At the risk of stating the obvious, you need money to make money. What is less obvious is or and in what Ordered to save and invest. After all, everything from tax-efficient retirement accounts to your cousin’s new start-up business seems like a place to put your hard-earned money.

However, just because you can investing in certain things does not mean that you should. If you want to optimize your long term wealth, you cannot allocate your dollars randomly. You need a plan — a systematic way to control your savings and investments. While these rules don’t have to be hard and fast, they can serve as good rules to follow.

Start by tackling any high-interest debt

Before you invest a penny, think eliminate all your high-interest debt first. Prioritize paying off your credit cards, payday loans, and other types of debt with double-digit interest rates. (However, debts with relatively low interest rates, such as mortgages and car loans, can be kept.)

There are two advantages to this strategy. For starters, reducing those heavy debts can help you sleep better at night. But it’s also good for your financial well-being since you effectively recoup the interest you would otherwise have had to pay.

Second, build an emergency fund

Now that your high-interest debt is gone, it’s time to establish an emergency fund. Also known as a rainy day fund, this cash reserve will act as a financial cushion if you ever lose your job, need medical attention, or experience another type of emergency.

In general, try to set aside at least 6 months of expenses, although you can always err on the side of caution and save a little more. For best results, house your emergency fund in a high-yield savings account or money market fund, like this one from Vanguard. Federal Money Market Fund (NASDAQMUTFUND: VMFXX).

However, don’t worry too much about maximizing yield here. Even if your money is just gathering dust, that’s okay. In fact, that’s arguably the point – to have a stable, easily accessible reserve of cash on hand when you need it most.

Then contribute to your retirement accounts

Now that your short-term financial needs are met, it’s time to save and invest for the long term in a tax-efficient manner.

On the retirement front, you can contribute to a traditional or Roth Individual Retirement Account (IRA). With a traditional IRA, your initial contribution is tax deductible – and the money, once inside the account, is compounded on a tax-deferred basis. Upon withdrawal, the income is taxed as ordinary income.

On the other hand, Roth IRA contributions are not tax deductible. However, funds inside the account become tax-exempt and you are not taxed on earnings or withdrawals.

In 2022, you can contribute up to a total of $6,000 (plus an additional $1,000 if you’re 50 or older) to either type of IRA, though Roth contributions are subject to additional income restrictions. To be eligible, single filers must have a modified adjusted gross income (MAGI) of less than $144,000, and married filers’ combined MAGI must not exceed $214,000.

If your employer offers you a 401(k), you can also use them. In 2022, you can contribute up to $20,500 combined (or up to $27,000 if you’re 50 or older) into traditional or Roth 401(k).

401(k) contribution limits are in addition to IRA limits, so you can potentially save $6,000 (up to $7,000) in your IRA and $20,500 (up to $27,000) in your 401(k) in the same year. Of course, that’s a lot of money, so don’t worry if you can’t hit those limits – but if you can, that’s great! Instead, try to at least maximize your employer match if possible.

Then consider other tax-efficient savings accounts

Retirement accounts aren’t the only ones with built-in tax benefits. If you have a Health Savings Account (HSA) or have established a 529 college savings plan for a child, consider contributing to these investment accounts as well.

HSAs must be associated with a high-deductible health plan (HDHP) and are subject to annual contribution limits. In 2022, individuals can save up to $3,650, while families are limited to $7,300. People 55 and older can make an additional “catch-up” contribution of $1,000.

What does this mean to you

Finally, if you still have money left over after maximizing all your tax-advantaged accounts, you might consider saving and investing in a taxable brokerage account. Or, maybe you can indulge a little – you decide!

Either way, the message is simple: save in a strategic, tax-efficient order that maximizes your short- and long-term financial well-being.

Save enough for now so you can cover your bills, pay off debts, and weather the tough times, as well as save enough for retirement, medical bills, your child’s education, and other important expenses that may arise. occur in the future.

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Dumb Contributor Ryan Sze does not hold any financial position in any of the companies mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.