The 4 Essential Accounts for Beginners (Start Your Journey to Financial Freedom)

In your quest for financial independence, you can picture your personal finances as a bucket being filled with water. We're all trying to fill that bucket to the top, but the flow rate of money (income) and the leaks (expenses/inflation) determine how fast we get there.

If you've been wondering where to put your money to make that bucket fill faster, you're in the right place. In this post, we'll cover the best financial accounts for beginners—the essential tools you need to maximize growth and minimize leaks on your journey to financial freedom.

Let’s look at four different types of accounts you need, from the slowest growth rate to the quickest.

1. CHECKING ACCOUNT (FOR PAYING BILLS ONLY)

There’s only one reason to have a checking account: to pay the bills. Period. The end.

Using a checking account as a haven for your money is probably the worst thing you could do. As noted in a previous post, checking accounts pay little to no interest. Even if they do pay interest, it will be lower than the inflation rate. Effectively, any money kept in a checking account is losing buying power every year.

It’s best to keep just enough of a balance to pay your immediate bills and meet any minimum balance requirement. Any other money not needed in the next few weeks would do better in one of the following accounts.

2. HIGH YIELD SAVINGS ACCOUNT (HYSA): YOUR EMERGENCY FUND BASE

A High Yield Savings Account (HYSA) is not going to help you escape the rat race, but it does pay higher interest than a checking account. So, it will at least slightly slow the negative effects of inflation. I go more in-depth about HYSAs here.

So why have an HYSA? The value of an HYSA lies in its liquidity: access to your cash when you need it. Keep any cash you don’t need immediately for bills but may need in the short term in an HYSA. When it's time to pay the bills, transfer just enough cash to your checking account.

3. RETIREMENT ACCOUNTS (401k AND IRA): TAX ADVANTAGES

Retirement accounts are your first set of tools that can make a significant financial difference in your future. There are several different ones out there, but the 401(k) and the IRA are the most common.

There is, however, one major caveat to be aware of with retirement accounts—only contribute money you won’t need in the short term.

Money in a retirement plan isn’t meant to be touched until age 59½. Withdrawing or borrowing money from the account before that can incur taxes, penalties, and interest.

If you’re living paycheck to paycheck, a retirement account isn’t right for you just yet. You're better off focusing on building an emergency fund in your HYSA first.

UNDERSTANDING YOUR 401(k) AND THE FREE COMPANY MATCH

If your employer has 100 or more employees, chances are they offer a 401(k) plan. A 401(k) is a tax-advantaged retirement plan that comes in two flavors: traditional and ROTH. The tax advantages for each are similar to those of a traditional and ROTH Individual Retirement Accounts. See the next section for more information on both.

Tax advantages aside, the selling point of a 401(k) is that the overwhelming majority of companies match employee contributions, at least partially. Commonly, companies contribute 50 cents for every dollar you contribute to your 401(k) plan up to 6% of your salary.

Let’s look at three different contribution scenarios and how they affect the company match.

• Contributing exactly 6% of your salary

  If your salary is $50,000 and you contribute $3,000 (6% of your salary) to your 401(k) plan, the company will contribute $1,500 (half the amount you contributed).

  
  

• Contributing less than 6% of your salary

  If your salary is $50,000 and you contribute $2,000 (4% of your salary) to your 401(k) plan, the company will contribute $1,000 (half the amount you contributed).

  
  

• Contributing more than 6% of your salary

  If your salary is $50,000 and you contribute $5,000 (10% of your salary) to your 401(k) plan, the company will still only contribute $1,500. The company stops matching contributions once you’ve contributed 6% of your salary.

The company match to your 401(k) is essentially free money. If they are matching 50 cents for every dollar of your contributions, that is like getting a guaranteed 50% return on your investment. That kind of return is hard to get on the stock market. So, the company match alone makes it a no-brainer to set up a 401(k) and contribute at least enough to get the full company match.

IRA OPTIONS: ROTH VS TRADITIONAL FOR TAX-FREE GROWTH

Some companies—usually small ones—may not offer a 401(k) plan. But you could still open an Individual Retirement Account (IRA) on your own. You can also open one in addition to an existing 401(k) plan.

Like the 401(k), IRAs are also tax-advantaged accounts. Depending on the type of IRA—ROTH or traditional—your money either grows tax-free or taxes are deferred until you begin withdrawing from your account.

Taxes are a huge drain on your financial bucket. It's one of those holes we can never completely plug; however, there are ways—legal ones, of course!—to minimize the effects of taxes on your net worth. Tax-advantaged accounts like an IRA or 401(k) are one of those ways.

So, which type of IRA should you choose: traditional or ROTH? One isn't necessarily better than the other. It really depends on your situation and preference. While you can certainly open both types—which is what we did—if choosing only one, there are some differences to be aware of.

The following is not an exhaustive list of all differences, but it gives an overview of the tax advantages for each.

Traditional (Enjoy tax advantage now)

• Contributions are made with before-tax money and may be tax-deductible in the year they’re made.

• Taxes on any growth are deferred until retirement

• Pay income taxes when you withdraw money from your account at retirement

ROTH (Enjoy tax advantage later)

• Contributions are made with after-tax money and are not deductible from income taxes

• Account grows tax-free

• No taxes when you withdraw money from your account at retirement

The general rule of thumb is to choose a ROTH IRA if you're currently in a low tax bracket and expect to be in a high tax bracket in retirement. If you're in a high tax bracket now but expect to be in a lower tax bracket later, then a traditional IRA might be the better choice.

Let me say I'm not a fan of this rule of thumb. How can anyone accurately predict what tax bracket they'll be in during retirement? So many things can change in your life until that time. And tax brackets are constantly shifting.

Don't overthink it if choosing only one. You can't really go wrong with either. We’ll cover IRAs more in-depth in the future, but the main thing to consider is when you want to enjoy the tax advantage.

Want to lower your income taxes now and don't mind paying taxes when you withdraw from your account later? Choose a traditional IRA. Don't mind paying more income taxes now in exchange for not paying any taxes later when you withdraw? Choose a ROTH.

If you plan to retire before 59½, you'll definitely want to open a ROTH IRA at some point, though. But that's for a future post.

401(k) or IRA

As mentioned, there's nothing stopping you from opening both a 401(k) and an IRA or two. I say do it if you can because tax-advantaged accounts are fantastic. But perhaps you don't have a lot of extra money yet to spread out. Which should you choose?

Again, that's really up to you, but below are the main differences to consider:

401(k)

• Contribution limit as of 2025 for people under age 50 is $23,000

• Investment options are usually limited to a handful of different funds and ETFs

• Employer contributions may be subject to a vesting schedule, which means you may need to stay with the company for a certain period of time to gain full ownership of the matching contributions and any growth on them

IRA

• Contribution limit as of 2025 for people under age 50 is $7,000

• Wide array of investment options, including individual stocks, bonds, ETFs, CDs, and mutual funds

• No vesting period (it's all yours, my friend)

4. TAXABLE BROKERAGE ACCOUNT: THE FASTEST WAY TO FINANCIAL FREEDOM

A taxable brokerage account is a non-retirement account used for investing. They can be opened through online brokers such as Charles Schwab, Vanguard, and Fidelity, or through a bank.

If you’re already contributing to a retirement account and still have money to invest, you have an opportunity to really grow your net worth quickly with one of these accounts.

If you imagine the rat race as an actual race, relying on only an HYSA is like crawling on your hands and knees. You’ll be half dead if you somehow get to the finish line. A retirement account would be the equivalent of running the race. Adding a taxable brokerage account is like completing the race in a car. It takes some skill, and you’ll need to drive carefully. But you can get to the finish line a lot quicker.

Here's why taxable brokerage accounts are awesome.

1. Similar to an IRA, a taxable brokerage account gives you a wide variety of investment options. If there are certain stocks, ETFs, bonds, mutual funds, or CDs you’re interested in, you’ll be able to buy them with a taxable brokerage account.

   
   

2. Unlike a retirement account, there is no limit to how much you can contribute in a year. You can put more of your money to work for you!

   
   

3. Although subject to income tax, any money in the account—contributions, capital gains, dividends, or interest—can be withdrawn at any time. You don’t need to wait until age 59½.

Don’t let the taxable nature of these accounts be a deterrent. Yes, any growth is taxable, but there are ways to legally pay little to no taxes on investments. I’ll cover this more in a later post.

YOUR STRATEGY: HOW TO BUILD YOUR ACCOUNTS OVER TIME

Escaping the rat race requires growing your money as efficiently as possible. This includes allocating money to the most efficient accounts based on your risk and time horizons.

As an example, here's how I allocate our cash. The majority has always been kept where it can generate the highest returns.

	Percentage of Cash	Growth Rate
Checking Account	1%	0%
High-Yield Savings Account	12%	4%
Retirement Account	58%	12-19%
Taxable Brokerage Account	29%	19-24%

Remember these four essential accounts for financial freedom as you try to outrun inflation. When you're just starting with a high-yield savings account or ready to open a retirement account, every step forward builds momentum. Start slow, but start today.

Let me know your thoughts on these account types in the comments section below.

See you at the finish line!

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Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.