The Real Financial Order of Operations - Part 1 of 2

Speaker 1 Look at how much money you're not throwing away by paying off high interest debt first. You know what builds confidence? Keeping more of your money.
You know what doesn't?

Speaker 1 Paying an extra $1,000 in interest over two years because you wanted to feel like you accomplished something. These, to me, are the non-negotiables, the foundation.

Speaker 1 If you get these steps right, everything else becomes easier.

Speaker 1 Hello friends, 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.

Speaker 1 I'm Tyler Gardner, and if you're new here, welcome to the only personal finance podcast that treats you like an adult, capable of understanding both compound interest and some of my occasional literary references.

Speaker 1 We're sitting now at episode 40, which in podcast years is roughly equivalent to making it through the first act of a Dickens novel, lots of setup, occasional suffering, but guess what?

Speaker 1 We're getting somewhere. Today, we're talking about something every financial guru claims to have figured out, including myself, the order in which you should handle your money.

Speaker 1 The problem is, most of these systems were designed by people who have either never been broke or have spent so much time in the Dave Ramsey cinematic universe that they think paying off a $200 credit card before a $20,000 one at the same interest rate is somehow a winning strategy because it, quote, builds confidence.

Speaker 1 You know what else builds confidence? Not lighting money on fire.

Speaker 1 So today, I'm giving you my preferred financial order of operations, a framework that works whether you're making $40,000 a year or $400,000 a year, whether you're 25 or 55,

Speaker 1 and whether you believe in the efficient market hypothesis or think you can time the market because you read three articles on seeking alpha.

Speaker 1 And because once I started writing this down, I somehow couldn't stop from finding more components to address. You're welcome.
Once again, this is a two-part series.

Speaker 1 So today, we're covering the foundational steps. These are the non-negotiables that need to come before anything else.

Speaker 1 Next episode, we'll tackle the more nuanced decisions around emergency funds, taxable accounts, and debt strategy.

Speaker 1 And yes, I did just exclude emergency funds from the non-negotiables, and I will be more than happy to explain the reasoning as we progress.

Speaker 1 But before we dive in, as always, if the show has been helpful to you or if you just enjoy hearing someone be be mildly sassy about index funds from time to time, the best way you can help me out is by leaving a review on Apple Podcasts or Spotify, or sharing this episode with a friend who needs to hear that their financial advisor's 1.5% fee is not, in fact, industry standard.

Speaker 1 As a starving financial artist, I need and appreciate all the help I can get, and I value deeply having received over a thousand reviews within the first six months of this this show's being live.

Speaker 1 You all are amazing, and it makes it all worth it. Thank you.
And now let's get into it.

Speaker 1 Order of operations, step number one.

Speaker 1 Put your own oxygen mask on first.

Speaker 1 I've always loved the quiet wisdom of airline safety instructions. Simple, almost absurdly obvious lines that somehow contain the entire philosophy of a good life.

Speaker 1 Put your own oxygen mask on first isn't just about altitude. It's about adulthood.
We cannot help others if we're gasping ourselves.

Speaker 1 That's why I spend two hours each morning working out physically and mentally before I ever check in email, pick up a phone, or go out in public.

Speaker 1 The same is true in personal finance, especially in personal finance. So we'll start the same way airlines do, and I hope you're paying more attention than you are during Delta's safety video.

Speaker 1 Please choose to take care of yourself financially before you take care of your kids. I know.
I know. You love your children.
Or maybe you don't. That's not what this show is about.

Speaker 1 If that's what you're thinking through, turn off this podcast and go listen to Good Inside by Dr. Becky.
But for those who are still here, yes, your kids might be the light of your life.

Speaker 1 You'd do just about anything for them. But you know what doesn't help them? You're being broke at 67 because you funded their 529 plan while carrying $8,000 in credit card debt at 22%

Speaker 1 interest.

Speaker 1 Every time you're on an airplane, assuming you still fly commercial like the rest of us common folk, the flight attendant will give you this same oxygen mask speech.

Speaker 1 Put yours on first, then assist others. This isn't because the airline industry is staffed by Ayn Rand enthusiasts.
It's because you cannot help anyone if you're unconscious.

Speaker 1 The same applies to money. Your kids can get scholarships.
They have more labor opportunity and potential earning power ahead of them.

Speaker 1 Or they could be like yours truly and choose to go to a state school. They can take out reasonable student loans.
But you know what they can't do? Take out a loan loan for your retirement.

Speaker 1 And I see this all the time. Parents who are contributing to a 529 while they have no additional cash on hand, no retirement savings, and a Discover card balance that would make a loan shark blush.

Speaker 1 The intention is beautiful. The execution is financial self-immolation.
Here's the thing.

Speaker 1 If you're financially stable, you're in a much better position to help your kids down the road if they need it. If you're broke, you become their problem.

Speaker 1 And if you've looked at the job market recently for college grads, you'd know kids will have enough problems without having to think about funding your ultimate health care needs.

Speaker 1 And I don't mean that cruelly. I mean it mathematically.
An adult child supporting a struggling parent is both emotionally and financially devastating.

Speaker 1 So before we talk about anything else, before we optimize tax-advantaged accounts or debate whether to pay off the mortgage early, we need to establish this. Your financial stability comes first.

Speaker 1 Not because you're selfish, but because it's the most responsible thing you can do for the people who depend on you. Put your own oxygen mask on first, then we'll talk about everything else.

Speaker 1 Okay,

Speaker 1 now that we can all take a breath together. Step number two, it sounds simple, but it is crucial.
Pay off your credit card debt first.

Speaker 1 Your first step now is to do every single thing you can and throw every single penny you can at your credit card debt. I don't want you to manage it.

Speaker 1 I don't want you to strategically pay it down using some snowball method. I want you to obliterate it.
And yet every time I say this, someone in the comments brings up the debt snowball method.

Speaker 1 You know the one. Pay off your smallest debts first, regardless of interest rate, because checking items off a list gives you a psychological boost.

Speaker 1 Let me be clear. The debt snowball method is financial astrology.

Speaker 1 It's a horoscope for people who think Susie Orman and Dave Ramsey descended from Mount Sinai with some form of divine wisdom that the rest of us could only dream to one day inherit and practice.

Speaker 1 Paying off your smallest debt first, regardless of its interest rate, feels good in the same way eating an entire sleeve of Oreos feels good. Momentarily satisfying, but ultimately, you're worse off.

Speaker 1 Here's the math, which unlike feelings, doesn't care about your level of confidence. If you have a $500 debt at 15%

Speaker 1 and a $5,000 debt at 22%,

Speaker 1 paying off the $500 first because it's smaller means you're continuing to pay 22%

Speaker 1 interest on 5 grand while you slowly chip away at something that's costing you way less. Congratulations, you've successfully prioritized theater over economics.

Speaker 1 And the argument I hear is always the same. But Tyler, people need wins.
They need to feel progress. Okay, fine.
You want to feel progress?

Speaker 1 Look at how much money you're not throwing away by paying off high interest debt first. You know what builds confidence? Keeping more of your money.
You know what doesn't?

Speaker 1 Paying an extra $1,000 in interest over two years because you wanted to feel like you accomplished something.

Speaker 1 And although I never like speaking ill of other creators, if there is some self-proclaimed financial expert out there telling you to establish an emergency fund that pays you 4% on your money before tackling your 25% credit card debt that is eating you alive,

Speaker 1 Well, that should be just about enough to give you a sense of what it means when someone has to self-proclaim their own expertise. Your credit card debt is your emergency, period.

Speaker 1 You cannot and will not out-invest 22%

Speaker 1 interest out the door. Thus, you're setting yourself up to be losing money each and every day going forward.
So here's the move. Every extra dollar you have goes toward the high-interest debt first.

Speaker 1 Not the smallest, not the one that feels the worst, the one that's costing you the most money. Pay it off, all of it, as fast as humanly possible.

Speaker 1 And that will make you feel far better in the long run. Then, and only then, do we move to step three.

Speaker 1 All right, we need to pause here and talk about something deeply boring, but absolutely non-negotiable. Step number three is going to be insurance.
I know. I'm sorry.

Speaker 1 Talking about life insurance is like discussing tire pressure. It is not fun.
No one wants to do it. But if you ignore it, things can go very badly very quickly.
Here's the deal.

Speaker 1 And it's the only litmus test you need for this. If other humans depend on your income, spouse, kids, aging parents, that one friend who always forgets their wallet.
You need life insurance.

Speaker 1 Specifically, term life insurance, not whole life or universal life or whatever other commission generating product your cousin who just got his insurance license in 20 minutes from getmybrokerslicense.com is trying to sell you at the family barbecue.

Speaker 1 Term life insurance is cheap, straightforward, and does exactly one thing, the one thing you need insurance to do. If you die, your people get money.
That's it.

Speaker 1 No investment component, no cash value, no complicated chart showing projected returns that assume the market goes up 12% annually forever.

Speaker 1 Get enough to cover your debts and replace your income for a reasonable period, usually 10 to 20 times your annual salary, depending on your situation.

Speaker 1 So if you're 35, healthy, you might need $500,000 in coverage and you're probably looking at $30,000 to $50 a month as a premium.

Speaker 1 That's less than most people spend on streaming services they don't watch.

Speaker 1 And while we're at it, disability insurance. This one's even less sexy, but statistically, you are far more likely to become disabled than to die during your working years.

Speaker 1 If you can't work, you can't earn. If you can't earn, everything else we're about to talk about becomes completely irrelevant.
Many employers offer long-term disability insurance. Take it.

Speaker 1 If they don't, buy it. Aim for coverage that replaces 60 to 70% of your income.
I know this isn't the thrilling part of personal finance, and it's probably not why you tuned into this episode.

Speaker 1 And nobody's making TikToks about term life insurance, but this is foundational stuff. You can't build wealth if one bad financial accident or an illness wipes out your family's financial future.

Speaker 1 And we'll jump right back into it after a quick thanks to those helping me keep this show free for everyone and helping me keep my thermostat above 58 degrees in Vermont winters.

Speaker 1 So without further ado, I give you a quick word from our our first ever sponsor. And if you've been here for a while, you'll understand why this is such a big deal for me.

Speaker 1 My main goal, always and forever, is to help you feel confident, empowered, and simply awesome managing your own money.

Speaker 1 I've spent years creating free financial education because I genuinely believe everyone should have access to it.

Speaker 1 And Every single day, I still get about 20 emails from people saying, that's great, Tyler, but who would you trust if you weren't a former portfolio manager or someone who wanted to manage their own money?

Speaker 1 And without a doubt, the answer is Facet.

Speaker 1 You all know I've been championing the flat fee model since day one, years before I linked up with Facet, because it's not twice as hard to manage $2 million as it is $1 million, and you shouldn't pay more simply because you have more.

Speaker 1 What I love about Facet is that you get access to a full team of CFP professionals who help you with your entire financial picture, not just your investment performance.

Speaker 1 They care about your life as much as your numbers.

Speaker 1 And to give you an idea of the kind of people they are, because that sort of thing matters to me, When we started working together, they didn't send me the usual swag box with a branded tote bag I'd never use.

Speaker 1 Instead, they sent two dog bulls for my bloodhounds. That told me everything I needed to know about who they are and what they value.

Speaker 1 It's also why I'm genuinely thrilled to have them as the first official sponsor of this show.

Speaker 1 So, if you're 90% of the way there, but want an expert hand with final allocation strategies, tax planning, or even unpacking your relationship with money and why it might be time for a change, visit facet.com slash tyler.

Speaker 1 That's facet.com slash tyler and see why they're the only partner I have ever brought to you thus far as a resource. Facet is an SEC registered RIA.
This is not advice.

Speaker 1 All opinions are my own and not a guarantee of a similar outcome. I'm not a member of Facet.

Speaker 1 I have an incentive to endorse Facet as I have an ongoing fee-based contract for cash compensation, as well as percentage of equity in Facet based on this endorsement. And now, back to the show.

Speaker 1 Now that that's taken care of, let's move on to the fun stuff. Step number four, fund the Roth IRA.

Speaker 1 Now we get to get to one of my favorite accounts in the entire tax code, as many of you know, the Roth IRA.

Speaker 1 Most people know the Roth IRA as that retirement account where you pay taxes now and not later, which is true. But it undersells what makes the Roth genuinely brilliant.
That is flexibility.

Speaker 1 Here's the thing almost nobody talks about. You can withdraw your contributions from a Roth IRA at any time, for any reason, with no taxes and no penalties.

Speaker 1 Not your earnings, those are locked up until you're 59 and a half with some exceptions, but the money you contribute. You've already paid taxes on that.
That's yours.

Speaker 1 You can take it back whenever you want. You don't need to wait five years.
That would be if you convert money from a pre-tax to a Roth.

Speaker 1 When you contribute directly to a Roth, you can take that back any time for any reason. Why is this crucial to me? Well, because this is why I've ranked the Roth where I have.

Speaker 1 This makes the Roth IRA a stealth emergency fund with way more upside potential than putting said emergency fund in a high-yield savings account.

Speaker 1 You know, those things that were invented about four years ago by fintech companies when people forgot that for a long time interest rates were just about zero, just saying.

Speaker 1 Now, to be clear, I am not saying you ever should take back your contributions.

Speaker 1 But in order of operations for financial optimization, I do believe deeply that you should fund a Roth before an emergency savings and treat the Roth as if it were an emergency savings for an emergency only.

Speaker 1 Let's say you're 28 years old. You've paid off your credit card debt, you've got your insurance sorted, and now you're trying to figure out your next move.

Speaker 1 Standard advice is to build a six-month emergency fund in a high-yield savings account before you do anything else.

Speaker 1 But here's the problem with that: money in a savings account right now, even in a high yield, is earning, what, three and a half, four percent if you're lucky, and that's before inflation and taxes.

Speaker 1 Adjusted for inflation, you're basically treading water.

Speaker 1 Meanwhile, if you put that same amount of money in a Roth IRA and invest it broadly in a low-cost index fund, let's say a total stock market fund or an SP 500 fund, you're giving it a fighting chance to actually grow and outpace inflation.

Speaker 1 Over time, historically, the market returns around 7% after inflation, and that's a heck of a lot better than 3.5%

Speaker 1 before inflation. But Tyler, you're saying, what if I need the money and the markets down? Fair question, but here's the reality.
True financial emergencies.

Speaker 1 And I want you to come along with me on this one. Let's just really take a leap of faith.
You know, the kind where you need five figures right now.

Speaker 1 Those are rare. I'm not saying they don't happen.
Medical crises, job losses, major car repairs, well, that's kind of more maintenance, but these things are real, but they're not frequent.

Speaker 1 And by the time you've built up a meaningful amount in your Roth IRA, you've likely also got a credit card with a decent limit or other options to float you for a few weeks while you liquidate assets in a quasi-responsible manner.

Speaker 1 And if you're invested in broad-based index funds, we're not talking penny stocks, mind you, the odds that even the worst case scenario in financial history will wipe you out are, well, as of today, zero.

Speaker 1 Is it ideal to sell your investments when the market's down 15%?

Speaker 1 Of course not. But you know what's worse? Having $20,000 sitting in a savings account earning 3% while inflation runs at 3%,

Speaker 1 meaning you've made zero real return and the market's up 20% over that same period. The opportunity cost of holding too much cash is real and it's expensive.
So here's my move.

Speaker 1 Max out your Roth IRA if you're eligible, $7,000 a year in 2025 if you're under 50, 8,000 if you're over.

Speaker 1 Invest it in a diversified low-cost index fund, and if you need the money in a true emergency, you can take back the contributions. And odds are, you won't need the money.

Speaker 1 And in 30 years, you'll have a tax-free pile of money that would make your 28-year-old self weep with gratitude. The Roth IRA is one of the best tools in personal finance, so use it.

Speaker 1 Step number five, the only free lunch you're ever going to get on Wall Street.

Speaker 1 Next step is I would contribute to and fund my 401k if I had access to one, specifically up to the employer match if I had access to one.

Speaker 1 If your employer offers a match on your 401k contributions and you're not taking it, you're leaving money on the table. Not metaphorically, literally.

Speaker 1 It's as if your boss said, Hey, for every dollar you put in this account, I'll give you 50 cents. And you said, No, thanks, I'm good.
Heard it's a scam.

Speaker 1 The most common match is about 50% of your contributions up to 6% of your salary, which means if you contribute 6%, your employer would kick in another 3%.

Speaker 1 That's an immediate 50% return on your money. You cannot get that anywhere else.

Speaker 1 Not in the stock market, not in real estate, not in crypto, despite what all the bros will tell you when things are good, and definitely not in that buddy's can't-miss startup idea.

Speaker 1 Even if you're not thrilled about your 401k investment options. And let's be honest, as we've addressed in past episodes, some employer plans are stuffed with high-fee garbage funds.

Speaker 1 The match alone makes it worth it. A bad fund with a 1% expense ratio, even though egregious, if it gets an immediate 50% boost from your employer, is still better than a great fund with no match.

Speaker 1 Plus, 401k contributions are pre-tax, which means they lower your taxable income today.

Speaker 1 If you're in the 22% tax bracket and you contribute $6,000 to your 401k, you're saving $13.20 in taxes that year. That's real money.
Now, I know some people get stressed about tax diversification.

Speaker 1 What if tax rates go up in retirement? Well, let's start here. The primary people spreading that narrative are insurance agents who want you to not contribute to a 401k.
So there's that.

Speaker 1 But also, just like the market's future, you don't know where taxes are going to go. I don't know where taxes are going to go.
So we diversify when it comes to our tax account classifications.

Speaker 1 Which is why you've already handled your Roth IRA in the previous step. Now, between your Roth and your 401k, you've got both sides covered.

Speaker 1 Tax-free withdrawals and retirement from the Roth and pre-tax contributions now from the 401k. So here's what I would do.
Contribute enough to your 401k to get the full employer match.

Speaker 1 If that's 6% of your salary, contribute 6%.

Speaker 1 If it's 4%, contribute 4%.

Speaker 1 Don't leave free money on the table. After that, we'll talk about where to put additional savings, but the match comes first.

Speaker 1 Now, before we go maxing out that 401k, it's worth inserting a brief but crucial philosophical interlude. Come on, you knew it was coming.

Speaker 1 As many of you know, most financial gurus err on the side of promoting delayed gratification. Max out the retirement accounts or you're a bum.

Speaker 1 Well, then call me a bum because for years I drank that Kool-Aid and honestly find myself promoting the same mindset from time to time.

Speaker 1 But then I began to realize I've built up a financial mindset now that is becoming harder and harder to break. I just invest everything and feel broke today.

Speaker 1 If you're a long-term investor, you know exactly what I'm talking about.

Speaker 1 So, my fix, as I've mentioned in past episodes, is I've started to simply fund a money market in a taxable brokerage account, and I'm not allowing myself to just max out every retirement account for the sake of maxing them out.

Speaker 1 It's not necessarily financially optimal, but it might in fact be optimal for Tyler's lifestyle in his 40s and 50s, as opposed to saving it all for his 70s and 80s.

Speaker 1 All right, end of philosophical digression. Before you go beyond the employer match, just stop and ask, do you believe you might want the money before 59 and a half? And guess what?

Speaker 1 It's okay to say yes.

Speaker 1 Back to the list. Step number six, the triple tax unicorn.
My next step would be, if I had access to one, I would fund and try to max out a health savings account.

Speaker 1 And this only applies if I were on a high deductible health plan. But congratulations, if I am, I've just unlocked one of the most powerful tools in the tax code.

Speaker 1 The HSA is the only account that's triple tax advantaged. Contributions are tax deductible, or pre-tax if done via payroll.
Growth is tax-free, and yes, you can and should invest the funds.

Speaker 1 And withdrawals for qualified medical expenses are also tax-free. Let me repeat that.
You get a tax deduction going in. You pay no taxes on growth and you pay no taxes coming out.

Speaker 1 That's called a financial unicorn, the holy grail, the financial equivalent of finding a $20 bill in your jacket pocket, except it's $20,000 and it's illegally sanctioned by the IRS.

Speaker 1 For 2025, you can contribute $4,300 as an individual or $8,550 as a family. If you're 55 or older, tack on another $1,000 catch-up contribution.
And here's the strategy most people miss.

Speaker 1 Don't use your HSA for current medical expenses if you can avoid it. You pay out of pocket, save your receipts, let the HSA grow, and then you can reimburse yourself decades later.

Speaker 1 There's no time limit. In the meantime, that money is invested and compounding tax-free.
And remember, little other known fact, after age 65, you can withdraw from your HSA for any reason.

Speaker 1 You'll pay regular income tax on non-medical withdrawals, just like a traditional IRA, but there's no penalty.

Speaker 1 So in the worst case, it's the equivalent of a traditional IRA or another pre-tax account. In the best case, it's a tax-free medical fund for life.

Speaker 1 Not everyone has access to an HSA, and high-deductible health plans aren't right for everyone, especially if you have ongoing medical needs.

Speaker 1 But if you're relatively healthy and you've got access to one, this one is worth maxing out, as even though none of us like to hear it or talk about it, yep, we're going to get sick.

Speaker 1 And yeah, we're going to need money to help place our oxygen masks wherever they will need to be at some point in the future. Okay,

Speaker 1 that's part one of the financial order of operations. To recap what we've covered today.

Speaker 1 One, we're going to start by putting our own oxygen mask on first. AKA, we're going to take care of ourselves before our kids.

Speaker 1 Number two, we're going to obliterate high interest credit card debt and remember that math beats feelings.

Speaker 1 Number three, we're going to get term, life, and disability insurance if people depend on our income.

Speaker 1 Number four, we're going to max out our Roth IRA as it's a stealth emergency fund with far greater upside. Number five, we'll contribute to our 401k up to the employer match.
Free money is free money.

Speaker 1 And number six, we're going to max out our A to say if we've got one, triple tax advantage, and it's unbeatable. These, to me, are the non-negotiables, the foundation.

Speaker 1 If you get these steps right, everything else becomes easier. And back to the Roth IRA as an emergency fund.

Speaker 1 If you really hate that idea of too much risk, absolutely substitute whatever you'd like at that point to make sure you have enough liquidity and safety to help you sleep at night.

Speaker 1 Just understand there is always immense opportunity cost to saving money in a type of account that doesn't outpace inflation.

Speaker 1 Now in the next episode we're tackling more controversial stuff and in my mind some of the more nuanced and fun stuff.

Speaker 1 We'll go further as to why the conventional emergency fund advice is outdated and expensive.

Speaker 1 We'll think more about taxable brokerage accounts and why they're one of the greatest retirement accounts you can have.

Speaker 1 And we'll explore the right way to handle student loans and other debt. Spoiler alert, yes, it involves more math and fewer feelings.

Speaker 1 Finally, I'll even provide some bonus personal finance hacks that will help answer the eternal question that I hear all the time when I produce shows like this.

Speaker 1 Well, that order is great, but where the heck are we supposed to get the extra money to do all of this in the first place? Yes, I'm on it and we'll explore one really solid option option together.

Speaker 1 And if this episode was helpful or if you simply now feel heard and seen as you too felt the debt snowball method was for ding-dongs, please consider leaving a review on Apple Podcasts or Spotify or share this episode with a friend who still thinks a high-yield savings account will give them 5% in perpetuity.

Speaker 1 Thanks for listening and I'm looking forward to completing this list with you all next week.

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 SocialCapOfficial.

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.