The Real Financial Order of Operations - Part 2 of 2

Speaker 1 This framework is by no means revolutionary. It's certainly not going to make you rich overnight.
It's not going to be featured on a Netflix documentary about the next big thing in personal finance.

Speaker 1 But what it will do is give you a clear, logical path from wherever you are today to financial security and eventual wealth in the years to come.

Speaker 1 Hello, friends.

Speaker 1 This is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.

Speaker 1 So let's get started and get you one step closer to where you need to be.

Speaker 1 Welcome back to Your Money Guide on the Side. I'm Tyler Gardner and this is part two of our Financial Order of Operations series.

Speaker 1 Last episode, we covered the foundational steps, the non-negotiables that come before anything else.

Speaker 1 If you haven't checked it out, good time to do it, and probably worth doing before listening to this part two, as it really does cover the basics.

Speaker 1 But for those who missed it or don't care, or already have the basics under control, we talked about putting your own financial oxygen mask on first, obliterating credit card debt, getting proper insurance, maxing out your Roth IRA if you can, grabbing the 401k match if you can and you have one, and taking advantage of a health savings account if you have access to one and are on a high-deductible health plan.

Speaker 1 So if you missed part one, I'd certainly encourage you to go back and listen to it. I'll wait.
Okay, today we're getting into the nuanced stuff.

Speaker 1 The decisions where the conventional wisdom is not just wrong, but kind of expensive. Additionally, we'll get into the stuff that almost nobody agrees on.

Speaker 1 And that's a good thing, because the last thing I would ever want us to do in our lives is value living in an echo chamber. If you already believe it, awesome.

Speaker 1 And yes, we feel so good when we hear someone we respect affirm our own decisions or values or choices.

Speaker 1 But for the love of academic and intellectual pride and just human connection, let's challenge ourselves daily to listen to people's opinions that really do challenge our own, like set our paradigms adrift type of thinking.

Speaker 1 And good news, just because you listened doesn't mean you have to agree.

Speaker 1 It just means that in a world where there are competing viewpoints, at the very least, it's worth hearing those viewpoints so you can make your own side slightly more logically sound.

Speaker 1 And in case this digression wasn't long enough, I also used to tell students that when it was a debate day, the goal of a good debate was not for one team to win, but for both teams to win.

Speaker 1 No, I'm not talking about an everybody gets a participation trophy type of thinking.

Speaker 1 I'm talking about the fact that if both sides present their positions well, we all will have benefited and found more ways to bolster our own sides or reposition our own thinking in the face of new information.

Speaker 1 So, today you might not agree with some things, but hear me out. We're talking about emergency funds, taxable brokerage accounts, and how to think about student loans and other types of debt.

Speaker 1 And to start off as bluntly as I can, a lot of what you've been told and taught about these topics, or personal finance in general, is designed to make you feel safe, not necessarily to optimize your wealth.

Speaker 1 But before we dive in, as always, quick reminder, request, if the show has been helpful to you, the best way to support it is by leaving a review on Apple Podcasts or Spotify or sharing it with a friend who still believes high-yield savings means your money gets a 5% return for the rest of your life.

Speaker 1 Additionally, remember that as I promised last episode, if you've ever sat here listening to any of my ramblings and thought, this all sounds great, but where do I actually find the money to do any of this?

Speaker 1 Hang with me until the end of this episode, because today I will share one quick modern trick that can free up hundreds to thousands of real dollars in under 20 minutes without giving up your coffee or giving up that leased car.

Speaker 1 So we're going to start part two where we left off in part one, continuing to explore the emergency fund or as I like to call it the emergency fund myth.

Speaker 1 Specifically why the conventional wisdom around emergency funds to me is outdated, expensive, and rooted far more in fear than in basic math.

Speaker 1 The standard advice, as you've all heard, is to keep three to six months worth of expenses in a high-yield savings account before you invest a dime.

Speaker 1 The logic is that life is unpredictable, emergencies happen, and you need liquid cash to cover them without going into debt. I'm not saying emergencies don't happen.
They do.

Speaker 1 But as should be true of all things in life that might or might not happen, let's do our best to think through the odds of certain things happening and what the worst case scenario really might be.

Speaker 1 And let's talk about what the actual cost is of keeping too much money in cash for a rainy day that might never come.

Speaker 1 According to various studies on household financial shocks, the median household experiences a major unexpected expense, something over $1,000, about once every few years.

Speaker 1 Not every few months. We're talking car repairs, medical bills, emergency travel.
Now, to me, some of these things still aren't emergencies. But these things are real.
They're just not that frequent.

Speaker 1 And when they do happen, most people have multiple ways to handle them. Credit cards, payment plans, short-term loans from family, or yes, selling investments.

Speaker 1 As I've mentioned before, 64% of households surveyed last year found that there was no financial emergency. On the 36% remaining, the majority were under $1,000.

Speaker 1 I'm not saying that's not a thing to think about, but it's not the catastrophe that necessitates having $20,000 of cash sitting on the sidelines in an account earning at best enough to keep pace with inflation and offset taxes.

Speaker 1 Let's say you keep $20,000 in a high-yield savings account earning at best right now 4% annually. After a year, you've made $800 before taxes.

Speaker 1 After taxes, assuming you're in the 22% federal bracket, you're left with about $624, adjust for 3% inflation, and your real return is barely positive.

Speaker 1 Meanwhile, if you had invested that $20,000 in a diversified index fund and earned a historical average of 10% annually, nominal terms, of course, you'd have made $1,400.

Speaker 1 Even after capital gains taxes, which are usually kinder than the taxes on the interest from your high-yield savings account, you're way ahead after just one year.

Speaker 1 But Tyler, markets don't just go up, and there's no guarantee it would work that way. Correct.

Speaker 1 And the sassy pants in me wants to remind you that there's a far higher likelihood statistically that the market will go up this year.

Speaker 1 In fact, there's a 75% chance that it will be higher in one year than it is today, versus you're somehow needing that money this year for an emergency that requires $20,000 of liquidity.

Speaker 1 But just because someone tells you there's a greater chance of your dying on the way to the airport than once you're flying, it doesn't stop us from wanting to call our loved ones and write down our memoirs on the back of a cocktail napkin at the first sign of turbulence.

Speaker 1 But I'll humor you. Let's say the market is down 20% when your emergency hits.
You sell, you take the loss, and you're left with $16,000 instead of $20,000. Yeah, that's a $4,000 hit.

Speaker 1 But over a 10-year period, the probability that you'll need that money and the market will be down is pretty darn low.

Speaker 1 And even if it happens once, the opportunity cost of keeping $20,000 in cash for a decade, missing out on potentially $10,000 to $15,000 in gains, is way higher than the one-time potential potential $4,000 loss.

Speaker 1 And here's something to think about.

Speaker 1 If you've been following this financial order of operations, again, go back and check out part one, which is very intentionally designed to avoid financial emergencies, you've already got some options because you've paid off your credit card, you've got Roth IRA contributions you can withdraw, you will have a taxable brokerage account that we're about to talk about, you've got a 401k that you can borrow from in a true crisis.

Speaker 1 You're not operating without a net, you're just operating from a growth mindset rather than from a fear-based mindset.

Speaker 1 So the emergency fund orthodoxy made more sense in an era with double-digit returns in savings accounts, which unfortunately hasn't existed since the 80s.

Speaker 1 In today's environment, hoarding cash is expensive. So here's my take.

Speaker 1 If you want to keep a couple thousand bucks on the sidelines so that you're statistically covered almost 99% of the time, amazing. I love it.

Speaker 1 But beyond that, invest your money in a broad-based low-cost fund.

Speaker 1 Keep some of it in your Roth IRA, some in a taxable brokerage account, maybe a chunk in a money market fund within the brokerage for slightly more liquidity.

Speaker 1 But stop letting your emergency fund rot in a savings account under the guise of peace of mind.

Speaker 1 What gives me peace of mind is knowing that my money is working for me, not for some fintech company that could change its rates on my high-yield savings account without ever telling me.

Speaker 1 And this happens all the time. My guess is this has happened to someone who's listening right now.

Speaker 1 Which brings me to the next step, step number eight in our financial order of operations, funding a taxable brokerage account, as this account will always provide us with flexibility and as it pertains to the above, accessibility when times get tough and we don't want to crack open the 401k and potentially be penalized.

Speaker 1 So once we've maxed out our Roth IRA, gotten our 401k match, and handled handled our HSA if applicable, it's time to open a taxable brokerage account. I know.
I know.

Speaker 1 You might say that taxable accounts don't have the same sexy tax advantages as retirement accounts. You're paying taxes on dividends and capital gains.
There's no upfront deduction.

Speaker 1 But here's what a taxable brokerage account does have, flexibility. You can access this money anytime.
for any reason with no penalties, including the gains. Want to buy a house? It's there.

Speaker 1 Want to start a business? It's there. Want to retire at 50 instead of 59 and a half? Yes, please.
And guess what? It's there.

Speaker 1 And you can actually do that because you've got money outside of retirement accounts that has been earmarked for investing in assets that outpace inflation on average.

Speaker 1 This is the step that almost everyone skips because they're so focused on maxing out every tax advantage account. But here's the thing.
Life doesn't wait until we're all 59 59 and a half.

Speaker 1 Opportunities come up, plans change, health changes, and if all your money is locked up in retirement accounts, you're either missing out or you're taking early withdrawal penalties that negate a lot of the tax advantages you were chasing in the first place.

Speaker 1 So here's how I think about my taxable brokerage account. It's my bridge account.
It's the money that gets me from today to retirement age without being stuck in a financial straitjacket.

Speaker 1 And here's the other thing. Long-term capital gains tax rates are actually pretty reasonable.

Speaker 1 If you hold investments for more than a year, you're paying 0%, 15, or 20% depending on your income, way less than most of us pay in ordinary income tax rates.

Speaker 1 So yes, you're paying taxes, but it's not as bad as people make it sound.

Speaker 1 Now, within your taxable brokerage account, I keep the bulk invested in low-cost funds, surprise, same as my other accounts, primarily because they're extremely tax-efficient and they don't generate high dividend yields per year, so I don't pay unnecessary taxes and let it all compound instead.

Speaker 1 But if you want a little extra liquidity or peace of mind, you can park a portion in a money market fund, which I do right now, just because I'm now paying quarterly taxes and can't afford to not have a little bit of guaranteed liquidity.

Speaker 1 So right now, money market funds are yielding around 4%,

Speaker 1 which is competitive with high-yield savings accounts, and it's all in one place place with my other investments. For me, I like that.
That gives me peace of mind.

Speaker 1 The taxable brokerage account is your flexibility play. It's the account that lets you live your life on your terms without waiting for retirement.

Speaker 1 So even though it wouldn't be my number one priority, it's absolutely part of the order of operations here.

Speaker 1 Finally, let's talk about step nine, which might be one of the more, I won't say controversial, but certainly subjective ones here. Student loans and other types of debt.

Speaker 1 Mortgages, car loans, personal loans, whatever you've got. I go into much greater detail on when and how to think about debt back in episode 9 or something like that.

Speaker 1 So if you're interested, trek on back through the old records if you want to dive deeper into a long conversation about debt. But in short, here is my framework.

Speaker 1 It all comes down to interest rates, not emotions. That's just me.
If my debt is above 5%, I've got a decision to make. Historically, the stock market returns around 7% post-inflation.

Speaker 1 After taxes on investment gains, I'm looking at maybe 5 or 6% real return. So if my debt is costing me more than that, paying it off is a guaranteed return that's really hard to beat.

Speaker 1 Now, if my debt is below 5%,

Speaker 1 let's say I happen to have a mortgage at 3.25%,

Speaker 1 which I'm I'm personally lucky enough to have, or a car loan at 4%, which I'm not lucky enough to have.

Speaker 1 I'd argue I'm better off investing any extra money instead of paying down any of that debt early. That was cheap money, and gone for now are the days of cheap, red-free money.

Speaker 1 Yes, I'm paying interest, but I'm likely earning more in the market over time. And this is basic arbitrage, and that's worth looking up.

Speaker 1 Just so you know, if you can get that free lunch, take advantage of the free lunch. Now, student loans are tricky because they come with all this emotional baggage.

Speaker 1 I appreciate that and I've heard from enough people who really do struggle with that. And nobody likes the idea of being in debt for a decade or more.

Speaker 1 But from a purely mathematical perspective, if your student loans are at 4% and you've got extra cash, you're better off investing that money than making extra payments.

Speaker 1 That said, and this is important, if the debt is weighing on you psychologically, if it's keeping you up at night, if it's affecting your mental health, which I know it does for many, then pay it off.

Speaker 1 Personal finance is personal, and no matter how much I want to think we're all rational optimizers who base all of these decisions on math, we know we're not.

Speaker 1 The math might say one thing, but your brain might need something else. I'm not going to tell you to ignore your mental health for an extra 1% return, and the same goes for the mortgage.

Speaker 1 I know people who currently have 2.5% 30-year fixed mortgages who would much rather try to pay that off than invest in the markets. That's great.
Personal finance is personal.

Speaker 1 But here's one last thing I'll tell you, and I mentioned this in the last episode. Please don't fall for the debt snowball nonsense.

Speaker 1 If you're going to pay off debt, pay off the highest interest debt first. Always, not the smallest amount of debt.
Not the one that feels the best.

Speaker 1 This is one place where I can say, I don't care about your feelings because it will cost you so much money.

Speaker 1 And it's worth knowing that paying off high interest debt is always and forever your first priority beyond putting your own oxygen mask on first.

Speaker 1 And please, for the love of compound interest, do not prioritize paying off a 3% mortgage while you've got credit card debt at 20%.

Speaker 1 Go back to last week's episode and secure that oxygen mask immediately before playing all these other games with your money. I see this all the time, and it's financial malpractice at best.

Speaker 1 Order matters. Let me give you one quick concrete example.
Let's say you have three deaths. $5,000 in student loans at 5%,

Speaker 1 8,000 on a credit card at 19%,

Speaker 1 200,000 mortgage at 3.5%.

Speaker 1 And you've got an extra $500 a month to put toward debt. The debt snowball method would tell you to pay off the 5,000 student loan first because it's the smallest.

Speaker 1 And sure, you'd pay pay it off in the fewest months. But during that time, you're paying 19% interest on $8,000 more than negating any financial benefit from paying down that 5%.

Speaker 1 My method, throw the entire 500 at the credit card because it's the highest interest rate, pay it off as quickly as possible, then take that 500 and start hammering the student loans because that's the next rate on the list.

Speaker 1 Once those are gone, then you can decide whether to pay off the mortgage early or invest the difference because that loan is under 5%.

Speaker 1 With student loans specifically, you do need to consider a few things beyond just the interest rate. Are you eligible for any forgiveness programs?

Speaker 1 Are you on an income-driven repayment plan that might result in forgiveness after 20 or 25 years? If so, the math changes.

Speaker 1 In some cases, making minimum payments and investing the difference might be the smarter play, even if the interest rate is above 5%.

Speaker 1 But for most people with most debt, here's the simple rule. Anything above 5%, pay it off aggressively.
Anything below 5%, invest instead.

Speaker 1 And always, always, always prioritize by interest rate, not by balance. Let's take a minute to put both parts together and sum up our two-part episode, Financial Order of Operations.

Speaker 1 Step one, we're going to put our own oxygen mask on first. Your financial security enables you to help others, not the other way around.

Speaker 1 Based on decisions I've made early in my life with investing and debt repayment, I am now in a way stronger position to help family, friends, organizations than I would have been if I'd tried to help others when I was in my 30s or struggling through funding my first Roth IRA.

Speaker 1 Step two, obliterate high interest credit card debt. This is a financial emergency.
not a let's build confidence with small wins situation. It's the only thing I will ever call a financial emergency.

Speaker 1 You're losing money daily by the bushel. Stop it.

Speaker 1 Step three, get term life insurance and disability insurance if people depend on your income. Boring, but non-negotiable.

Speaker 1 And the day you find someone who tells you whole life is the way to go, who doesn't sell whole life, that's the day you and I might choose to listen. But I haven't found it yet.

Speaker 1 Step four, max out your Roth IRA.

Speaker 1 It is a stealth emergency fund because you can take back the contributions at any time, penalty and tax-free, and it has massive upside and more liquidity than you think.

Speaker 1 Step five, contribute to your 401k up to that employer match. Free money does not grow on trees, but this is as close as we're going to get.

Speaker 1 Step six, max out the health savings account if you're on a high-deductible health plan. Triple tax advantage, it is unbeatable.
Step seven, rethink the emergency fund.

Speaker 1 Keep one to two months of expenses liquid, invest the rest. It's an odds game that we're playing always, and may the odds be forever in your favor.

Speaker 1 Step 8, open and fund a taxable brokerage account because the flexibility matters.

Speaker 1 And finally, step 9, handle student loans and other debt based on interest rates and try to leave the emotions at the door.

Speaker 1 Handle student loans and other debt based on interest rates, not emotions or balance size, but again, if there's an emotional component to it, I get it. You do you.

Speaker 1 This order works regardless of your income level, your age, or your financial goals. It's based on math, not motivational platitudes.

Speaker 1 It prioritizes both growth and flexibility, and it acknowledges that life doesn't fit into neat little boxes labeled retirement and before retirement.

Speaker 1 The biggest mistake I see people make is getting paralyzed by trying to optimize everything perfectly.

Speaker 1 They read 47 blog posts about Roth IRA contribution limits and backdoor conversions and mega backdoor conversions, and they end up doing nothing because they're afraid of making the wrong choice.

Speaker 1 So remember this. The difference between a good plan executed imperfectly and a perfect plan that never happens is enormous.
Whereas the difference between a good plan and a perfect plan? Negligible.

Speaker 1 So pick a plan. This one, ideally, but honestly, any reasonable plan is better than no plan.
And start executing.

Speaker 1 Open the accounts, set up automatic contributions, invest in low-cost index funds, check in once or twice a year to rebalance and adjust as needed.

Speaker 1 The hard part isn't figuring out what to do because now you know what to do. The hard part is going and actually doing it consistently over decades while ignoring the noise.

Speaker 1 Now, as promised, for those still with me, to address the old elephant in the room, some of you might be thinking, Tyler, this all sounds great, but where do I actually find the money to do this stuff?

Speaker 1 This is a lot, and I'm really struggling.

Speaker 1 Well, again, that's why we start with the oxygen mask, so we don't worry about any of these steps if we're still figuring out how to put the thing on ourselves in the first place and take care of our credit card debt.

Speaker 1 We wouldn't pass go, and we certainly wouldn't have the $200 to contemplate a boardwalk hotel maneuver.

Speaker 1 But here is my personal hack that I use all the time to procure about an extra $1,000 to $1,500 a year.

Speaker 1 And for anyone who says that that isn't life-changing money, if done annually and invested appropriately across these steps,

Speaker 1 yes it is. I leave you with my number one hack in the modern financial era.
Learn about tiered pricing. Everything in your life now has tiers.

Speaker 1 Your phone plan, your streaming services, your internet, your software subscriptions. And here's the really fun part.

Speaker 1 Every one of those companies would much rather keep you at a cheaper tiered price than lose you entirely. It's cheaper for them.

Speaker 1 So all big companies develop these tiers so they can take advantage of attracting as many customers at that customer's preferred rate as possible.

Speaker 1 It's why you could go see a movie initially in the theaters for $15

Speaker 1 or wait until it comes out and see it on a streaming platform for $4.

Speaker 1 Either way, you've paid the right price for your current demand. Same is true of every company that you currently work with.

Speaker 1 So your task that I know you don't want to do is to pick up the phone and call each one of them. Tell them you're thinking of canceling unless they can get your rate down.

Speaker 1 And you don't do this as a play. Do it seriously.
If they can't get your rate down, leave. Shop around if they won't bring it down.

Speaker 1 Want to know why your rate has jumped from $50 a month to $90 a month?

Speaker 1 Because they know most of us will never call and they've just almost doubled their revenue stream and you've just almost doubled your expenses.

Speaker 1 If you call, they will almost automatically bring you back to an intro rate if you're willing to stay.

Speaker 1 I've done this with my phone company, my internet provider, even my streaming subscriptions, and almost every time they've offered me a special retention rate that basically resets me to their lowest tier pricing for another year or two.

Speaker 1 Now the real hack, for the bold among us, say no to their first few offers. They have more than one retention tier, and I've gotten some companies down to a free year year of service.

Speaker 1 Takes about 20 minutes per company, a touch of courage and patience, and it can save hundreds, sometimes thousands of dollars a year.

Speaker 1 That's real money that you can direct straight into your Roth IRA, HSA, or taxable brokerage.

Speaker 1 And remember, even 50 bucks a month into those accounts, invested in low-cost funds, working for you, and not going right out the door, is a quick and reliable system that you can do once a year.

Speaker 1 It's the modern version of coupon clipping, except instead of scissors, you're going to use your phone.

Speaker 1 So before you tell yourself you can't afford to start investing, do a quick service provider audit, see what you're currently paying, and remember this.

Speaker 1 Sometimes the money is already there, it's just going to go to the wrong place. And guess what? That service provider is not going to be the one to tell you there's a way to get it back.
That's me.

Speaker 1 And that's about as complete of a financial order of operations as I can think of right now. This framework is by no means revolutionary.
It's certainly not going going to make you rich overnight.

Speaker 1 It's not going to be featured on a Netflix documentary about the next big thing in personal finance.

Speaker 1 But what it will do is give you a clear, logical path from wherever you are today to financial security and eventual wealth in the years to come. It works if you're broke.

Speaker 1 It works if you're comfortable. It works if you're already wealthy and just want to make sure you're not screwing things up.

Speaker 1 The financial advice industry loves to overcomplicate things because complexity sells.

Speaker 1 But telling you just invest in low-cost index funds and be patient doesn't generate as many consulting fees, but it's the truth. It's the answer.

Speaker 1 Follow this order of operations, automate as much as you can, ignore the noise, be patient. That's it.

Speaker 1 And if these two episodes were helpful, please do consider leaving a review on Apple Podcasts or Spotify, or share them with a friend who still believes they're getting a great deal from Hulu because now they're getting ESPN and Disney Plus for one low monthly rate of $49.95.

Speaker 1 Your friend can do better. We can do better.
And if you've made it this far and you're still not sure where to start, start with step one. Put your own oxygen mask on first.
The rest will follow.

Speaker 1 Even if all that means for you is that you start your day by going for a walk, taking in the air, and making yourself that much more patient when you're stuck in traffic or on hold trying to negotiate your monthly rates one hour later.

Speaker 1 Thanks for listening, and I'll see you next time.

Speaker 1 Thanks for tuning in to your Money Guide on the Side. If you enjoyed today's episode, be sure to visit my website at tylergardner.com for even more helpful resources and insights.

Speaker 1 And if you are interested in receiving some quick and actionable guidance each week, don't forget to sign up for my weekly newsletter where each Sunday I share three actionable financial ideas to help you take control of your money and investments.

Speaker 1 You can find the sign-up link on my website, tylergardner.com, or on any of my socials at socialcapicial.

Speaker 1 Until next time, I'm Tyler Gardner, your money guide on the side, and I truly hope this episode got you one step closer to where you need to be.