Investing Income: The Order of Operations

Imagine you’ve just received your paycheck or annual bonus. You may wonder how best to save or invest it to maximize its value. But with so many different types of accounts, competing goals, and tax classifications, it can be overwhelming to know how to get started and where to allocate your savings.

In this article, we’ll highlight the investing order of operations financial professionals often recommend after receiving income. Additionally, we’ll examine how this can shift throughout your life, depending on your income, life stage, and overarching goals. To provide deeper insight, we’ve included the perspectives of multiple financial advisors with cash flow, investment management, and budgeting expertise.

1. Pay Off High-Interest Debt and Build an Emergency Fund

Investing is a great, forward-looking way to get ahead, especially when done in the right order. But it works best when your present life is in good shape, ensuring you’re not sacrificing life now or making yourself financially vulnerable.

A crucial first step to begin saving more effectively is paying off high-interest debt. Unpaid credit cards or personal loans with high interest rates can put you behind and, ultimately, derail your ability to pad savings and invest. Your cash flow, essentially, belongs to your debt, not you, making it the utmost priority to erase it from your balance sheet.

Once clear of bad debt, it’s smart to stack a strong cash reserve for emergencies “before large sums of money” go into “retirement accounts or brokerage accounts,” says Alex Canitano, Associate Wealth Manager at Fairway Wealth Management. “A general recommendation is to keep between three- and six-months’ worth of cash on hand, to be used in time of emergency or uncertainty. This could be a medical emergency, job loss, etc.,” he says.

Where should you keep your emergency fund? This depends on your needs and goals, but storing at least some of it in a high-yield savings account (HYSA) can be beneficial. By doing so, your funds aren’t just sitting there; they could be earning up to around 4.5% in monthly interest which could compound over time. However, you may also choose to keep a portion in an easily accessible checking or savings account if you desire easier liquidity.

Staying out of excessive high-interest debt and keeping money available for emergencies can set you up to start your investing strategy. If you’re unsure how to get started, a qualified financial advisor can help you with tasks such as debt management, building emergency savings, and monthly budgeting.

2. Contribute to Your 401(k) Up to Employer Match

Since it allows for regular, automatic tax-advantaged contributions, your 401(k) is a valuable place to begin investing. But possibly the most powerful characteristic is employer matching. If your company offers a match (some offer up to 6% of your contributions annually or per paycheck), this is essentially free money from them that goes straight into your account.

At least at first, the goal should be to contribute enough to qualify for your employer’s full contribution, if applicable. This allows you to boost your retirement savings and long-term potential for compound interest. Ben Loughery CFP^®, CRPC^™, founder of Lock Wealth Management, advises to “[always] contribute at least enough to get the match because it’s a 100% return.”

Once you’ve crossed the threshold for your employer’s contribution, you’ll have to decide whether to continue funding up to the annual limit or allocate money to other vehicles, such as a traditional or Roth IRA or taxable brokerage account.

“I analyze my clients’ current and projected tax brackets to determine whether to contribute to their Roth or Traditional IRA,” explains Asher Rogovy, chief investment officer at Magnifina. He adds that he views the “main benefit of a 401k as any contribution match provided by an employer,” but “[otherwise] IRA accounts generally provide more flexibility with investments.”

While 401(k)s allow for easy, often automatic contributions from your salary and come with matching, they can be limited in their investment choices. Most often, you’ll have to pick your securities from a curated selection, or they could already be chosen for you by a fund manager. It’s for this reason, as Rogovy mentions, that it could be worth contributing to a Roth IRA instead once you hit the match for greater investing control.

3. Contribute to or Max Out a Roth IRA

The next most promising place to save and invest your income for retirement is within a traditional or Roth IRA. Roth IRAs let you contribute after-tax dollars and withdraw both contributions and earnings tax-free when you reach 59.5 years old. In contrast, traditional IRAs work more like a 401(k) and defer taxes until you retire and reach eligibility at 59.5 years old.

As of 2025, you can contribute up to $7,000 ($8,000 if you’re 50 or older) to both types of accounts. However, Roth IRAs come with household income phaseout limits: $150,000 to $165,000 if you’re a single filer and $236,000 to $246,000 if you’re married and filing jointly. So be aware that if you’re at or over these numbers, you can’t contribute directly.

Contributing to a Roth IRA can have significant benefits, particularly for younger investors. “Since Roth IRA contributions are made with after-tax dollars, these contributions do not reduce taxable income, which does happen with pre-tax 401(k) contributions,” says Canitano. “For this reason, it makes sense to make Roth IRA contributions until you reach a point where you have exceeded the income phaseout, then prioritize 401(k) contributions.”

It may make sense now to either invest in a traditional IRA or continue traditional 401(k) savings if you’re in a higher tax bracket now or expect a lower one upon retirement.

“Income phaseouts may also limit you to making Roth IRA contributions,” notes Loughery. It’s also possible to do a backdoor Roth IRA with the help of an advisory professional to reap the benefits of tax-free retirement income if your household income exceeds the phaseout limits for Roth IRA contributions.

Another advantage of both traditional and Roth IRAs is their investment flexibility. Unlike a 401(k), you get to decide which assets fit your risk tolerance and time horizon, either by yourself or with the assistance of an investment advisor.

4. Max Out Your 401(k) or Similar Plan

Once you’ve been regularly contributing to your Roth IRA and have already put in enough to reach your employer’s match, then you can refocus on maximizing your 401(k) or similar retirement plan for the year.

This is much easier said than done, though, especially if you’re in a lower-income stage of life. In 2025, the maximum annual limit for workplace retirement plans—including 401(k), 403(b), or 457(b)— contributions is $23,500 ($31,500 if you’re 50 or older). If you’re just getting started as a professional, putting away that much money for the future can be intimidating.

But by contributing more money to your traditional 401(k), you can reduce your taxable income in the present. Why can this matter? If your income is already high, this can allow you to pay fewer taxes in the current year. It can also be helpful if your Roth or regular IRA is full and you want to direct even more toward retirement.

Consider, however, that a 401(k) will still incur taxes at some point—and potentially when you’re at a higher tax rate. Once you retire, you’ll face income taxes upon drawing down the funds. Unlike Roth IRAs, the money is also subject to required minimum distributions (RMDs), which require you to begin taking money out at around 73 years old to avoid penalties.

It’s always possible, though, to convert your 401(k) to a Roth IRA to sidestep higher taxes in retirement. However, this still sustains taxes during the conversion process and can be complex, so it’s recommended to consult an experienced financial advisor or retirement planning professional beforehand.

5. Contribute to a Taxable Brokerage Account

After you’ve addressed your retirement savings and investing, the next step in the order of operations is putting money into a taxable brokerage account. Unlike retirement accounts or employer-sponsored plans, like Roth IRAs and 401(k)s, this money is always accessible and comes with unlimited freedom to contribute and invest. There are no annual contributions or phaseout limits to worry about.

“The formula is simple: income minus expenses equals savings, but the decision on how/where to invest the savings is not,” says Canitano. “Part of the equation is solved by contribution limits. High earners would be wise to max out retirement plan contributions, then direct any remaining surplus into the taxable account,” he continues.

What should you do with the money in your brokerage account? According to Loughery, “Think of a taxable brokerage account as your flexible opportunity fund. It’s great for midterm goals like a home down payment or even a business fund.”

The money in a taxable brokerage is always there and, in theory, accessible. You don’t have to wait until you’re at retirement to use it without penalty. This can make it beneficial for accelerated saving and withdrawal for short-term goals, as Loughery points out.

Brokerage accounts do have some downsides, however, which is why they fall a bit lower on the list. They incur both income tax and capital gains taxes upon withdrawals, as you’ll often be liquidating your positions in your assets to be able to access your funds. You’ll also face trading fees with certain assets upon buying and selling.

There’s also always the real chance of losing money in a brokerage account. Investments are never guaranteed to pan out and can fall prey to market volatility, which can especially be an issue if you’re hoping to use funds for short-term goals and see losses. Rogovy explains that “investing in securities involves risk, but it might be appropriate depending on one’s goals.”

Therefore, it’s advisable to meet with a financial advisor, who can help develop an investment plan and help you understand the role a brokerage account could play in your portfolio.

Bottom Line and Key Thoughts

Receiving any income, whether it’s your monthly paycheck, a yearly bonus, or from something else, presents an opportunity to put a foot forward in your overarching financial plans. Whether it’s clearing high-interest debt, furthering retirement savings across multiple accounts, or investing in a brokerage account, there’s always a chance to maximize every dollar.

While we’ve presented a common order based on the insights of professionals, no two plans are the same. Your goals, needs, and financial circumstances are unique and require careful thought and consideration. In that way, you could end up taking a different path than another investor.

For instance, if your employer doesn’t have an employer match, you may jump right into a Roth IRA. Or if you exceed the income limits for a Roth IRA, you may use a traditional IRA and ponder options, such as a Roth conversion, later. These are just a couple of examples, but the variability in plans can be endless.

With the help of a financial advisor, you can understand and design a plan that accounts for your cash flow, short- and long-term goals, and risk tolerance. To find one, we recommend using this free matching tool. After answering a brief list of questions, it’ll connect you to a fiduciary professional that fits your needs and situation.