Saving money can be difficult, especially during high inflation. Here are some tips

Saving money has been tougher over the past year of increased cost of living and declining investment values. Especially at times like these, it is important to make each extra dollar you can save work hard for you.

There is no one-size-fits-all recommendation for how to put your money to work – that’s why it’s called personal finance. Consider the following destinations for your savings as an order of progression from basic financial security to maximizing tax efficiency and retirement income.

Assuming that you live within your means – which should include paying your future self with current savings before establishing the rest of your spending budget – the first destination of your savings should be a cash reserve equivalent to at least three months of your expenses. If you are the sole income earner in a family or your employment is fragile, build the cash reserve to six months. To make this money work harder for you than a traditional bank savings account, put it in an online high-yield savings account.

Next up, if you have kids and/or a mortgage and your dependents rely on your income, make sure you have an adequate amount of term life insurance, either through your employer benefits or by adding an additional privately purchased policy.

With two basic risks covered, you can shift your emphasis to investing for the long term. If your employer retirement plan offers a company match, make sure you contribute enough to receive all of it. This is a form of risk-free return on your investment. After contributing enough to earn the matching contributions, you will have a separate decision to make about whether to maximize your contributions in the employer retirement plan or use other types of accounts.

In many cases, funding a Roth IRA would be preferable to putting more money into your employer-based retirement plan. This depends on whether your income is below the Roth eligibility limit. Since the Roth IRA does have income limits, which vary depending on whether you are married or a single tax filer, it’s best to utilize this account while you can. Contributions to a Roth IRA are made with after-tax dollars, but all future growth in the account can be tax-free if a few rules are met. The annual contribution limit to a Roth IRA for 2022 is $6,000 if you are under 50 and $7,000 for people 50 and over. When you get to retirement, you will be grateful for having tax diversification with some money in tax-free accounts.

After the first steps of investing, there is an eternal debate regarding whether you should pay down your debt first or further invest your discretionary savings and pay off the debt slowly. If you are confident that your investment returns will be higher than the rate of interest on your debt, there is a case to be made for a slow payoff. That requires taking investment risk, however. The higher the interest rate, the more likely the investment return will not outpace the cost of the debt. There are people who argue against accelerating debt repayment from a quantitative perspective, but the psychological benefits of paying off debt also have value beyond the dollars involved.

Protecting your savings against inflation is now more important than it has been in 40-plus years. A cost-free way to address this challenge is to own Series I U.S. savings bonds. You can purchase up to $10,000 per person per year at TreasuryDirect.gov. This should be for long-term money. Redemptions are not allowed in the first 12 months and, if redeemed in the first five years, some of the interest earned is forfeited. The interest rate on these bonds is 6.47 percent. This rate is reset every six months and will likely go down as current high inflation declines.

Having addressed debt, inflation and after-tax accounts, now turn back to your employer retirement plan to maximize your contribution. Some employer plans allow after-tax contributions in addition to pre-tax contributions. That presents an opportunity for a proactive conversation with your accountant to determine the pros and cons of positioning money on either side of the tax fence from year to year.

If you’ve reached the contribution limits in the previous options, then it is time to utilize a non-retirement brokerage account that will allow you to invest with no restrictions and have access to your money at any time. Alternatively, if you have kids and a desire to save for college, opening a section 529 account to position money for tax-free growth if used for qualified education expenses, might take precedence at this step.

Commit to these forms of savings and you will have some risk protection along with building tax diversification, inflation-protected income, and flexibility to access different forms of your savings at different times, for different purposes.