Optimal Order For Investing Your Money

According to a study by the Federal Reserve, if you have at least $400 saved to cover an unexpected emergency, you’re already financially better off than one third of Americans. It’s well known that most people do a poor job of managing their finances and there are seemingly few people that are responsible with their money. Having a good relationship with money doesn’t necessarily mean being ultra-wealthy or earning a high income, either. It just means that you are making financially sound choices, not making reckless decisions on a regular basis and are comfortable with your income and expenses. In this video, I will go over the optimal order for investing your money, be sure to take a look so you know you are not making any mistakes.

Cash

The top priority for investing your money is to keep some cash available, which is often called an emergency fund or safety net. This cash is really important because unexpected things can happen, like your child getting hurt during a soccer game, your car needing a new tire, or your laptop breaking. If you have enough cash saved up, these problems won’t be such a big deal. I think having easy access to cash is the most important. I want to be able to access my funds easily and quickly without any hassle. While high-interest CDs might seem good, they can have fees if you take money out early. Instead, I like using a high-yield savings account because it earns decent interest and doesn’t charge fees for the first six withdrawals each month. How much cash you should keep depends on your personal situation and how much you spend. I try to save enough to cover six months of expenses, but some people save more, like twelve months, or less, like three months, especially if they have a stable job and are okay with a bit more risk. The key is to build up a good amount of cash before you start investing your money in other places.

401(k) Employer Match

The second important thing for investing your money is to put money into your 401k up to the amount your company will match. The employer match is like getting extra free money. Here’s how it works: If you make $100,000 a year and your company matches your 401k contributions up to 5%, this means that if you put $5,000 into your 401k, your company will also put in $5,000. So, your $5,000 turns into $10,000 right away, which is like doubling your money without doing extra work. Also, putting money into your 401k up to the match helps you pay less in taxes, lowering your taxable income by $5,000 in the example earlier. It’s a smart move to take advantage of this match. If you’re not already doing this, stop this video and start now before moving on to the next point.

High-Interest Debt

The third thing to do with your money is to pay off debts with high interest, like car loans, student loans, and credit card debt. Holding onto these debts just makes other people richer and doesn’t help you. Before you invest in other things, it's best to pay off these debts as quickly as you can. I like to keep it simple: write down all your debts and pay them off one by one. You can use either the debt snowball method or the debt avalanche method—both work well, so choose what you prefer. The important thing is to focus on paying off high-interest debts to reduce your financial stress and get closer to being free from debt.

Roth IRA

The fourth thing to do with your money is to max out your Roth IRA. I think a Roth IRA is one of the most tax efficient accounts available to investors. You put money into a Roth IRA with after-tax dollars, but then you don’t have to pay taxes on the money you earn from it. There are some conditions: you need to leave the money in for at least five years and be at least 59 and a half years old. However, what is amazing about the money in the Roth IRA is that you will never need to pay taxes on it ever. There are some eligibility considerations to a Roth IRA. In order to contribute directly to a Roth IRA, you or your spouse must have earned income, but not too much. In 2024, if you’re married and make more than $230,000 together, you can’t put money directly into a Roth IRA. If that’s the case, you can try a backdoor Roth IRA strategy. I have a separate video covering how to do this step by step, which is catered towards high income earners. In 2024, if you’re under 50, you can put up to $7,000 into a Roth IRA. If you’re 50 or older, you can put in up to $8,000.

Health Savings Account (HSA)

The fifth thing to do with your money is to maximize your contributions to your HSA, or health savings account. If you and your family are usually healthy, you might want to choose a high-deductible health plan, called an HDHP, for your health insurance coverage. With an HDHP, you'll have a higher deductible compared to traditional insurance plans, but you'll also benefit from lower premiums. Plus, you can open a health savings account, or HSA, with this plan. In the world of investing, many people see HSAs as a special tool for saving money and even retiring early. That’s because HSAs have a great tax benefit: you can save money for medical expenses, and they offer a triple tax benefit that's often overlooked.

• First, your contributions to an HSA are tax deductible, providing a tax benefit upfront.

• Second, the funds in your HSA can grow tax-free over time.

• Finally, if you use the money for qualified medical expenses, your withdrawals are also tax-free.

This triple tax benefit makes HSAs very valuable for reducing how much you pay in taxes and for growing your savings. Another great thing about HSAs is that you don’t have to use the money right away. You can keep your medical receipts and take money out of your HSA without paying taxes whenever you need it, even if it's many years later. For 2024, you can put up to $4,150 into an HSA for just yourself or up to $8,300 if you have a family plan.

529 Education Savings Plan

The sixth thing to think about when investing your money is a 529 education savings plan. If you want to help with education costs for your kids, nieces, or nephews, a 529 plan can be a good choice. It works like a Roth IRA but is meant for school expenses. You put money in after paying taxes, and the money grows without being subject to federal and state taxes, as long as you use it for school costs. There are no yearly limits on how much you can put in a 529 plan, but the money you put in is seen as completed gifts for tax purposes. In 2024, you can give up to $18,000 per person per year without paying extra taxes.

Max Out 401(k)

The seventh thing to focus on when investing your money is to maximize your contributions to your 401k retirement account. If you make a lot of money, putting some of it into a 401k when you earn a lot can save you a lot on taxes.

1. You receive an upfront tax deduction,

2. You enjoy tax-protected growth on the duration of your investment,

3. You often benefit from a tax rate arbitrage between when you contribute and when you plan to withdraw.

This tax break is one of the biggest you can get, even more than deductions for charity or mortgage interest. For 2024, if you're under 50, you can put in up to $23,000. If you're 50 or older, you can add up to $30,500, which includes an extra $7,500 to help you catch up.

Taxable Brokerage Account

The eighth step for investing your money is using a taxable brokerage account. After you've maxed out all the special tax-saving accounts we talked about, you can start putting extra money into a regular taxable investment account. It's best to invest in simple, broad market index funds. My favorite is the Vanguard 500 Index Fund, also known as VFIAX, or its ETF version, the Vanguard S&P 500 ETF, or VOO. Many people new to investing often make the mistake of starting with taxable accounts before using up their tax-saving options. In my opinion, you should do this last because taxable accounts don’t give you any tax breaks. The impact of using tax-saving accounts like a 401k or Roth IRA is huge, as it compounds over many decades. These tax savings let more of your money grow faster for you. So why should you pay more than necessary? But once you’ve used all your tax-saving accounts, a taxable account can help you go from regular retirement to early retirement. Just make sure to take care of the other accounts first.

Low-Interest Debt

The ninth step for investing your money is to pay off any low-interest debt. This includes things like a home mortgage or other debts with interest rates lower than 3% to 5%. Some people might say you should invest your money in the stock market instead, but it's important to do what feels right for you. There isn’t one perfect answer for everyone’s money choices. While it’s true that putting your money in the stock market is the right move mathematically, if getting rid of your debt makes you feel better, then go for it. Paying off low-interest debt can help you live debt-free, which might be a better fit for your own money goals and values.

Thank you for reading, cheers!

- Ivan