I believe our dollars should be broken down into three main categories. Present money, future money and retirement money. These categories should be contributed to after the elimination of debt, with the exception of mortgage debt.

Present money can be broken down further to include an emergency fund and cost of living fund/household budget. Present money is usually kept in cash in a regular saving or high yield saving account. What percentage of net worth kept in the present fund is going to depend on your monthly budget and how much emergency fund you desire.

Future funds are funds that are invested in order to get a return that is greater than inflation. It is usually invested in stocks and bonds in a taxable investing account. Future funds are meant to be invested for 10-20 years and are great for those seeking early retirement. If not used for early retirement then future funds can be used to make major purchases and each future fund portfolio should have a goal for which it was developed. It may be difficult at times to avoid selling down the portfolio during a bear market for planned purchases. If this does occur then the emergency fund can be used, but as long as you’ve still persevere your principal investment then selling down the portfolio during a bear market should not matter.

What percentage of network kept in future funds is subjective, but it’s generally best to contribute to and max out your retirement accounts first before putting money in future funds, unless you are seeking early retirement.

Retirement funds is meant for funding retirement and a traditional retirement would start when funds are able to be withdrawn from tax deferred retirement accounts penalty free. This age is 59.5. Most keep the majority of their net worth in retirement accounts. These accounts should be maxed out first when able to. These accounts should not be touched before age 59.5. No withdrawals whatsoever. That’s what present and future funds are for.

Once you’re in retirement then a portion of your nest egg/retirement fund will become your present money. Whether you plan on living on 4% or 8% of your nest egg is up to the individual and this will become your present money. The 92 or 96% becomes your future money and should be conservatively invested in a high bond portfolio or annuity.

At this point there is less need to put money aside for future purchases, especially if you have a big nest egg. You can just spend down more of your nest egg to cover the cost. If you have a smaller nest egg and a tight budget then building up a bigger 1-2 year emergency fund will be paramount as well as developing passive streams of income. Having a side gig or PRN type job to cover unexpected expenses might be something to consider as well.

Of all the categories, retirement money is the most important because it’s generally invested for the longest amount of time and benefits the most from compounding. The bigger your nest egg the more comfortable your retirement will be. Putting aside 15% of your income for retirement will generally give you a comfortable nest egg. If you can’t hit that percentage just contribute early and often and you’ll come close enough.