SHEWOLFEOFWALLSTREET

View Original

Investing Order of Operations

No one likes to do hard things, and money decisions are never easy. There’s always some risk involved, and the anxiety of making the right choice comes with that risk. But sometimes, we can overcomplicate personal finance to the point where we think it’s really difficult, and then we don’t even bother to try. 

Analysis paralysis, anyone? I’m here to tell you investing doesn’t have to be hard. It can be really easy! For real. And I’ll say it until I’m blue in the face—you can’t save your way to wealth! We must invest. If you spend too much time worrying about making the wrong investment decision (and never actually end up investing), that’s no good because money works best for us when we give it TIME to work for us.

When it comes to prioritizing investments and knowing where to invest your money first and how much to invest, I like to follow an easy order of operations. 

Following the investing order of operations gives you the best bang for your buck (especially when it comes to taxes) by utilizing the best accounts out there! 

Let’s explore why it matters and in what order you should be investing your money!

Why does the order in which you invest matter?

Investing in a specific order is important to maximize benefits and gains, such as tax breaks, advantages, and optimal growth.

Even if you aren't doing it perfectly now, remember that investing is better than not investing. You're already a step ahead!

See this content in the original post

Step 1: 401k Employer Match

Even if you’re swimming in debt, getting your 401k employer match is non-negotiable. This is a 100% return on your investment (or free money, as some say), and we never leave free money on the table. 

The 401k employer match is not only a 100% return on your money, but it’s really part of your compensation package that HR took into account when they hired you. You wouldn’t tell HR to go ahead and keep part of your paycheck because you don’t need it, right?! So don’t miss your employer match! 

If you have a different type of retirement plan that is eligible for a match, like a pension, the rule here still applies. Snatch up that free money so it can start earning a return before moving on to step two. 

See this content in the original post

Step 2: Health Savings Account (HSA)

I’m a big fan of the HSA (not to be confused with the FSA). 

There are so many benefits associated with this account, I wish everyone had one. However, the HSA is only for those who are on a high-deductible healthcare plan. So, if you’re not, skip step two.

Now, unbeknownst to many, the HSA is actually also an investment account. With this account, you don’t pay taxes on the money you put in. You invest the money and don’t pay taxes on the growth. And then, when you withdraw the money, you don’t pay taxes on those expenses either if they’re qualified medical expenses!

So not only is it an investment account, but it’s a triple tax-advantaged investment account. TALK ABOUT AN ABSOLUTE MAGICAL FROLICKING UNICORN of an investment account! 🦄

The best part is that if you have the money to pay for medical expenses now, you can REIMBURSE yourself later in life.

So think about it: you pay all those copays and deductibles out of pocket now, which you could technically use the HSA for, but instead, you keep investing the money in your HSA.

In 20 years, or whenever, after your money has had SO MUCH TIME TO WORK, you reimburse yourself for those expenses tax-free!

Here’s more info on the list of qualifying medical and dental expenses that can be covered by an HSA, but of course, that could change over the years. You can also read in-depth on how to use your HSA!

See this content in the original post

Step 3: Roth IRA

An IRA is an Individual Retirement Account that you open yourself. With the Roth IRA, you are taxed NOW when you invest your money. You don't pay taxes when you withdraw the money because you already did that!

Great option for people in a lower tax bracket today or think taxes will be higher at their retirement.

For 2024, the Roth IRA contribution limit is $7,000.

Unlike a 401k or HSA, you must open a Roth IRA yourself using companies like Vanguard, Charles Schwab, Fidelity, etc.  

We ❤️ her because we pay taxes on our contributions, and then all of our money grows tax-free. It’s also incredibly flexible in that you can access your contributions without penalty if you need to or plan to retire early.

This is great for people who are nervous about having their money “locked away” in a retirement account (though it never truly is—you can always access your money if absolutely necessary—just sometimes there is a penalty depending on the account).

See this content in the original post

Step 4: Back to the 401k

If you still have money after completing the previous steps, then go back and put more into your 401k. If you can max it out and still have money left over for a brokerage, even better! 

For 2024, the 401k contribution limit is $23,000.

However, if you can’t max it out, put in as much as you can to still leave some money for a taxable brokerage.

See this content in the original post

Step 5: Taxable Brokerage Account

A brokerage account is just a fancy name for a regular investment account. 

While the taxable brokerage account doesn’t offer as strong a tax advantage as the accounts above, I really like the idea of people having one. 

Even if you’re only investing $50-$100/month in it (plus if you randomly have extra, you can throw it in here and there), it can help with some of those 10+ year goals you don’t even know you have yet (like that big 15-year anniversary Hawaiian cruise you just decided you want to go on)! 

I think this is especially valuable if you’re in your 20s, 30s or even 40s! I think it’s safe to assume that the chances of you wanting to buy a house, pay for a wedding, or go on a big trip before retirement are pretty high, and you’ll be all set to pay for those things without having to dip into your daily budget. 

If nothing ever comes up and you don’t need it? Well, then, great, you just have another investment account when you get to retirement! 

Your Next Steps

Don’t have an employer-sponsored retirement plan? If you’re eligible, max out your HSA, then max out your Roth IRA, and finally, put all your extra money in the taxable brokerage!

The investing order of operations helps you get the most bang for your buck regardless of which step you start on, but going in order as much as works for your individual situation helps make sure you don’t leave any free money on the table! 

Still have questions? RSVP to my next free investing class, where you can ask me your questions LIVE!