The Financial Order of Operations: How To Prioritize Every Dollar
Have you ever thought that there should be an instruction manual for managing money? If you remember anything from your days in grade school math, it’s probably the acronym PEMDAS, or Please Excuse My Dear Aunt Sally, designed to help you remember the correct order for solving math equations (Parentheses, Exponents, Multiplication, Division, Addition, Subtraction). We believe that money problems have a similar order of operations, which we like to call the Financial Order of Operations.
No matter where you find yourself in your financial life, the Financial Order of Operations will work for you. Did you just start your first job and aren’t sure how to start investing? Do you have high-interest debt that you aren’t sure how to balance with other financial needs? Or maybe you are maximizing all of your retirement accounts and don’t know where to invest next.
Nearly 60% of Americans are unable to pay for an unexpected $1,000 expense with savings. We struggle with the basics, like budgeting, credit card debt, and saving for retirement. That’s why the Financial Order of Operations is so powerful - it grants clarity to those seeking order amidst financial chaos.
Before we dive into each step of the Financial Order of Operations, here are five ground rules to the Money Guy philosophy about building wealth.
Ground Rule #1: Generosity is not a single step in the FOO.
Being charitable and giving of your time and resources is a fundamental step 0. There are plenty of ways to be generous even if you can’t give much money, like donating your talent, knowledge, and time. We all should be doing our part to make the world a better place.
Ground Rule #2: The goal is to invest 25% of your gross income. If it were easy, everyone would do it.
We get it, investing 25% for retirement isn’t easy. It’s probably not any fun either, unless you are a true Financial Mutant. We will provide you with the tools and knowledge to get on the path to investing 25%, but it’s important to remember that it may take time to reach this goal and it isn’t easy. But don’t let that discourage you!
Ground Rule #3: Debt is a four-letter word.
Hearing the word “debt” should make the hair on your arms stand up. Always be cautious with your use of debt and learn how to use it in a safe and responsible manner by following our Money Guy debt rules.
Ground Rule #4: Liking what you do makes everything a lot easier.
Not everyone loves their job, and that’s okay. However, if you do have passion for what you do, life will be much easier. Many of us spend more time at work than we do with our family. The people you work with, and the environment you work in, is extremely important. Working in a career that provides you purpose will make time fly.
Ground Rule #5: You only get one life.
Don’t lose the perspective on the importance of enjoying each stage of life. There is a line you can cross that takes you from being awesome with your money to being a miserable miser.
The Financial Order of Operations is so foundational to Money Guy that we created our first course based on it. The FOO course includes video lessons from Brian and Bo, homework for each step in the FOO, private YouTube live streams, and access to an exclusive Facebook group.
Step 1 of FOO - Highest Deductible Covered
The first step of the Financial Order of Operations is to cover your highest insurance deductible. When something goes wrong in life, having your deductible covered is essential to keeping your financial life out of the ditch. You likely have a deductible for your health insurance, car insurance, homeowner’s insurance (if you own a home), and more.
How do I know I’ve completed Step 1, Deductibles Covered?
If you have enough in a liquid savings account to cover your highest insurance deductible, you can check the box on the first step of the Financial Order of Operations. If you aren’t sure what your deductibles are, check your policy documents for all your insurance policies.
Step 2 of FOO - Employer Match
Getting your employer match is important - so important, in fact, that we prioritize it in the Financial Order of Operations before high-interest debt. High-interest credit card debt may have interest rates of 20% or more, but an employer match can have a rate of return of 50% or 100%.
How do I know I’ve completed Step 2, Employer Match?
To complete step two, you need to be investing enough to your employer-sponsored account, such as a 401(k), to get your full employer match. Some may not need to contribute anything to get their employer’s contribution/free money, while others may need to contribute 5% of their income, 10%, or even more.
Step 3 of FOO - High-Interest Debt
High-interest debt can be extremely harmful to your finances, which is why it is prioritized highly in the Financial Order of Operations. Paying off all of your high-interest debt will allow you to invest more for the future.
How do I know I’ve completed Step 3, High-Interest Debt?
You can move on to the next step in the Financial Order of Operations if you have no high-interest debt. High-interest debt includes consumer debt such as credit cards, car loans outside of our 20/3/8 rule, and student loans depending on your age and the interest rate.
Step 4 of FOO - Emergency Fund
Building a full 3-6 month (or greater) emergency fund is step four of the Financial Order of Operations. An emergency fund is vital to staying on-track financially and paying for unexpected emergency expenses.
How do I know I’ve completed Step 4, Emergency Fund?
The typical rule of thumb is to save three to six months’ worth of expenses for an emergency fund, but depending on your situation, you may need more. If you only have one income in your household or are in a very specialized field where it may take you longer to find a new job, you should consider having a larger emergency fund.
Step 5 of FOO - Max Roth IRA/HSA
Maximizing your Roth IRA and HSA, if you can contribute to both, is step five of the Financial Order of Operations. These powerful tax-free accounts can supercharge your retirement and help pay for healthcare which is why they are prioritized before maximizing your employer-sponsored account or contributing to a taxable brokerage account.
How do I know I’ve completed Step 5, Max Roth IRA/HSA?
If you are maximizing your Roth IRA and HSA, you can check the box on step five and move on to the next step in the Financial Order of Operations. If you don’t have a high-deductible health plan and can’t contribute to an HSA, or are unable to contribute to a Roth IRA, you can skip step five of the FOO.
Step 6 of FOO - Max Employer Accounts
Maximizing all of your employer-sponsored retirement accounts is step 6 of the Financial Order of Operations. This includes 401(k)s, 403(b)s, 457 plans, and more. This is a very difficult step of the FOO to accomplish because of how much money it takes to maximize your accounts.
How do I know I’ve completed Step 6, Max Employer Accounts?
Obviously if you’ve maximized your employer accounts you can move on to the next step in the Financial Order of Operations, but you may be able to complete step 6 without maxing out your accounts. If you don’t have a high-income and can hit an investing rate of 25% before maxing out your employer accounts, move on to the next step of the FOO.
Step 7 of FOO - Hyperaccumulation (Invest 25%+)
Hyperaccumulation occurs when you are investing 25% or more of your income for retirement. Depending on your income, hyperaccumulation may happen inside of your employer-sponsored accounts, using the mega backdoor Roth strategy, or in a taxable brokerage account. This step also helps you vision-plan what financial independence will look like and how it will be funded.
How do I know I’ve completed Step 7, Hyperaccumulation?
Completing step seven means you are investing 25% or more of your income and you know you’re investing what you need to be for retirement. Why the caveat? If you started investing later or want to retire early, hyperaccumulation for you could mean investing more than 25% of your income for retirement.
Step 8 of FOO - Prepay Future Expenses & Abundance Goals
It’s finally time to save for your kids’ college education! Step 8 of the Financial Order of Operations is, among other things, where you start investing for your children. This could mean saving in a 529 plan, UGMA/UTMA, custodial account, or if they have earned income, custodial Roth IRA. Step 8 is also for any other long-term financial goals you have. Maybe you want a vacation home in Florida. Maybe you want to take a month-long trip of your dreams to Europe. Or maybe you want to start investing in real estate.
How do I know I’ve completed Step 8, Prepay Future Expenses?
Unlike other steps of the Financial Order of Operations, where your goals are clearly defined, completing step 8 will be different for everyone. You may not need to save anything on step 8, or you may need to save a lot, depending on your financial goals. The aspiration for this step is for you to know that your hard work and discipline of earlier steps is now generating enough that you can do more for others (the kids) or expand your lifestyle without regret.
Step 9 of FOO - Prepay Low-Interest Debt
It’s difficult to say you are truly financially independent as long as you have debt, and step 9 of the Financial Order of Operations is where you finally get rid of those pesky low-interest debts. This typically includes mortgage debt, but may include student loan debt depending on your age (as it may be a priority at earlier steps if you are older).
How do I know I’ve completed Step 9, Prepay Low-Interest Debt?
It’s easy to know when you’ve completed step 9 of the FOO - you no longer have any debt! We want everyone to be debt-free by retirement, so aim to have all of your debts paid off, and step 9 completed, by the time you retire.
The Financial Order of Operations is designed to work no matter your age, stage in life, or financial goals. Brian’s book, Millionaire Mission, will cover each step in detail along with Brian’s personal journey through the Financial Order of Operations. Make sure to sign up for updates to get an exclusive chapter preview and free bonus content!
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