Navigating Your Financial Waterfall

Where Should Your Next Dollar Go?

Managing money often feels like solving a complex puzzle. You might wonder whether to boost your savings, pay off debt, or start investing. The idea of a financial waterfall can help you decide where your next dollar should flow — a sequence of priorities that helps most people get the biggest return per dollar saved.

But it is really about finding the right balance for your unique situation. The order below is a starting framework, not a fixed rule. Before we get into the waterfall itself, one foundation matters: an emergency fund. Three to six months of essential expenses in a high-yield savings account is the safety net that keeps the rest of this plan from falling apart when life throws a curveball.

#1) Employer Match: Don’t Leave Free Money Behind

If your employer offers a 401(k) match, this is your first stop. A common structure is a dollar-for-dollar match on the first 6% of your salary. On a $50,000 salary, that means you put in $3,000 and your employer puts in $3,000 — your money doubles the moment it hits the account.

Nothing else in personal finance comes close. Skipping this is one of the most expensive mistakes you can make, and even a partial contribution to capture some of the match is worth prioritizing. Just check your plan's vesting schedule — that is when the employer's dollars become fully yours.

#2) High-Interest Debt: Put out the Fire

Once the match is secured, direct your next dollar toward high-interest debt — typically credit cards, payday loans, or high-rate personal loans. This is not the same as low-rate debt like a 3% mortgage or subsidized student loans, which can often be managed as part of a long-term plan.

The math here is compelling. When a credit card charges 22% APR, paying it down produces a certain, risk-free return equal to that interest rate — something no traditional investment can reliably match. If you owe $5,000 on a card at 22%, aggressive repayment saves you roughly $1,100 a year in interest and frees cash flow for the steps ahead.

#3) Health Savings Account (HSA)

If you are enrolled in a qualifying High-Deductible Health Plan (HDHP), you are eligible for a Health Savings Account. The HSA is one of the most powerful tools in the tax code because it offers a genuine triple tax advantage: contributions are pretax, investment growth is tax-free, and qualified medical withdrawals are tax-free.

For 2026, contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, with an additional $1,000 catch-up for those 55 and older. Contributions made through payroll deduction also avoid Social Security and Medicare (FICA) taxes — a benefit you do not get by contributing outside of payroll. If your employer matches HSA contributions, prioritize enough to capture the full match, just as you would with a 401(k).

An advanced strategy: pay current medical costs out of pocket (if you have the cash), save the receipts, and let your HSA investments compound tax-free for years. You can reimburse yourself for those historical expenses at any point in the future, effectively creating a tax-free retirement bucket that also happens to cover healthcare. Because healthcare inflation has historically outpaced general inflation, this hedge grows more valuable over time.

#4) IRAs: Roth or Traditional

The choice between a Roth and a Traditional IRA usually comes down to the math of your current versus expected future tax rate.

A Traditional IRA offers an above-the-line deduction that reduces your Adjusted Gross Income today — generally most useful if you are in a high tax bracket now and expect to be in a lower one in retirement. However, deductibility phases out when you or your spouse are covered by a workplace retirement plan. For 2026, single filers covered by a workplace plan see the deduction begin to phase out at $81,000 of modified AGI and fully phase out at $91,000. For married couples filing jointly with the contributor covered by a workplace plan, the range is $129,000 to $149,000.

A Roth IRA is funded with after-tax dollars — no upfront deduction — with the tradeoff that qualified withdrawals in retirement are tax-free. This tends to appeal to savers who are currently in a lower bracket than they expect to be later, or who want tax diversification across their retirement buckets. For 2026, direct Roth IRA contributions phase out between $153,000 and $168,000 for single filers, and between $242,000 and $252,000 for married filing jointly. Higher earners may still access Roth space through a "backdoor Roth" strategy, which is worth a separate conversation.

Several underappreciated Roth features often tip the scales:

• No lifetime RMDs. Traditional IRA owners generally must begin taking taxable Required Minimum Distributions at age 73. Roth IRA owners are never forced to withdraw during their lifetime, giving you full control over timing.

• Contribution access. You can withdraw your Roth IRA contributions (not earnings) at any time, tax- and penalty-free — making Roth contributions a useful secondary reserve.

• Legacy planning. A Roth passed to non-spouse heirs generally delivers tax-free income during the 10-year inherited-account window, unlike a Traditional IRA that transfers a tax bill along with the assets.

#5) 529 Plans and Education Savings

This step is conditional. If you have children, grandchildren, or other beneficiaries whose education or professional development you want to help fund, 529 plans (commonly referenced as EdVest in Wisconsin) deserve serious attention. If not, the next step might make more sense for you.

529 plans are more flexible than most people realize. They support trade programs, apprenticeships, professional credentialing, and qualified higher-education expenses. Beginning in 2026, the annual K-12 withdrawal limit doubled from $10,000 to $20,000 per beneficiary under the One Big Beautiful Bill Act, and qualified K-12 expenses expanded beyond tuition to include curriculum materials, tutoring, standardized test fees, and certain educational therapies. State treatment of these newer categories varies, so it is worth confirming your state's rules before using 529 dollars for the expanded expenses.

The tax treatment is compelling. Contributions are made with after-tax dollars at the federal level, but many states (including Wisconsin) offer a state income tax deduction or credit for contributions. Investment growth is tax-deferred, and withdrawals for qualified expenses are entirely tax-free at the federal level.

The "SECURE 2.0 bonus" addresses the biggest concern with 529s — what happens to unused funds. Provided the account has been open at least 15 years, you may roll up to a lifetime limit of $35,000 of unused funds into a Roth IRA for the beneficiary. A few important guardrails apply:

• Annual rollovers cannot exceed that year's Roth IRA contribution limit ($7,500 for 2026)

• Contributions made in the past five years (and their earnings) are ineligible for rollover

• The beneficiary must have earned income at least equal to the rollover amount in that year

  
  

For higher-net-worth families, 529 plans are also an estate planning tool. A contributor can "superfund" a 529 by front-loading up to five years of annual gift tax exclusions in a single year — up to $95,000 as a single donor or $190,000 for a married couple electing to split gifts in 2026. This moves significant assets out of a taxable estate while the account owner retains control over distributions. The beneficiary can also be changed to another family member without tax penalty, allowing these accounts to serve multiple generations.

#6) Max out 401(k): Retirement Overflow

Once your pre-retirement liquidity needs are met within your taxable account and those above accounts are funded, the final step is to fill the remainder of your 401(k) up to the annual elective deferral limit ($24,500 in 2026 for those not "catch-up" eligible). Directing these final dollars toward your workplace plan provides tax advantaged growth.

Since most workplace plans offer both Roth and Pre-tax 401(k) options, it is important to ensure your specific election aligns with your long-term tax strategy, allowing your wealth to compound in the most tax-efficient way possible. This final push is the "capstone" of the waterfall, turning any excess cash flow into a robust engine for long-term retirement security.

Are you self-employed? You still have the ability to start up an Individual 401(k) if you have no non-spouse full time employees, or an employer retirement plan if you do have full time employees. This could be way up the priority list for some business owners. Learn more here.

#7) Taxable Account: Flexible Overflow

Once you’ve addressed employer matches, high-interest debt, HSAs, and IRAs, you might have extra money to invest. A standard brokerage account has no contribution limits or penalties for withdrawals, making it ideal for goals like saving for a home down payment or a future big purchase. The taxable account also has genuine advantages that get overlooked: long-term capital gains rates, tax-loss harvesting, step-up in basis at death, and the ability to donate appreciated securities directly to charity for a double tax benefit.

Depending on your short and medium term goals, this may be much higher up the priority list for your "Financial Waterfall". Often times, this can be used to fund pre-retirement spending and early retirement. For example, if you plan to buy a house in 5 years, investing in a brokerage account allows you to grow your money while keeping it accessible when you need it.

Why Your Waterfall Might Look Different

The order above is a framework, not a prescription. Your personal goals, tax situation, comfort with debt, and time horizon will all change the flow. A few common reasons the order shifts:

• Buying a home soon – A taxable brokerage or high-yield savings account for the down payment may move above education or IRA funding

• High current tax bracket – Maximizing pretax deferrals often outweighs Roth or taxable investing

• Early retirement planning – Building a taxable "bridge" to cover pre-59½ spending typically means taxable investing moves above finishing the 401(k)

• No dependents – Skip the 529 step entirely

• Business owner – Solo 401(k), SEP-IRA, or a defined benefit / cash balance plan may reshape the entire waterfall

The financial waterfall is a helpful guide, but your plan should fit your life and goals — not the other way around.

Have questions? Let us help.

This material is for informational purposes only and does not constitute investment, tax, or legal advice. Past performance is not indicative of future results. Please consult a qualified advisor before making financial decisions.