When I explain to clients or prospective clients how to save, I have an approach I like to call my “Next Dollar Policy.” The policy exists so that I don’t have to think about it – when I get to a world where there’s extra, I know exactly where it will go. Here’s a high level overview of my NDP, but see the Next Dollar Policy post for more details:

1.  Get (and hide) all the Free Money from your 401(k) – it’s not even part of this – it’s nonnegotiable as soon as you can afford it.  
2. Reverse Budget – in a perfect world, your savings is included, but in the beginning, it’s more realistic to realize that it’s not – to find out what you’re working with on a monthly basis.  Your retirement savings goes into the Reverse Budget.  If you have debt to pay (credit cards and student loans), this also goes in the reverse budget. The secret to a successful reverse budget is using it to hide some extra money for yourself!
3. Decide which dollars are available to spend, which I call “Sound Spending” (SS) and “Better to Save” (BS) for your after tax money.  I like this because it aligns the BS with the stuff I don’t really want to do!
   • Be realistic.  It might be “better” to save in most months, and some months you’ll accidentally spend too much at Nordstrom.  It’s ok.  Just pay off that credit card and move on next month. 
   • As your income increases, most of your Reverse Budget items remain fixed costs, like your mortgage – so you can split your raises between increasing your retirement savings to the max and then between AS and BS.  
4. The BS dollars need to be doled out between High Yield Savings, Health Savings Accounts, Roth IRAs and After Tax Savings (Investments).  
5. The SS dollars still need a methodology.  Bucket them into things like Self Care, Date Nights & babysitters, Retail Therapy, Family Vacations, Girls Trips.  

Hiding Your Own Money

How great is the feeling when you put on a winter coat and find a $20 in the pocket that you totally forgot about?  This hasn’t really happened to me in a very long time, probably since I was young enough to be dating, going to bars, and carrying cash (all of which happened in the early 2000s).  This is why I love the policy of hiding my own money.  

It’s not really hidden – but it goes somewhere with a separate login than your regular bank account – hence, you don’t see it every time you log in to check your bank balance. 

A 401(k) is the most common retirement plan option available to employees today. If you work for a nonprofit or in education, you may have a 403(b) instead – they’re very similar – but always check with an advisor (like me!) if you’re looking for specifics on how they compare. This type of account is sponsored by employers, and allows employees to make tax-deferred contributions and invest for retirement. You save tax dollars today, and you invest for the long term, because you can’t easily access the funds until age 59 1/2.

401(k) plans came to be in 1980 – just 6 years after 1974 when women could finally get a bank account without a male cosigner! While the plans have evolved substantially (and positively) since the Reagan era, I still want to call out a few ‘catches’ that women (and men!) should be aware of when contributing to and investing inside their 401(k).

Start with hiding your money is your employer 401(k).  Often, employers offer you a match on the first dollars you save.  This is typically something like ½ of your first 6% of salary, or 3%.  So if you make $100,000 a year, and you save $6,000 into your 401(k) plan, your employer will match (read: GIVE) $3,000 into the plan.  That is free money.  FREE.  MONEY.  You don’t get it if you don’t save.  Double plus bonus – saving your $6,000 doesn’t actually cost you $6,000 off the top of your paycheck, because of the tax benefit of these plans.  These dollars are pretax dollars today.  So your paycheck math takes out the savings BEFORE it calculates the taxes to be withheld.  This means that for every $1,000 you save to your plan, you pay about $300 less in taxes (using an average effective rate of 25% federal and 5% state) – so your paychecks only go down about $700 for that grand you get in savings.  Pretty. damn. awesome.  

What’s the catch here?  Well, depends on how you look at it.  These dollars get saved and aren’t accessible to you until you’re 59 ½ years old, under today’s law.  That’s when you get to find that $20 in your pocket – only guess what, it’s a $50 now.  401(k) dollars should be invested in the market, and I think, as aggressively as possible.  You’re not spending this money, so there’s time to let it grow!  This is the reason I think the “catch” is just fine, because in so many ways it works out to your benefit. 

There is another catch though – your investments are limited to a menu that the employer has selected. While employers do have a fiduciary duty to their employees in the selection of these investments, it’s still possible that these aren’t the cheapest or best investments available for your personal situation. When you’re starting out, investing in a global ETF is just fine, and your employer probably has one of those in the plan.  Once you’re account is really growing, you should be checking to see if your employer offers a ‘Brokerage Link’ option – this means that you can choose investments outside of what you’re employer has selected, so a financial advisor can often step in and recommend better (more cost effective) investments. Some plans even allow for ‘in service withdrawals,’ especially after you’ve reached 59 1/2. These are meant for those who need to access their accounts but still wish to work – but this can also be used to roll funds to an IRA account where the investment options are not limited by the employer.

However it’s invested, investment gains are tax deferred in these accounts, which means that your money is growing without having to pay any tax on it until later, when you’re spending it.  The reason this is all so awesome is compound growth.  Compounding is like a flywheel – once things get moving, it keeps going of it’s own volition.  Compounding dollars means, essentially, that the more dollars in your account, the more interest or growth you can achieve, which results in more dollars, more growth, ad infinitum.  We’ll talk lots more about investments in other posts, for now the important part is that the dollars are IN the market.  

One other “catch” is the limitation on how much you can save into these plans.  For 2025, the limit is $23,500.  To me starting out, that was a whopping number that I could NEVER imagine saving. Today though, I max out. Here’s how: most plans will allow you to automatically set your contributions to increase by 1% annually. You’ll barely notice it, and likely you got a raise when the extra savings kicks in and so you really won’t notice it! If you want to go a little faster, I recommend splitting those raises between your today self and your future self. If you got a 3% raise, bump up that 401(k) contribution by 1.5%, and keep the rest for yourself to allocate somewhere else (maybe even spending).

Is there any reason you WOULDN’T want save as much as you can, all the way to that limitation, into a 401(k)?  Yes, there is.  Generally this would apply if you’re in a very low tax rate right now, such as your beginning years of working, or even in some of the middle years where you have decent sized deductions for your kids (dependent care and child tax credits) and you expect to earn more later.  Another reason is that you need to build some other buckets – direct some of your dollars toward your after tax bucket first, before going up to that maximum.  We’ll get to that.  Step 1 though, remember, is save enough to get your full employer match – the free money.  

What if you’re not working for an employer right now?  That sucks.  While I’d love to jump on a big soapbox here about how these plans were meant for men because they had employers and women stayed at home working for their husband… I’ll spare you the rant.  But the amazing news is that if you are SELF employed, you just hit the retirement plan jackpot.  As an example, my sister is a nanny in NYC, and she receives a 1099 from her families, meaning she is SELF employed. That means she can open a Solo 401(k).

A Solo 401(k) or Individual 401(k) allows you to save in the shoes of both the employER and the employEE.  This means that in addition to your deferral of $23,500, you as the employer can give yourself a profit sharing contribution of up to 25% of what you’ve earned, up to a ceiling of about $60k.  So if you’re SELF employed, making $100k, and you are able to save some of these dollars, you can get on this train and defer, defer, defer those taxes.  When you spend this money in retirement, you will likely be at a lower tax rate (you’re not earning at your peak anymore – AND you can manage your tax rate by coordinating your savings into the various buckets), so you’re getting more like 75 – 80 cents of each dollar out to spend.  

These are often the times when a Financial Advisor should become part of your life.  They can not only educate, but also administrate and invest these dollars, and they’ll ensure you’re maximizing your tax savings and balancing this with your life needs.  I love to talk to women learning how to save and invest – if you’re one of them, I’m right here.