<prompt> Human: One of the most frequent questions in rpersonalfinance goes something like: I have X, what should I do with it? The link in the sidebar is, in my opinion, quite confusing in several respects. This post is intended as a replacement, and incorporates general guidance found in the FAQ and that given often by rpersonalfinance regulars. I also address several common questions for each step. If you see something that isnt correct or have suggestions on other things to add, please let me know in the comments or by private message. Step 0: Budget and reduce expenses, set realistic goalsFundamental to a sound financial footing is knowing where your money is going. Budgeting helps you see your sources of income less your expenses. Online tools like Mint.com or Excel sheets like those found in the sidebar can help you track your expenses. You should minimize your expenses to the extent practical - housing costs, utilities, and basic sustenance are harder to eliminate than entertainment, eating out, or clothing expenses.Once your budget is figured out, you need to figure out what your goals are. Secure retirement? Buying a house? Saving for a car? Well get to specifics on how to save for these a little later on. Step 1: Build an emergency fundAn emergency fund should be a relatively liquid sum of money that you dont touch unless something unexpected comes up. Unexpected travel essential appliance replacement and sudden medical procedures are all user-submitted examples of emergency funds in action. If you need to draw from your emergency fund at any time, your first priority as soon as you get back on your feet should be to replenish it. Treat your emergency fund right and it will return the favor. How should I size my emergency fund?Take a look at the sidebar link, Why have an Emergency Fund? for some general guidance. What kind of account should I hold my emergency fund in?Opinions vary, but generally emergency funds should be held in safe investments you can liquidate in a hurry. FDIC-insured savings or checking accounts, CDs, treasury bonds I-bonds in particular are often recommended here. Since the point of an emergency fund is to have a sum of money you can depend on, things that should not compose your emergency fund include stocks, credit cards, HELOCs, or anything else whose value can vary significantly or be taken away without warning such as lines of credit. Step 2: Employer-sponsored matching fundsOnce your emergency fund is set, the next step is to ensure you are contributing enough to your employer-sponsored retirement plan if available to get any matching funds from your employer if they offer them. The reason you do this before paying off high interest debt is that employer matching funds are risk-free, guaranteed returns on your investments at usually a higher rate than your debts. For example, if your employer offers 50 matching on the first 6 of your contributions to a 401k, you want to make sure you contribute 6 of your salary to take full advantage of the match. Instant 50 return on investment is pretty good! Be aware that 401k contributions must come from payroll deductions, so if you have a sum of money and want to take advantage of the match you need to increase your contribution percentage from your paycheck and use your lump sum for expenses. What if my employer doesnt match, or I dont have an employer-sponsored plan?Move to step 3. What if my employer contributes to an account on my behalf regardless of whether I contribute or not?You are very fortunate. Move to step 3. Step 3: Pay down high interest debtsAfter you ensure youre taking advantage of your employer match, you should use your lump sum to pay down your high interest debt. There are two main methods of paying down debt: In the avalanche method, debts are paid down in order of interest rate, starting with the debt that carries the highest interest rate. This is the financially optimal method of paying down debt, and you will pay less money overall compared to the snowball method. The snowball method, popularized by Dave Ramsey, debts are paid down in order of balance size, starting with the smallest. Paying off small debts first may give you a psychological boost and improve ones cash flow situation, as paid off debts free up minimum payments. The downside is that larger loans that may be at higher interest rates are left untouched for longer, costing more in the long run.In both cases you should make the minimum payments on all of your debts before choosing which method to devote extra money to. As an example, Debtor Dan has the following situation: Loan A: 1100 with a minimum payment of 100month, 5 interest Loan B: 3300 with a minimum payment of 300month, 10 interest Sudden windfall: 2000Dan needs to first pay 100 300 400 to make the minimum payments on loans A and B so the payments are recorded as on time. The extra 1600 can either go towards Loan A smallest balance, snowball method, eliminating it with 500 left to go towards Loan B, or Loan B entirely highest interest rate, avalanche method.Whats the best method? rpersonalfinance tends to default to the avalanche method, but do not underestimate the psychological side of debt payments. If you think that the psychological boost from paying off a smaller debt sooner will help you stay the course, do it! You can always switch things up later. The important thing is to start paying your debts as soon as you can, and to keep paying them until theyre gone. You can use unbury.us to help you get an idea of how long each method will take, and how much interest youll be paying overall. Should I be in a hurry to pay off lower interest loans? What rate is low enough to where I should just pay the minimum?Depending on your attitude towards debt, you may want to stop paying off loans with low interest rates once you have paid all other loans above that threshold. A common argument is that the long-term return from investments in the stock market will likely exceed the interest rate from a low-interest loan. While this has been true in the past, keep in mind that paying down a loan is a guaranteed return at the loans interest rate. Stock performance is anything but guaranteed. Fairly common consensus is that loans above 4 interest should be paid off in the debt reduction phase, while anything under that can be stretched out. Shouldnt I stretch out a loan to improve my credit score?No. Loans should never be stretched out longer than they need to be, as you should not pay a cent in interest more than you have to for the sake of improving ones credit score. Interest rate should be the sole factor in whether or not you pay extra on a loan or not. Step 4: Additional savings for retirement in an IRAA lot of questions in rpersonalfinance involve the various retirement accounts and how to save money in them. Once your emergency fund is set and your high interest debt paid off, if you want to save more for retirement the next step is to maximize your IRA contribution for the current tax year. For specifics on IRAs, see Your IRA and You: Basic Information Why contribute to an IRA? Shouldnt I go back to my 401k?IRAs, since they are opened by individuals with a provider of your choice, are generally better than 401k plans because you have more fund choices. Low cost providers like Vanguard, Fidelity, and Schwab all offer low expense ratio index funds to invest in. However, if you have an excellent 401k plan such as the U.S. Federal governments Thrift Savings Plan or work for a large company that has negotiated institutional rates for the mutual funds in their 401k plan, you may want to do step 5a first and return to your IRA contribution afterwards. Step 5a: Maximize contributions to employer-sponsored planAfter youve funded an IRA, if you still have money you want to put away for retirement then you should go back and round out your 401k contributions so you are contributing as much as your budget allows. For specifics on 401ks, see Your 401k and You: Basic Information As in step 2, you cant make direct contributions to your 401k they have to come from payroll deductions. Adjust your contributions from your paycheck accordingly. My 401k plan is awful. Should I still contribute to it?Yes. You should always take advantage of your tax-advantaged retirement accounts before saving for retirement in a taxable account. The effect of high expenses really only starts to bite after long periods of time, and 401ks are quite portable in that you can roll them to your IRA if you leave your current employer, or sometimes you can roll it into a new 401k with a new employer. Bad 401k plans can turn into great IRAs in a heartbeat. Step 5b: Save for non-retirement goalsAfter your IRA contribution you may want to divert your discretionary income towards shorter-term goals than retirement. Common examples include down payments for homes, vehicles, babies, and vacations. The time frame for these goals will dictate what kind of account you save in. For short term goals usually 5 years youll want to use an FDIC-insured savings account or short term CDs. If your time horizon is longer, or you can afford to adjust your plans, you might consider something riskier like a mixed stockbond fund or other mutual fund. The best savings or investment vehicle will vary depending on time frame and risk tolerance. Feel free to start a thread with the details of your situation and we will help you.Also, I listed this as step 5b but you could certainly prioritize non-retirement savings over retirement savings in an IRA step 4. Just keep in mind that especially for a young person the more time your money has to grow, the more powerful the effects of compounding will be on your retirement savings. Step 6: Save for retirement in a taxable accountIf you decided to save for non-retirement goals instead of a 401k in step 5b, you should maximize contributions to your 401k before opening a taxable account.If you maximize contributions to your IRA and 401k, but your lump sum still leaves you more money you want to spend in retirement, open a taxable brokerage account and invest according to your retirement asset allocation. Youll want to have a decent grasp on asset allocation in multiple accounts and tax-efficient fund placementThats the basic list you should be going through in order to determine where you put your sum of money. You may have compelling reasons for rearranging these steps as you see fit, but try to understand and appreciate the implications of doing so. For quick reference, uBrainSturgeon created this handy graphic  <response>: Awesome post. Thank you for doing this. Reddit can be a real downer sometimes, but great content like this that provides valuable information is a reason I stick around. 