The Savings Cascade

    Before making any risky financial plays, you must first build a firm foundation. A healthy saving and retirement fund allows you greater compliance in making riskier financial decisions since your overall exposure to risk will be much lower. The Savings Cascade is both a litmus test and a template to help you understand when and if you are ready to try your hand at nontraditional investments and possibly (though hopefully not) trading.

High Liquidity Funds

1. Checking Account

    Your checking account should be the backbone of your day-to-day financial life. It should contain 1-2 months of necessary expenses but should not exceed more than 4 months of necessary expenses. There should be just enough money to pay the bills on time, but not so much that you're losing out purchasing power and investment opportunities in order to pad an already ample supply of readily available cash. If you're currently living paycheck to paycheck there is no reason you should be investing in the market. The market is far too volatile in the short term for you to risk your next meal, bill, or rent payment.

2. Savings Account

    Often overlooked, a savings account should be your second step in the Savings Cascade. Not all savings accounts are equal, many savings accounts require minimum balances and certain limits on monthly withdrawals, so it is important that you find a savings account that is flexible according to your needs. A good savings account will allow you to avoid lifestyle inflation early in your career, and provide you with exposure to compounding interest. A good savings account allows you to not just mentally, but physically separate your money, ensuring that you avoid spending above your means, which will in turn prevent you from living paycheck to paycheck. Most savings account will give you a return for storing your money with that associated bank. This return is called an APY (Annual Percentage Yield) and can outpace inflation if the return is high enough. The Federal Reserve has a targeted inflation rate of 2% year over year, however, year to date since 1960s inflation has been roughly 3.8% every year. This means that every year, you lose roughly 3.8% in purchasing power, as your money sits in the bank. Finding a savings account above 3.8% in APY will help ensure that your money continues to hold its value over time.

    A good goal for your savings account is to have roughly 3 to 6 months of necessary spending in it at all times with an APY of ~4%. With 3-6 months of rent, bills, groceries, and car payments available in a high yield account, you'll have more freedom to choose how to live in the long run and will not need to worry about a loss of purchasing power. A good savings account will ensure that you do not need to work a back breaking job every day just to make ends meet, and will allow you the financial independence to cover any possible emergencies without having to go into debt.

3. Matched 401k

    Once your checking account and savings account contain a total of 4 to 8 months of necessary spending you can focus on investments. Everyone's financial situation is different and will only get more personal and thus more unique as you continue in your career. The number one greatest guaranteed return you can achieve reliably, regardless of personal circumstance, comes from the contribution match on your employer 401k. There is an automatic 50-100% guaranteed return on how much money you contribute (up to the contribution percentage limit) when you opt into a matched 401k. It is for this reason that you should meet the percentage match limit on your 401k exactly. For most companies, your employer will contribute 50 cents per every dollar you contribute up to roughly 6 percent of your annual salary. Keep in mind that your employer 401k matches can vary widely depending on your company, industry and compensation package. Regardless, so long as you know your contract, you should strive to make the most of your employer contributions. In addition to the guaranteed return, the 401k is also a tax advantaged retirement account. This means that money placed into this account is on a pre-tax basis and can help lower your tax bill depending on your personal circumstances. It is also important to note that a 401k is simply a type or retirement account and that the actual assets which make up the account are dependent on you and the personal choices you make depending on your risk tolerance.

4. Individual Retirement Account

    Once you have met the contribution requirements in order to max your employer's contribution match, the most common next step in the savings cascade is to open and contribute to some form of Individual Retirement Account or IRA. There are four types of IRAs: Traditional, Roth, Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE). The type (and sometimes even types) of IRA(s) you will choose depends on your employment, overall and base compensation, type of employment and company. A general overview between the difference between the two most common IRAs is listed below.

• Traditional IRA - Contributions are made with pre- or after-tax dollars. Contributions that are tax-deferred give a tax deduction immediately and growth is not taxed, however withdrawals will be taxed as ordinary income. 
• Roth IRA - All contributions are made with after-tax dollars, this means that unfortunately, contributions are not tax-deductible. However, withdrawals at retirement are tax exempt. Additionally, contributions to a Roth IRA are able to be withdrawn from the Roth IRA as long as the contributions are withdrawn within the year they are contributed.

    The general rule of thumb for which IRA you should contribute to depends substantially on your current tax bracket and tax bracket you are expected to be in at retirement age. If you are in a lower tax bracket currently but expect to be in a higher tax bracket at retirement age, then the Roth IRA is generally a better retirement account. If you are currently in a higher tax bracket now and expect to be in a lower tax bracket in retirement age, then it would be better for you to realize the tax advantages of a Traditional IRA over the future tax exemption of a Roth IRA. Remember that each person's financial journey is very personal and there is no right general answer. Please ensure that you meet with a tax professional in order to find a tax strategy that is best suited for you.

Tax Brokerage Account

    Once all of your tax advantaged accounts are met and you have enough liquid cash to mitigate emergency financial hardships, only then should you start to invest in a taxable brokerage account. The reason why you want to invest in a tax brokerage account last is because of how a brokerage account fits into an overall healthy portfolio. A brokerage account is contributed with after tax dollars and therefore does not receive any tax benefits. A brokerage account is taxed based on how long ago the contributions were made. The short-term capital gains tax of a tax brokerage account is for contributions made and then withdrawn from in under a year. This type of tax is taxed at your ordinary income level and may or may not be beneficial for you to realize depending on your situation. The long-term capital gains tax is for contributions that were made and then withdrawn after a year. These contributions are taxed at 0-20% depending on your current income and filing status.

    Although a brokerage account is not the greatest account when it comes to being tax advantaged it is a highly liquid account that gives a large amount of flexibility and freedom in choosing assets.

Portfolio Management

    It is important to note that all of the accounts listed above do not have a set type of investment within them. Once you open an account it is up to you to choose what assets you wish to invest in. Generally speaking, the best thing for the average layman investor to do, is to mitigate risk through a highly diversified portfolio consisting of ETFs, and Index Funds. Single stock picks and risky trades involving options and other day trading-esque strategies expose the investor to unnecessary and (generally) unmitigated risk. A better and more sustainable investing strategy in the long term is to choose a selection of highly diversified assets and contribute to your portfolio consistently and regularly regardless of what the market is doing currently. This idea of making regular fixed contributions regardless of the market is known as dollar cost averaging (aka the constant dollar plan) and is by far the best strategy for the everyday investor.

Alternative Investments (Nontraditional Assets)

    The last optional type of investment consists of nontraditional assets or alternative investments. Alternative investments can consist of real estate, precious metals, crypto, art, NFTs, luxury items, collectors' items, and other commodities and collectables. All alternative investments are nonproductive highly illiquid assets. This means that they do not directly produce income (the exception is for rental real estate) and are very difficult to sell especially for a favorable return. Alternative investments typically require a greater amount of knowledge and expertise for a favorable return and are therefore not recommended.

Final Note

This is a general overview to savings and investing. Everyone's financial situation is different and there is no general right answer to financial freedom. The only wrong answer in the financial world is to never save and to never invest, with this in mind, it is important that you meet with a financial professional, learn your personal risk tolerance, and mitigate accordingly. Best of luck,

- W.G Lason