Personal Finance Order of Operations:
1) Create a budget to figure out expenses
2) Build a 1-month emergency fund
3) Maximize employer 401k matches to let free money compound
4) Pay off high-interest consumer debt
5) Save 3 to 6 months of expenses in an emergency fund
The Financial Order of Operations:
6) Maximize Roth IRA contributions for retirement
7) Save 15% in 401K for retirement
8) Invest for long-term goals or pay off medium-interest debt
9) Pay off low-interest debt
10) Do whatever you want!
Let’s discuss each step 1-10 in detail:
Step 1) Create a budget to figure out expenses: A budget is simply a plan for your money, outlining your income and expenses. It allows you to see exactly where your money is going and helps you make informed decisions about your spending.
Step 2) Build a 1-month emergency fund: An emergency fund is a safety net to cover unexpected expenses such as car repairs, medical bills, or job loss. Without an emergency fund, you are forced to rely on credit card debt, which leads to high-interest debt & financial stress.
Step 3) Maximize employer 401k matches to let free money compound: You get free money from your employer, and it grows tax-free until you withdraw it. This results in a substantial amount of money over time due to the power of compound interest.
Step 4) Pay off high-interest consumer debt: High-interest consumer debt, such as credit card debt or personal loans, can spiral out of control. The longer you carry this debt, the more you pay in interest & fees. High levels of debt also negatively impact your credit score.
Step 5) Save 3 to 6 months of expenses in an emergency fund: A 1-month emergency fund helps with short-term unexpected expenses, but 3 to 6 months provides peace of mind to cover essential living expenses like rent/mortgage, utilities, groceries, transportation, and insurance.
Step 6) Maximize Roth IRA contributions for retirement: To maximize your Roth IRA contributions, you should aim to contribute the maximum allowed amount each year, which as of 2023 is $6,000 for individuals under age 50 and $7,000 for those over age 50.
Step 7) Save 15% in 401K for retirement: The 15% savings goal is a general guideline, but you may need to adjust it based on your individual circumstances and retirement goals.
Step 8) Invest for long-term goals or pay off medium-interest debt: Decide whether to pay off medium-interest debt or invest for long-term goals (down payment on home) Medium-interest debt typically includes rates from 6%-8%, such as student loans, car loans, or personal loans.
Step 9) Pay off low-interest debt: Low-interest debt is debt with an interest rate lower than the expected rate of return on your investments. In general, it makes more sense to invest in something that earns more than the interest you’re paying on a low-interest debt.
Step 10) Do whatever you want: You can allocate your extra money towards whatever you want. It could be a dream vacation, a new car, a down payment on a house, or anything else that you have been saving up for.
source Twitter: fluentfinance
