- If I showed you this math problem
and asked you to solve it for me,
then you'd probably be able to get me an answer, right?
Even if there was a niner in there-
- Two, four...
Niner.
- And you needed to use your fingers and toes,
I'm pretty sure you could figure it out.
The method to solve a problem like this
is of course called the order of operations,
which most of us learned in school
when we were just little kids.
Now, if I showed you all of these investment accounts
and asked you to tell me which order to invest in
for financial independence, then could you tell me?
In this video, I'm gonna go through what I call
the order of investing operations
for financial independence
to help you optimize where your next dollar should go.
I see way too many people messing this up
and it's costing them tens of thousands
to even hundreds of thousands of dollars in lost money.
And the worst part is that they're not even gonna realize it
until it's too late to fix the problem.
If you are someone who is
or wants to start investing in cryptocurrency,
then I'll give you my thoughts about where that falls into
within this whole process as well.
If you don't have access to any of these accounts,
then skip it and move on to the next one.
The first place to start contributing
would be in your 401(k) up to your employer match.
No matter how much they give you,
take it because they are offering you literally free money.
A lot of people don't realize
that this is a part of your compensation,
just like your salary, health care,
sick days, and vacation days.
It'll usually be offered to you in two different ways,
either partial matching or dollar for dollar matching.
For partial matching, it'll say something like,
"50% match up to the first 6%,"
which means that they'll match half of what you contribute
up to 6% of your salary.
So, as long as your income grows,
the amount that they match will of course increase as well.
So, if you make a $100,000 per year,
then any amount you contribute up to 6%, or $6,000,
they'll match half of that, so up to 3%, or $3,000.
What seems like a small amount on the surface
can turn into a huge lump sum of money.
That yearly $3,000 match invested every year for 30 years
could turn into over $280,000.
Or for the people who kind of think more like me,
that is over 35,000 Chipotle burritos.
Who doesn't want more Chipotle burritos?
Don't contribute more into your 401(k) yet.
We'll come back to the 401(k) in just a minute.
My dog Molly would greatly appreciate
a thumbs-up on this video.
To up the ante a little bit,
I'll give her as many kisses as this video gets likes.
Challenge accepted.
I know this isn't technically an investment account,
but it has a decent enough return on investment to mention.
That would be to pay off any bad debt
that has an interest rate of 4% to 5% or higher.
For any rates less than that,
just pay the minimum payment and move on with your life.
You can use the famous Dave Ramsey-promoted
debt snowball method,
where you pay off the lowest debt first
or you can use the debt avalanche method
where you pay the debt with the highest interest rate first.
I'm a big fan of investing at least something
while you're paying off non-credit card debt,
so if you wanna check that box
with any employer match, then that works.
The next two steps are interchangeable.
I'm mentioning this now
because some people might rage out in the comments,
telling me how one of these
should be maxed out before the other.
I'm putting them in a specific order
based on the math and nothing more.
After I go through them both,
I'll let you know why you might wanna put money
into one before the other
so that you can understand the actual thought process.
After the debt's handled,
you wanna move into maxing out your health savings account.
Now, in 2022, for singles, it's $3,650,
and for families it's $7,300 for the year.
This is purely based on the fact that this account
offers you a triple tax savings
when money is invested within the account.
I have a whole video series
where I break this down in more detail
that I'll link up at the end of this video
and down in the description as well.
What I mean by triple tax savings
is that money goes into the account with pre-tax dollars,
it grows tax-free, and it can be withdrawn
for medical expenses tax-free as well.
One caveat is that if you use this money
for nonmedical expenses before the age of 65,
then you'll pay a penalty and taxes on the money,
so you should really avoid this, if possible.
The good news is that if you happen to not need
any of the HSA money for medical expenses,
then at the age of 65 you can use it
for non-medical purposes.
At that point, it basically turns into a traditional IRA
for withdrawal purposes because you'll have to pay taxes
on that money, but you will not pay any penalties.
If you wanna contribute to an HSA,
then you will have to be enrolled
in a high-deductible health plan, so keep that in mind.
They're not for everyone,
so make that decision based on your specific situation.
Maxing just this account out for 30 years
could turn into a $344,000 account.
In case you're not keeping track
of what the future value of this portfolio will be,
we're looking at $283,000 for the 401(k) match
and $344,000 for the HSA,
which brings us to a total of $627,000.
After you've maxed out your HSA,
the next account to put money into is a Roth IRA.
Contribute to a Roth IRA if you're within the income limit
and contribute to a traditional IRA
if you're over the income limit.
After that, decide if it makes sense to do a backdoor Roth
from a traditional IRA to a Roth IRA.
It usually makes sense to try to get money into a Roth IRA,
if possible, so that the money can grow tax-free.
Another good thing about a Roth IRA
is that you can withdraw contributions at any point in time
without paying early withdrawal penalties.
As long as you don't touch
any of the investment gains, you're fine.
A Roth IRA is something that a lot of people overlook
because, unlike a 401(k), it's self-directed,
so you have to open and fund the account on your own.
There's just enough friction in the process,
which is probably why we only see
about 30% of taxpayers that have an IRA.
One of the main reasons that I say to max this out
before putting any additional money
into something like a 401(k)
is because you have more control over a Roth IRA.
With a 401(k), you're forced to use the provider
that your employer chooses,
and there's usually very limited investment options
for you to choose from.
With a Roth IRA, you can choose the brokerage,
like Vanguard, Fidelity,
or my favorite, of course, M1 Finance,
and you have thousands of investment options
as opposed to the 20 to 40 that your 401(k) offers you.
Maxing out a Roth IRA at $6,000 per year for 30 years
would grow this account to roughly $566,000.
Adding that to our $627,000 total
from the 401(k) match and HSA brings us up to investments
totaling around $1.2 million.
If you can master those first three steps,
then you're basically a millionaire in 30 years,
but that's not enough because we want more,
so we need to keep going.
But first, we should quickly cover
the HSA versus Roth IRA debate
before some of you start rage quitting out of this video.
In a perfect world, you're able to max out both,
so choosing one or the other is a non-issue.
Here's a little chart to give you a quick visual
of the differences.
Use an HSA if you want the most optimal
tax advantage strategy
and you plan to use it for medical expenses.
Keep in mind that there's still a benefit
for contributing to an HSA,
even if you use some of it for nonmedical expenses,
at the age of 65.
Contribute to a Roth IRA first
if you wanna take advantage of the tax-free growth
and have more flexibility with your money,
since you're able to withdraw contributions
at any point in time.
Putting the HSA ahead of the Roth IRA on this list
was a tough one for me
because I love everything about an IRA,
but it just doesn't make sense to do it that way.
Another thing about an HSA
is that I know we all like to pretend
like we're gonna skate through this life
without any medical issues, especially when we're older,
but that's just not realistic.
Plus, no one knows how much
they're actually gonna be spending on medical
at the age of 60-plus, but I can probably guarantee
you're gonna be spending some money.
Better to be safe by prioritizing an HSA
and ending up with "too much money" than not prioritizing it
and realizing that you could've had
a lot more money available to spend
if you would've just maxed out that account to begin with.
Let's be honest: Out of your overall portfolio,
a portion of it is automatically gonna go
towards medical expenses anyways,
you just don't know how much yet.
At least you'll have a health-specific portfolio
that's optimized for that overall expense.
Once all of those accounts have been maxed out,
it's time to move back into accounts
like a 401(k), 457, and 403(b).
These are most likely going to end up being
the largest accounts that you own
when it's time to withdraw money to live off of
because you're able to contribute so much more money.
With a 401(k),
the max amount that you can contribute in 2022 is $20,500.
Now, it usually jumps by about $500
every year or every other year.
2022 was the first time that it jumped
by $1,000 within a one-year period since about 2005-2006.
Deciding whether to invest in a traditional 401(k)
or Roth 401(k) is going to be specific to your situation.
If you wanna reduce your taxable income today,
then look into contributing to a traditional 401(k).
For the tax-free growth, a Roth 401(k) would be ideal.
Before I quit my job in corporate America a few months ago
to take a mini retirement,
I was personally putting 100% of my money
into a traditional 401(k).
One thing to always remember
is that with a traditional 401(k),
you'll eventually be forced to withdraw money
through required minimum distributions,
so you won't be able to push off paying those taxes forever.
Not necessarily a deal breaker,
but it's something to keep in mind.
Choosing a Roth or traditional here
is going to have a lot to do with what tax rates will be
when you start withdrawing versus what they are today,
but I have a little secret to tell you about that.
Come closer, come closer.
That's better.
No one actually knows what the rates will be in four years,
let alone 20 to 30 years
when you start withdrawing this money.
Because of that, don't let this small decision
prevent you from doing something.
Split it 50/50 between both 401(k)s
until you have a better idea
of what you wanna do going forward.
I wanna point out real quick that I am completely aware
of how difficult it is to be able to max out a 401(k).
We're talking about roughly $1,700 per month
on top of maxing out all of the other accounts
that we've talked about so far,
which is a lot of freaking money.
I wasn't able to do something like that for a few years,
but I eventually got there, so don't get discouraged
if you are not in this position right now.
Maxing out a 401(k) and investing that money for 30 years
would give you an account worth a little over $1.9 million.
Between our 401(k) match, HSA, Roth IRA, and 401(k),
this would bring our total amount invested
to an insane $3.1 million.
If there's money left that needs a home,
then this is where you'd wanna start putting it
into a taxable investment account.
So many people are putting money into this account
before even touching HSAs, Roth IRAs, and 401(k)s,
which absolutely blows my mind.
It's extremely important to maximize
your tax advantage retirement accounts
before even thinking about messing
with a taxable brokerage account
because those accounts are more tax efficient.
If you plan to do something like an early retirement,
then having access to taxable investment accounts
will help you live off of money
while you do things like Roth conversions.
So, trying to get to a point
where you're able to invest money
within a taxable investment account
should be a high priority.
Now we need to talk about
investing in cryptocurrency along the way.
For just the sheer fact that I uttered those words
in this video means that there's going to be
scammer YouTube accounts spamming the comments down below.
They're going to mention contacting them through Instagram,
WhatsApp, Telegram,
and they might even throw a phone number out there
for you to contact them.
Please, please, please,
ignore them and/or report those comments
because it's not me and I do not endorse that kinda trash.
PSA over.
So, anyways, back to the investing in crypto talk.
If you're maxing out all of those retirement accounts
that we've covered so far,
then you're putting away roughly $30,000 per year,
which is great.
Because of this, you could probably feel
a little more comfortable
putting money into this type of investment.
Any sort of cryptocurrency would basically be under
the taxable investment account umbrella
because as of right now,
you can't put those into an HSA or 401(k).
I believe there's some companies that allow you to hold them
within something like a Roth IRA,
but I haven't done enough research into how legit it is,
so I don't wanna speak too much on that specific topic.
I am all for taking some speculative bets
with things like individual stocks and crypto,
so it's pretty much up to you
how much of your leftover money
should be allocated towards this sorta thing.
I have my personal number, which is no more than 10%.
And with that amount, I hold the more well-known ones,
like Bitcoin, Ethereum, and two others
that I'm not specifically gonna call out right now.
No, they are not dog coin
or any of the other it-coins out there.
I am not a super crypto bull.
I'm more someone who is, we'll say, in the middle
because there's a lot of trash coins out there
and I think that the future of the overall space
is very unpredictable.
Cautiously optimistic is probably the best way
to describe my personal outlook
on this type of investment class.
I'll go deeper into my thoughts at some point in the future,
so I'll leave it at that for now.
If you wanna learn about some small changes
to help speed up your financial independence results,
then watch this video to your left next.
There's a link to get in
the private Financial Independence community
down below in the description as well.
Please make sure to Hulk-smash that thumbs-up button.
I'll see you in the next one, friends; done.