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Welcome to the fourth entry in the Basics of Finance Series. While any long time readers may see these articles as having much of the same information as Talk Like an Investor, this series is about taking our learning one step at a time. In this article I’m going to bring up a lot of things, but this article will live as a map to future parts of this series and I will cycle back and hyperlink the appropriate sections to those more bite sized articles.
The last article discussed the importance of the Emergency Fund and how to prioritize your future self as a bill that should be paid before anything else. Future articles will discuss how to keep your emergency fund safe and growing, but before we can dip our toes into that we have to look deeper into what kind of savings and investing people should prioritize.
This is where the Investing Order comes about. There have been many discussions across many forums about this. Almost all of which stem from the math derived in this Mr. Money Mustache Forum thread. It’s a really good read, but if the articles in this series are the start of you wrapping your head around financial things, I’d wait a little bit and return to it later.
The Investment Order – USA
- $1,000 or 1 Month Emergency Fund
- 401k or equivalent Employer Sponsored Retirement Plan contribute up to the full employer match.
- 3 – 6 Month Emergency Fund.
- Pay off any Debts higher than 9% interest.
- Max your Health Savings Account (HSA), or Flexible Spending Account (FSA): If you have these options.
- Max your traditional IRA (tIRA) or Roth IRA (Roth)
- Max your 401k.
- Pay off debts above 4%
- Invest in a taxable brokerage account.
This list will become the basis for many of our future breakdown articles. Thanks to Budgeting the funding of the Emergency Fund should be covered.
Step 2 is something many people miss out on, but an employer match is a portion of your wages that you are losing if you don’t take advantage of it. According to Google the national average is 4% matching. The most popular is usually 3% $1 for $1 then $0.50 for each $1 style matches. Lets look at what 4% employer match would take with that setup:
| Total Pay | Your Contribution to Max Match 5% | Employer Match 4% |
|---|---|---|
| $20,000 | $1000 | $800 |
| $50,000 | $2,500 | $2,000 |
| $100,000 | $5,000 | $4,000 |
It’s easy to see how this adds up over time as your income increases, but the key part is this. This is compensation that your employer is planning to spend on you. If you don’t take advantage of this you are working for less money.
The only other thing I would like to comment on regarding this list, before I dive deeper in future articles, is that there will be many tax situations that can swap #6 Max your IRA, and #7 Max your 401k. The most famous example is when income reaches reduced IRA deductions (2026 starts at $81k for Single, and $129k Married). I can explain that in more detail later, but the basic version is that 401k contributions lower your taxable income to qualify for deducting your IRA from your taxable income.
This will be a nexus article for this series, future off shoots will hyperlink off of this. Comment below if there is something you would like me to cover.
~~Miniwing~~
Parent, Investor, Stoic