Optimal Order For Investing Your Money

when it comes to investing your money there are a lot of different opinions on the best way to do it some people Advocate maxing out your 401K as soon as you have some extra cash While others say you should hold off until you've paid off all your student loans so what is the right order for investing your money what do you invest in first hi if you're new to China my name is Tay from Financial tourists where we learn to grow our wealth slow and steady when it comes to investing our money there is an endless list of choices to make 401K Ira HSA Student Loans mortgage Etc the list never ends and we're constantly fearful of making the wrong choice that is why in this video I want to share with you what I personally believe is the most optimal order for investing your money yes every situation is different and there's no way we can cover all the different scenarios in this video but I firmly believe there are some general guidelines that most people can follow to make sure they're putting their hard-earned money to work in the most optimized way possible number one on our list is an emergency fund before you put a diamond to the stock market or anything else your first order of business should include building up a reasonable buffer of cash store it in a simple checking or savings account the exact amount will be different for everyone and much depends on your personal risk tolerance but I recommend at least three to six months I know it's not an exciting activity with your money but there is a good reason imagine an emergency fund like bowling guardrails these bumpers essentially keep your bowling ball from falling into gutters they keep in the game even though you might have launched the ball improperly or your boss started spinning in the wrong direction think of an emergency phone like these bowling bumpers life will always throw your curveballs and you need to be ready for them at all times for me a good chunk of my curveballs are most often related to my car it might have to do with the fact that both my wife and I drove Clunkers for the first 10 years of our marriage one time my car wouldn't start and the mechanic told me it would cost me close to four thousand dollars to fix a problem or I will need to purchase a new car now if I was in a more precarious financial situation and didn't have cash in my bank account four thousand dollars could have easily kicked me off the game opponent is a Bankrate survey only 39 of respondents said they would be able to cover an unexpected one thousand dollar expense from their their savings most often people don't have a choice but use credit cards to cover the shortfall and it sends them into deeper Financial whole in our journey to Debt Pay down investing or financial Independence there will always be curveballs but enough cash in our emergency fund will ensure that we don't get derailed and help us stay on track towards our financial goals number two on our list is a 401k employer match if you work for an employer that offers matching 401K contributions this should be your first and Main priority before you do anything else take full advantage of your employer's matching contributions why because 401K match provides an instant guaranteed 100 return on your investment for example let's say that your employer matches 100 of your contributions up to four percent of your income if you make hundred thousand dollars a year when you contribute four thousand dollars into your 401k your employer matches your dollar for dollar another four thousand dollars you're essentially making a hundred percent return on your investment instantly there's not an investment in the world that offers risk-free returns like that the stock market doesn't rental property doesn't and even a lucky streak in Las Vegas can compete if you aren't sure if your company's 401K employer match policy ask your HR department or your benefits manager if they have an employer match and how it works and take full advantage of an employer matching contributions a quick note if you don't plan on staying at your company for too long make sure to ask about the vesting schedule the vesting schedule will tell you how long you have to stay at the company in order to keep the employer's matching contributions the most common length of time that an employee waits to be 100 invested in the company match is around three years consider this when you're thinking about moving jobs you want to be aware how much money you're leaving the table by accepting a new position number three on our list is get rid of high interest debt our categorize High interest debt as anything more than five percent for most people this would include things like credit card or student loans in my book credit cards is one of the worst high interest debt given the average credit card carries a 16 interest rate if you have credit card debt that you've been carrying month to month this is where you want to start with your debt reduction plan there is no easy way to knock down heintress dead X except to just do it list out all your high interest debts and create a plan for getting rid of them you can use the debt snowball method or the Avalanche method whichever one that best motivates you once High interest that is knocked out you'll be amazed at how much income you have available to optimize the rest of your finances alright once your high interest debts are paid down the next on our list is max out your Roth IRA in my personal opinion the Roth IRA is one of the most tax efficient accounts available to investors in a nutshell with a Roth IRA contributions are made on after tax basis but any growth is tax-free of course there are conditions such as needing to leave the money in your Roth IRA account for at least five years and you have reached the age of 59 and a half however what is amazing about the money in the Roth IRA is that you will never need to pay taxes on it ever we don't know what the tax landscape will look like in the future a new politician might decide that he or she needs to raise taxes to fund big government projects when you contribute to a Roth IRA you reduce the unknown tax related risks in the future there are some eligibility considerations to a Roth IRA in order to contribute directly to Roth IRA you or your spouse must have earned income but not too much in 2023 if you're married filing join the combined income exceeds 214 000 you're ineligible to make direct Roth IRA contributions but if your income is too high to contribute directly to a Roth IRA consider the backdoor Roth IRA strategy I have a whole video here that walks you through step by step in 2023 the contribution limit for anybody under the age of 50 is 6500. if you're age 50 or older the contribution limit is 7 500. the number five on our list is take advantage of Health a savings account also known as HSA now this may not be for everyone since in order to contribute to an HSA you need to be eligible to do so you must be covered under a qualified High deductible Health Plan HD HP before you can contribute to an HSA however if you do qualify this is a great way to save money for future health related expenses hsas offer what's known as Triple Tax Benefit your contributions are tax deductible your money grows Tax Defense referred while in the HSA and you can withdraw money from your HSA tax-free as long as it's used to pay for qualified medical expenses if you'd like to learn more I have a whole video here where I delve deeper if you're qualified High deductible health plan is for yourself only you can contribute up to 38 15 2023 if you're qualified High deductible Health Plan is a family health insurance plan you can contribute up to seven thousand seven fifteen twenty twenty three if your age 55 or older you can contribute an additional thousand dollars the number six on our list is the 529 education savings plan if you have children if you're looking to save money for your children's future College five to nine education Savings Plan offers a great tax efficient way to do it a five to nine education savings plan is basically like a Roth IRA but for Education expenses contributions are made on after tax basis but growth is not subject to federal tax and oftentimes State taxed as well when used for qualified education expenses five to nine plans do not have annual contribution limits however contributions to a 529 plans are considered completed gifts for federal tax purposes and in 2023 up to seventeen thousand dollars per donor per beneficiary qualifies for the annual gift tax exclusion personally I don't want my kids to think I'm going to cover their college tuition 100 so I invest just a moderate amount if we're creative there are tons of different ways to effectively fund College I personally had my college paid for by the US Army and my wife had her Nursing degree paid for by her future employer so though I like to have the five to nine education savings plan as an option I don't want my kids to completely depend upon it alright the number seven on our list brings us back to 401K but this time not just for the match but to completely Max it out just because we've taken full advantage of your employer match doesn't mean we can contribute more money to our 401K this is one of the most effective ways to lower our taxable income and put more money into the market I have personally saved thousands of dollars per year on my taxes just for maxing out my 401k in 2023 the contribution limit for anybody under the age of 50 is 22 500 if you're age 50 or older the contribution limit is thirty thousand dollars number eight on our list is now the taxable account once you've maxed out all your tax advantage options when it comes to your investment you can start investing additional money into a regular taxable investment account I talked to a lot of people who are excited to jump into the market and oftentimes they're opening up taxable brokerage accounts way before they've maxed out all their tax advantage accounts but this should be your last priority since you don't get any tax advantage when you use taxable accounts the tax drag from using taxable accounts instead of tax advantage accounts like a 401k can be significant especially when compounding over decades tax advantages like tax deductions allow more of your money to get work for you sooner in the market and therefore greater growth in the long run why pay more in taxes than you need to and make sure you're also following the index one strategy when it comes to your taxable accounts individual stocks and mutual fund picking is a loser's game and you're a winner number nine on our list is where you can tackle lower interest debt and I would say lower interest debt or debts with interest rates lower than five percent most often this would include low rate student loans and most car loans not include most mortgages even though from a financial perspective this debt may not be hurting you as much I would still recommend getting rid of it if you have the means to do so debt is quite an interesting concept It Is touted by some as a way to achieve the American dream others say it's a devil and should be avoided at all cost my personal perception is this never let our guard down around debt because it has a way of easily warping our perception about money when we accept debt as a normal way of life it can quickly Cascade into a borderline dangerous mindset of justification we can start to fund an elevated lifestyle with that low interest debt buying cars we don't need getting student loans for a degree that will advance our career if at all possible get rid of as much debt from our lives you're not only taking care of your financial well-being but your mental emotional well-being as well number 10 on our list is I personally believe optional but a valid way to deploy your money if you choose to do so and that is to pay off your mortgage if you purchased a home in the last few years you hopefully benefited from a low interest rate environment and you have at least a decade before your loan matures with a 15 to 30 year time frame your chances are stock Market outperforming your two to four percent mortgage is very high so I would say it makes sense to invest your extra cash into index funds rather than the mortgage however if you're getting to the end of your mortgage and you like to be completely debt free this is a great option I mean is there anything better than living in a mortgage-free home that's it guys thank you guys for watching if you'd like to learn more about decision to buy a home right now please check out my video here until next time all the best thank you [Music]

Channel: Tae Kim - Financial Tortoise

Views: 799,744

Keywords: Personal Finance, Money, Finance, Investing

Id: UfR9WqxDhGk

Length: 10min 25sec (625 seconds)

Published: Mon Nov 07 2022