Prioritizing Your Money: Putting your money to work in the most effective way

The key to prioritizing your money is letting it flow into high-interest accounts.

Many modern people can barely count on their fingers the number of different financial accounts that they have. School loans, mutual funds, car loans, mortgages, stocks, savings account, emergency fund, retirement funds, credit cards, checking accounts…the list could go on and on. With so many places for your money, it can be difficult to know how to prioritize the way you use your money in these accounts.

The goal of this essay is to show you some simple principles for maximizing the power of your money across all your financial accounts. The key here is going to be to understand the way interest rates work in combination with inflation.

The first step is to make a list of your accounts along with their productive or reductive values (interest). Below we’ve listed a hypothetical situation for you to consider:

Account Current Value Rate of Production or Reduction
Credit Cards $9,000 -14%
Company Retirement $15,000 9 – 11% Tax Deferred
IRA Retirement $30,000 9-11% and Tax Deferred
Standard Mutual Fund $40,000 9-11%
Auto Loan $10,000 -8%
Mortgage $120,000 -6%
Savings Account $35,000 4%
Emergency Fund* $10,000 2%

Here, we have ten accounts, all of which are common financial accounts for the average person. There are two questions to ask about this table. First, is the money properly distributed across accounts? In other words, are we currently maximizing the power of our money. Second, if we were to find ourselves with an extra $20,000, what would be the best way to distribute this money across our accounts.

Hopefully, by asking these two questions, we can help you to prioritize your money and maximize your wealth.

Let’s address the first question: is the money properly distributed across accounts? The short answer is no. Can you figure out why? The main reason is that you have too much money wrapped up in low-production accounts like savings. Your first move should be to take the money in your savings account and put it towards accounts with the highest interest rates (both positive and negative). In this scenario, the highest interest rates are your credit cards. You should move money from your savings account to your credit card account.

Once you’d paid off your credit card accounts, you’d still have $26,000 left in savings: still way too much. In its current state, that money is not being used effectively. The next step is to look for the next highest interest rates. All of your investment accounts (there are three of them) provide a 9-11% return. However, your retirement accounts are tax-deductible and should be used before your non-retirement mutual fund. For more on this, see our article on prioritizing your retirement investments.

Keep following this procedure, and soon you will have maximized your investment returns. Hint: the next step would be paying off your car loan at 8%.

It turns out, that the very same principle applies if you find yourself with an extra $20,000. The best way to maximize the power of this money is to place it in those accounts with the highest interest rates (both positive and negative). Perhaps the worst thing you could do is to put this $20,000 into a savings account accruing only 4% interest. By doing that, you’d actually be putting your money at risk because it barely makes money in a savings account after inflation and taxes.

You should always prioritize the flow of your money based on the rate of interest in your accounts. By making a chart where the highest interest accounts are at top and the lowest are at the bottom, you can quickly get a picture of where your money should flow (hint: to the top!) By using this simple principle, you can maximize the power of your money in today’s modern economy.