Broker Check

The Hierarchy of Savings

June 11, 2021

There are many different types of savings and investment accounts and an increasing number of ways to save for your goals and financial planning objectives. Specifically, many clients we work with are trying to purchase a home, save for college, achieve financial independence, et cetera.

We often talk to our clients about a concept called The Hierarchy of Savings. Here’s a specific example of this concept:


Assume a couple with children own a home whose two main goals are to save for retirement and maintain their standard of living.  Based on their particular situation and goals, their hierarchy of savings might look something like this:

1. Contribute to your employer sponsored 401(k) plan, up to the company match. If your plan offers a Roth 401(k) option, make Roth contributions for tax-free retirement income.

2. Save and maintain an adequate amount of cash on hand for short-term reserve and emergency needs, typically 3-6 months of expenses

3. Save to a 529 College Savings Account for each of your children. Calculate the savings amount needed to fully fund their educational needs, whether for a two-year, four-year, tech school, or other. Develop a monthly contribution plan to achieve this savings amount prior to the start of their education.

4. Maximize your employer sponsored 401(k) plan to the statutory limit of $19,500 per year (2021).

5. If you are eligible to fund a Roth IRA, contribute the maximum of $6,000 annually (2021).

6. If your employer 401(k) plan allows after-tax 401(k) contributions and in-plan conversions, fund your 401(k) to the total contribution limit of $58,000 (2021). Convert your after-tax contributions periodically to Roth 401(k) inside your plan.

7. Systematically save on a monthly basis to a non-qualified investment account.


The Hierarchy of Savings is meant to be followed one step at a time in order to achieve your long-term financial goals. Every family’s situation is different and should be assessed based on their unique goals. If you need help creating a savings plan for your family, we’re here to help.