Portfolio Structure

Any revolving debt with interest rates higher than ~3% should be paid off before investing in stocks/bonds. The risk/return on investment from stocks and bonds is significantly diminished if interest payments are being made on debt while investing. For example, if $1000 is owed in debt with an 8% interest rate and $1000 is invested in a stock, the stock would need to return at least 8% just to break even given the interest that will be paid on the debt.

One exception to this rule is 401k’s with employer matching. Employers that match contributions dollar-for-dollar are effectively providing an immediate 100% return on investment.

Maintain enough in cash (checking/savings) accounts to cover 3-6 months of living expenses. Cash can also be used to save for short-term goals but is not a suitable long-term investment as inflation/taxes diminishes the real-return on savings account interest rates.

Tax-Deferred accounts such as IRA’s and 401k’s are used to accumulate wealth for retirement. In general, funds in tax-deferred accounts should not be withdrawn until the investor reaches 59 1/2 due to penalties that will be assessed. There are some exceptions such as using funds in an IRA to purchase a first home which the IRS will waive the penalty for.

If your employer matches contributions, putting in at least enough to get the full employer match should always be your first step. Otherwise, you are leaving free money on the table. If no employer matching is available or no 401k is available, it may be more efficient to invest in an IRA first depending on the fees that the 401k has.

IRA’s have lower contribution limits than 401k’s.

Investments can be made in taxable brokerage accounts to meet short-term and long-term goals. All income generated by the investments will be subject to taxes that vary based on asset type and income bracket.