of state tax reduction – you should definitely try to take advantage of it.

#9 Invest in Taxable Brokerage Account

Last, but not the least, comes your taxable brokerage account.

One response to “Investment Allocation Strategy”

Is money the only type of wealth you should care about? – RICH & UNRUFFLED

March 12, 2025 at 10:21 pm

[…] agreed this is second most important aspect of wealth.Tip: Use this and this to allocate your funds the right […]

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RICH & UNRUFFLED