How To Prioritize Your Investments For Financial Independence

How to prioritize your investments for financial independenceFirst off, I’m not a professional financial advisor and I’m just sharing what worked for me. If you need help with your investments, you might want to talk to a financial advisor.

When I got my first job, I had no idea how to invest my income. I never had any extra money before and investing was a foreign concept to me. I knew how to be frugal and to save money, but I knew nothing about investing.   Luckily, my dad pushed me to start contributing to my 401k right away. This was a great advice and it started me down the path of investing instead of the typical American consumerism lifestyle.

Many people aren’t really sure how to invest their money when they first start out. I went through the public school system and 5 years of college and I never had a class on investing. We really should make basic financial literacy a part of our education. I was really lucky that I had someone who convinced me to start investing as soon as I started my first job.

So here is my attempt to help those that want to start investing, but are unsure what to do. We’ll start off with the high priority items and then go down the list.

Priority 1 – Grow your savings

The first thing everyone should concentrate on is growing your savings. This means increasing your income and decreasing your expense. Your career is probably the single most important investment you can make. That’s where the majority of your income will come from over a lifetime. You can get an advanced degree, technical certification, or just learn new skills to improve your chances of getting ahead.

Another way to grow your income is to find some side hustles that you enjoy. I met many people who house sat, blogged, consulted, and otherwise figured out a way to make a bit extra on the side. Some of these side jobs can grow to be an enjoyable full time gig as well.

Don’t forget about the expense side of equation. A lot of people have high income, but they spend it all. You need to focus on growing the difference between your income and expense. That’s just a fancy word for saving, but it’s a huge first step to financial independence.

Priority 2 – Pay off Debt

High interest debts are killers. If you are carrying a balance on your credit card, you are paying a ton of interest every month. You are just making the credit card company richer and you need to get rid of that balance fast. The average interest rate of a credit card is around 15%. It is very difficult to achieve this kind of return with your investments. Concentrate on paying credit card debt off first if you are carrying a balance.

Mortgage, student loans, car loans, and other lower interest rate loans are more debatable. It’s still good to pay them off, but perhaps don’t need to be prioritized as much.

Priority 3 – Tax deferred retirement accounts

As mentioned above, the 401k was my first foray into investment. I made some mistakes along the way, but I learned quite a bit as well. It’s great that you can defer tax on the contribution and everyone should take advantage of it. Anytime you can put off paying tax, you really should.

  1. 401k up to matching. Many employers will match a certain amount of your 401k contribution. That’s an instant 100% return on investment. I would concentrate on index funds in your 401k. You can build up a stable foundation here and diversify elsewhere.
  2. Max out Roth IRA contribution. For 2013, you can contribute $5,500 to your Roth IRA. The contribution will be after tax, but you won’t have to pay any tax on the capital gain when you withdraw in retirement.
  3. Max out 401k contribution. Once you max out your Roth IRA contribution, concentrate on maxing out your 401k every year. For 2013, you can contribute up to $17,500. That might sound like a lot of money, but you will see that it’s nothing compared to what your retirement portfolio will look like in 20 years.

Some young folks hesitate to contribute to their retirement accounts because they won’t see the benefit until they are 60. This isn’t strictly true. We maxed out our 401k and Roth IRA for over 10 years and it gave me the confidence to leave my career. If I didn’t have my retirement accounts as a fallback, I don’t think I could bear to walk away from a steady paycheck.

Priority 4 – Taxable accounts

After this, it’s more flexible. You can try all of these in parallel or concentrate on one thing at a time.

  • Taxable brokerage account. After a few years investing in mutual funds, you’d probably want to invest in individual stocks. You can open a brokerage account and invest in whatever company you like. I started out investing in growth stocks, but recently I converted most of my portfolio to dividend stocks to generate some income.
  • Bonds. Bonds are pretty boring and usually not as lucrative as stock investing. However, in a down market, bonds usually increase in value. You can sell some bonds and buy stocks when the price is down. Everyone needs some bonds in their portfolio to balance out their stock investment. One easy way to start is to buy I Bonds from the US Treasury. You can also buy some certificate of deposit from your bank.
  • Rental properties. Some people like tangible assets and enjoy being a landlord. Usually rental properties require more money to get started though so you might have to save up and wait for the right time to enter the market.
  • Peer to peer lending. This is a relative new way to invest. Lending money to consumers is a tough business, but many people are getting decent ROI. This is a good way to generate a little income, but we don’t know if it can sustain the high ROI in a bad economy. Our investment at is returning 8.66% at this time. Also, I wouldn’t invest more than 5% of your net worth in P2P lending.
  • Diversification. We also need to diversify our portfolio with investments other than stocks, bonds, and properties. You can try investing in REIT, precious metals, energy companies, or commodities.

Priority 5 – Other investments

  • Pay down mortgage. This is pretty low on my list. I don’t mind carrying some low interest mortgage debt. I guess it just depends on your personality.
  • 529 plan (saving for college.) We want to help RB40 Junior with his college education as much as possible. I would hate for him to start life off with a huge student loan.
  • Life insurance. Yes, I’m getting on it and just emailed my insurance guy to get the ball rolling.
  • Annuities.
  • A lotto ticket. Powerball jackpot is $235 million dollars! 🙂

These are a bit lower priority and probably could be delayed for most people. Actually, I guess life insurance should be higher on the priority list. Did I miss any of your favorite investments?

I hope this is helpful for some of our readers who need a little help getting started. The goal is to keep building your net worth and reach Financial Independence. Let me know if you have any addition to this list. 

If you need more help with your investment try signing up with Personal Capital through this link. It’s a free service to go over your portfolio and they might be a good fit for you. (affiliate link.)


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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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51 thoughts on “How To Prioritize Your Investments For Financial Independence”

  1. I keep seeing you checking out peer-to-peer lending. I have tried and dd not like it at all. I lost 57%. Loans went bad a lot and I only invested in A and AA loans. Surely hope your experience is better than mine and I will not be trying it again.

    Have been checking your site out and found many useful, information suggestions. Thanks for blogging. I am on the same trip and starting to enjoy it.

  2. I know most people recommend doing the 401k up to the matching, then Roth IRA, then max out 401k. I’m electing to max out the 401k first because that’s the more automatic one. It’s deducted from my paycheck and I don’t have the opportunity to spend it. I still haven’t kicked all of my consumerist urges so the more automatic and locked away the better for me :p

  3. I just wanted to mention that a high net worth doesn’t necessarily mean a solid financial footing! We have almost a half million net worth, but we have almost 1mil in assets, and half a mil in liabilities. I would consider us not-quite living paycheck to paycheck, but not far from it. We live in a very high cost of living area, so our house plays a *huge* part of our assets (and liabilities). So while our net worth may be high, it’s not necessarily the “key” to financial independence.

  4. I agree with priority number 1 being to grow your savings. Its so important to analyse properly what you are spending money on and cut down on the non-essentials if you really want to grow your savings.

  5. I love the lottery ticket strategy. That is my plan! Haha!

    All kidding aside, I think these are great tips! I’m a big saver but I don’t always know what to do with my money once it’s saved. That is one area that I’m working on.

  6. This was so helpful! I know next to nothing about investments. Just started regularly contributing to my Roth account, but as you know my biggest goal is to pay off my student loans. Once they are gone, I can divide the 1k+ a mo into retirement, savings and fun money. Oh, I can’t wait!

  7. Why max out your 401k before investing in passive income like rental properties? Even if a rental property breaks even for no monthly profit, assuming 2-5% yearly inflation on the value of the property, if you hold the property long term, you’ll have a nice profit when it comes time to sell and the tax benefits along the way.

    Most families I know (including mine), aren’t able to do both, but grabbing the employer match dollars is a must.

    • Historically, stocks have always outpace housing. I’m not sure about stock vs rental properties though.
      401k is just easier to invest in than real estate. Almost everyone can participate in their 401k plan, but only a few people can deal with rental properties.

  8. Well, wouldn’t put lotto in there (the tax on stupid), although I saw some show on 20/20 or something about some guy that’s won like 7 times now using some goofy system. Seemed hard to believe but he made it onto a legit show somehow… Anyway, most folks probably would be best off with a fee-only advisor at least once. many don’t know where to start!

    • I buy a ticket once in a blue moon. It’s just for entertainment value really. I know I don’t have a chance, but it’s still fun.
      Personal Finance is a good place to get one session in. It’s not bad at all.

  9. I’m curious why Roth IRA contributions would be prioritized before maxing out 401K. Due to the pre-tax benefits of 401K wouldn’t it be better to max that out first before doing Roth?

    • Roth IRA is good because you won’t have to pay tax on that account in the future. It will give more Tax flexibility when you need to withdraw later. Basically, you should do both. You can also withdraw some funds from Roth earlier with no penalty.

  10. I am a strong advocate for keeping your investments simple. You can just invest in the total stock market index and you have the broadest most diversified investment. I think it is a good basic investment and you can build from there. I stated investing before there were 401k’s! The key was I saved and invested.

    • I like the total stock market index when I started out, but it is lacking in some ways. I would like more small caps, foreign market, and under represented sectors like utilities. Diversification is a good thing, but it is more work.

  11. I favor taxable accounts over tax deferred ones because I want to hit financial independence sooner rather than later. After I hit financial independence, I’ll reassess my goals, maybe start maxing an IRA.

    I consider financial independence more of an insurance policy than a retirement plan. I’m not planning on ditching my job, the moment I hit FI. Rather, I’m planning on FI buffering me from random layoffs or career burnout. FI will also let me take risks, like joining a startup in a nicer area of the country without having to worry about a plan B if the startup fails as so many do.

    • That’s good too. I still prefer tax deferred accounts because I figure we can always work a little when we’re young. It’s better to keep some funds for when we’re older.
      FI is great too. 🙂

      • As someone who retired 2 years ago @ 48, I’d like to weigh in here, as a voice of experience.
        You’ve made this same point in a rebuttal of sorts to anyone who has mentioned slanting more towards the taxable accounts because of needing the funds for early retirement. Most people can indeed continue to work a little, but if they have to work, they’re not really retired. If they WANT to work a little, then that’s great, but it should be just one of your options. You might also do some work, but maybe not enough to pay all the bills, so you would still need income from investments to fill the gap. I and my wife both worked part time the last 2 years (me VERY part time), and still we took about $15k out of taxable accounts to maintain our pre-retirement expenses. I’ve got 9 1/2 more years before I can start taking money from tax advantaged accounts safely, so I’ve got to know that I can make it without HAVING to work, because if I HAVE to work to make the whole thing happen, I’m not really retired, am I?

        • Sure, you can look at it that way. I look at it a bit differently. If I enjoy my work, then that’s a good thing. I don’t see why retired people can’t work. You can still enjoy your retirement even if you HAVE to work a little bit. It’s not a big deal for me.

  12. Start trying to get those side hustles going as soon as possible, no delays.

    Once kids show up, time and energy to push them over the top becomes scarce.

    The 529 is an extremely generous financial move, but many would argue that all funds to go toward your retirement because you would not want to forsake that and then end up as a financial burden on your children because you were too busy diverting your money towards their education.

    For the record, I fund two 529 accounts monthly, so I’m on your side.

    • You’re right about the kids. We rarely have time left to do anything these days.
      529 is lower priority for me as well, but I do want to help out our kid with his education.

  13. Can someone explain the traditional IRA? Can I contribute to one of those if I contribute to 401k? Should I? If I do, does it make sense to do a conversion to a Roth IRA (above the Rotha IRA income limit).

    • From what I understand, the sum of 401k and traditional IRA contribution can’t exceed contribution limit ($17.5k).
      I don’t like converting to Roth because you’ll be paying a ton of taxes. It depends on what you think your tax rate in retiremetn will be. If your tax rate is higher in retirement, then converting to Roth IRA makes sense.

  14. Thank you so much for posting this!! I have a similar path pictured in my mind, and am not exactly sure it is what I should be thinking, so your list greatly helps me out, and also points out some things I hadn’t considered. I don’t think I’ll ever be able to contribute fully to my 401K (I make less than double the 401K cap, so..yea) because I’d like to start investing in mutual funds. This way, I’ll have access to money earlier so I can become financially independent (waaaay) before retirement age. I also just got life insurance (term for a couple years to eventually be rolled into whole – we are planning on starting a business within the next few years so I saw it as a MUST to get started on).

    • Good luck! You might not make a lot of money now, but someday you will. Just keep control of your expenses and you’ll have more to invest.

  15. I managed to do the “grow your savings” part and I am now seriously looking into ways to invest money. Living in Romania doesn’t give me all the nice options you guys have in the US – like the 401K and Roth IRA (we’re just starting with the private pensions part so…) but there are certainly ways to invest and be smart about it: I am actually looking into getting some stocks on the market, but since I know nothing about that, I will give me a few months to learn the basics. And risk that first purchase 🙂

  16. One of the best “investments” you can make is having a low cost of living lifestyle. The biggest elephant in the room is the house that you might get an urge to buy after a couple of years working a real job that pays well. Most people are tempted or talked into buying the biggest house they can afford, which will leave them with little money to invest after paying all the bills. My advice would be to buy only as much house as you need. Smaller house will free up a lot of cash flow so that you can invest into income producing assets, such as those covered in this article. Same approach can then be applied to other big expenses, such as auto and other discretionary spending. Investing is great, but most people struggle to find the money to do so after paying all their bills since they have designed an inefficient lifestyle for themselves.

    • I agree. That’s why I mentioned controlling your expense in the priority 1. Housing is a big part of that. Thanks for your comment.

  17. Nice post Joe! I like your breakdown and order of what to attack. I would also tend to agree with Robert that if you’re shooting for early retirement to keep that in mind in regards to what you’re putting in tax deferred accounts vs. taxable accounts. Another thing that I might add is looking for tax diversification with your retirement accounts. It’s something many do not think of and can be a potential benefit for some people.

    • Thanks. I still like putting more in retirement accounts. When you’re young, you can always find ways to make money. When you’re older, it becomes much harder. That’s why I like having more in retirement accounts.

  18. Rby40,
    At the end of the article you mentioned ANNUITIES, isn’t that something many recommend to stay away from?

    • That’s why I put it as low priority. 🙂 I think it’s a good diversification, but you probably don’t want to put all your money there. Maybe 10% to 20%…

      • I’m just surprised 529 plans are down on that level too. And all insurance (good term and bad VUL) are lumped together into one line.

        • I assume the readers will figure out their own life insurance. The topic is too big to go in depth in this post.
          As for 529, I guess it depends on how much you want to help your children. They will have more options too.

  19. Depending on how early you plan on being independent (or retired), you may want to have more in taxable accounts than retirement accounts. My friend just wanted to retire at 50, but all his “retirement” savings was in IRAs and 401ks, which he could access until he was older. Lesson learned – max out savings and keep some in taxable accounts as well.

    • It depends on your plan. If your friend can work part time from 50 to 60, then his nest egg will keep growing.
      After 60, he can withdraw at a more comfortable pace.

    • Contributions from Roth IRA’s can be withdrawn any time, even for early retirement.

      IRA’s can be withdrawn from using “substantially equal periodic payments” (SEPP). Once risk of SEPP is that you are locked into continuing the withdrawals even if you want to stop, for 5 years or until 59.5, whichever is later. Still, age 50 means one is locked in to only 10 years of SEPP, which isn’t too bad.

      401(k)s and 403(b)s can be transferred to an IRA and then SEPP can be taken. Alternatively, if you wait until age 55 or to leave an employer, you can start withdrawing from that employer’s 401(k) right away.

      If you happen to have a 457 deferred compensation plan, you can usually withdraw the money any time after leaving the employer, regardless of age.

      So my point is, just because money is in a retirement account does not mean that you can’t use that money until full retirement age.

  20. I do think life insurance is optional for singles with no dependents. I also think that maxing out the 401K should not be a priority if you can do better yourself in your brokerage account. For me I only contribute up to the match, and dump everything else into my brokerage account after maxing out my ROTH contribution.

    • Andrew…don’t fail to neglect the power of pre-tax dollars into your 401k. Assuming a 15% tax bracket, for every $100 you put into your 401k the equivalent amount to put into a brokerage account is only $85. Can you beat the return of your 401k, in excess of 15%? Many people are not able to do this consistently…in fact, if you can…you should sell your secret!

    • Sure, that’s a good option too. 401k is a great starting place for new investor though. If you have good funds in your 401k, you’ll be able to build a stable foundation. You can always branch out later on in the taxable account. Also many of us are in the higher tax bracket. 25% is a big deal.


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