- If you eventually want to achieve financial freedom
or even financial independence,
then you need to know how to invest your money properly.
You know how there's a certain order
that you need to go through
when you want to wash dishes in a dishwasher?
Rinse the dishes off so there's no food on them,
load them into the dishwasher, add dishwasher soap,
run the dishwasher, unload the dishes.
If you skip the steps of rinsing off the dishes
or, I don't know, forgetting to add soap,
then you'll end up with plates and silverware
that aren't clean.
It's the same thing with investing your money
if you do it wrong.
There's a certain order
that you need to follow with investing,
just like there's certain steps that you need to go through
to have clean dishes.
If you skip one of those steps
without knowing why you are skipping a step,
then you're going to pay for it later down the line.
Unfortunately, your investments aren't as forgiving
as your dirty dishes are.
In this video, I'm gonna go through the order
that you should be investing to ensure
that you have the maximal amount of money
so you can achieve financial freedom
or even financial independence in the future.
My older brother called me up recently,
asking me some questions about investing
and as we had this conversation
I caught myself going through these exact steps with him,
so I figured I'd share it with you.
Hey, I'm Jarrad with an A,
and on this channel we talk about all things,
p-p-personal finance, investing
and we try to have some fun in the process.
If you don't have access to any of these on the list,
then just skip that step and move onto the next one.
Don't completely ignore it, though,
because at some point it may be available to you
so you should at least be aware of what you're gonna do.
Other than that you should not jump around
from step to step.
Do not pass go, and do not collect $200.
Think of this process like a row of buckets
that you need to fill up.
Once the first one is filled up,
then you move onto the next one,
and then the next one, and so on.
At some point in this video, I'll go through
how I'm personally working through this whole process.
Obviously nothing in this video
should be taken as investment advice.
Stick figure drawings is what I do professionally,
so this video is for informational and entertainmental,
entertainment purposes only.
Please do your own research
and don't listen to a stick figure guy like me.
The first thing you need to think about
is building up an emergency fund.
Now this should technically be done
as early in the process as possible,
but it can be built up while you are still investing
and going through the following process.
It's kind of tough for me to give you any sort of timing
because it's smart to start investing
as quickly as possible, but that emergency fund
is going to save your butt more often than you know.
This is one of those gray areas
that you'll have to decide for yourself.
After I paid off all of my $82,000 debts,
I chose to build up my emergency fund
and invest at the same time.
I had mine fully funded within about eight months,
so I was okay with it taking that amount of time
so I could ramp up my investments a lot sooner.
The stability of your job
and whether or not you have a family,
will give you an idea of how much you need to carry.
If you have a steady job like a teacher,
then you might be fine with,
we'll say three to six months worth of expenses.
Now if you have a sales job
where income can drastically change throughout the year,
then a six to 12 month emergency fund
would work best for your situation.
All of this money should be put
into a high-yield savings account.
Do not, under any circumstances, invest this money.
I know it's going to be extremely tempting
because the stock market has done nothing but go up
over the past 10 or 11 years
and you feel like you could be earning so much more
if it was invested in the market.
But playing the stock market in the short term
is a loser's game.
You have no clue when you'll actually need the money
since it's there for emergencies.
So, you have to assume
it will be invested for the short term.
The next step in the process
is to invest up to your employer's match.
There is no gray area with this one.
Under all circumstances you should be doing this
no matter what people like Dave Ramsey tell you.
Let's say your employer gave you 30 days vacation,
every single year, and if you didn't use that vacation
by January 1st, then you would lose it.
Would you make sure that you used it all by January 1st?
Of course you would.
Those are free days that you can't get back
once the option is off the table after January 1st.
It's the exact same thing as a 401K match.
If you don't invest enough for them to match today,
then you can't go back and get that free money from them
later down the line.
A $3,000 per year employer 401K match invested for 30 years
at a 7% return comes out to over $280,000 free dollars.
This is a part of your compensation, just like your salary
and all of the other benefits you receive from them.
So, take advantage of that free money.
One thing to note is that all of the money
an employer contributes for you,
goes into a traditional 401K.
So for example, if you are currently investing
in a Roth 401K,
then they will still match your contributions but,
but, it will go into a traditional 401K.
This is how it is everywhere, so you can't change it,
you just gotta deal with it and be happy with the fact
that they're giving you free money.
The next investment bucket that you need to complete
before moving on is maxing out a Health Savings Account.
This is the ideal bucket, especially if you treat it
like it's a tax-free retirement account.
Not many people think about it in this way,
because on the surface,
it looks like it's for medical expenses,
which is technically true,
but how you interact with it changes everything
and leave you with insane amounts of money in retirement.
I made a whole video going over how to maximize an HSA
where I break everything down and show you the process
that I'm going through, to make this happen.
I'll throw a link to that video in the descriptions
so you can watch it after this video to take a deeper dive.
Just a quick, high-level summary,
the way to do this is to contribute to your HSA every year
and avoid touching that money until you're retired.
That means that you'd pay all of your medical expenses
out of pocket instead of withdrawing money
from your HSA account to pay for them right now.
To really take advantage of this,
you'll need to make sure that the money in your HSA account
is actually invested so it has a chance to grow.
If you are single, maxing out your HSA for just one year,
letting it stay invested for 30 years, assuming a 7% return
and never investing another dime would turn
that 35 th--, 35 h--,
$3,550 into over $27,000 of tax-free money.
You actually save on paying taxes three different times.
So, it's a triple tax savings.
You don't pay taxes on the money
when it's going into the account,
you don't pay taxes on the investment gains,
so in our example, that we just talked about,
you don't pay taxes on the $23,000 gains
and you don't pay taxes
when you withdraw money from the account.
For medical expenses.
Sorry, I should have said that.
It's very rare that the IRS gives you a chance
to legally skip out on paying taxes once,
let alone three different times.
So, that's why this is such a powerful account
if you use it properly.
There's more you need to know before doing this,
so go watch the video that I mentioned just a minute ago
for all the details.
Oh, hey, how's it going?
I'm in the middle of editing
the video you're watching right now
and I forgot to say something.
Please Hulk smash that thumbs up button.
After those last couple are filled up,
the next bucket that you need to max out is your IRA.
Don't call it an IRA, I hate when people call it an IRA.
It is an I-R-A, not IRA.
IRA's like a girl that used to live down the street from me.
It was honestly really tough for me to put an HSA
before a Roth IRA because I love everything
about a Roth IRA,
but that triple tax savings you get with an HSA
is just too good to pass up and not contribute to first.
If your income is over the Roth IRA limit,
then this would be the time
for you to look into contributing to a traditional IRA
and converting it to a Roth IRA using a backdoor Roth IRA.
Not IRA.
If you're eligible to invest in a Roth IRA, then go for it.
The reason I say that is because none of us have any idea
of what the tax rate is going to be in the future,
so I always say to put the tax, pay the taxes now
so the money can grow tax-free forever.
But once again, that's just my opinion,
do your own research and do what you want.
Plus, dealing with required minimum distributions
from a traditional IRA is a little annoying.
The reason that IRA is the next best thing to max out
before you go back to investing in something like your 401K,
is because you have full control over everything.
You choose where you want to invest
and there are a lot more options for you to choose from
when it comes to equities to invest in.
With a 401K, you're locked into having to use
the platform your employer sets up for you,
you have to deal with the fees that they charge you
and your investment options are limited
to only the ones that they offer.
The one major problem with investing in an IRA
is the fact that it is self-directed.
So, you have to take all of the initial steps to set one up
and most people don't do this.
And I think that's either because they don't know about it
or even know how to do it.
Now this could be a little bit intimidating
if you don't know what you're doing.
I'm hoping to get something out there
to help you with this soon, but until then,
I've put a video together walking you through the things
that you need to think about before opening a Roth IRA,
that I'll link up down in the description.
Now we're heading into the territory of, it depends.
Which one of these four you choose
is all going to depend on you.
Now you could potentially do all four at the same time
or do a little bit of each, or just do one.
But I would put them all on the same level
just in case someone wants to choose one.
The first of the three is going to be maxing out your 401K
up to the limit allowed which is right now,
$19,500 per year.
You would deduct $19,500 from whatever you contributed
up to your employer match
and that's what you would contribute
in this portion or this bucket.
Whether you invest in a traditional or a Roth 401K
is going to be up to you.
Now some people who are pursuing financial independence
will contribute to a traditional 401K,
then roll it into a traditional IRA,
then convert it to a Roth IRA.
Now that level of detail
is way beyond the scope of this video,
so just have an idea of which type of 401K
that you'll put money into.
If you are not sure, then don't let that stop you
from moving through this step.
Just contribute to one while you spend a few weeks
or a few months figuring it out.
You're not going to make or break your future
one way or the other while you gather more information,
but you will if you're not investing at all.
Another option at this level would be to invest
in real estate or start putting money aside
to invest in real estate at some point in the future.
I have friends who are bypassing their 401K
just to buy real estate
because that's how they want to generate money
for themselves in retirement.
And I don't see an issue with this at all.
The people I know who have had a lot of success
with real estate investing do it two ways.
The first way is that they buy, make improvements on,
then sell that property to make a profit.
Now there's a lot more that goes into this sort of thing,
so you might want to talk to someone
who successfully does it, before giving it a go.
The second way is you could also think about investing
in real estate through the buy and hold method,
where you purchase an investment property,
then rent it out as a way to build
a consistent stream of cash.
If investing in physical real estate on your own
isn't something you're interested in,
but you still want some of your money
invested into real estate for diversification purposes,
then you could always go the route
of using a crowdfunded real estate platform.
I personally recommend and currently invest in Fundrise.
I made videos on them that I'll link up
down in the description if you want to learn more
about Fundrise in general.
The third one on this level would be to invest money
into a current business you have
or start setting money aside to start a business.
I love it when people build a business on the side
with a full-time job.
I honestly wish that everyone did this
because there are so many benefits.
The tax benefits alone are insane
and make me wonder why everyone doesn't start a business.
Having additional income outside of your full-time job,
also gives you a little safety net
in case something happens where you got laid off.
It's a great way to ensure
that you at least have a little bit of money coming in
just to get you by.
Another benefit a lot of people don't mention
is that it gives you something to do
that's more productive than just sitting around
and watching television or YouTube videos all the time.
If you actually enjoy what you do,
then it starts to become your entertainment
as opposed to work.
I work a full-time job and I also make money
running this YouTube business and in other ways as well.
I genuinely enjoy teaching people like you
about money and investing.
So while some people look at it as work,
I look at it as entertainment
that I just so happen to get paid for.
The fourth thing you could do at this level or this stage
is starting to pay down your mortgage
or start saving for a home.
Some people have the desire to pay off their mortgage
because it helps them sleep better at night
and there's nothing wrong with that.
I, personally, have no desire to do this
because my money is better invested somewhere else
where I can get a higher return.
If you want to do this, then absolutely go for it,
I wouldn't call you stupid for doing it.
The next two, take this to the next level down.
Just like the last four,
you can choose which route you want to go.
I'm sure that everyone's been wondering
when I was gonna mention this one,
and that is your taxable investment accounts.
Unfortunately, this is probably the account
that most people invest in first,
which is completely wrong and I hate that this is the case.
I put some of the blame on popular investing apps
like Robinhood, who only offer taxable accounts
and no retirement accounts like Roth IRAs.
It's important to take care of things
like your retirement accounts
before touching your taxable accounts
because there's many tax benefits to investing in an IRA,
a 401K, and HSA that are completely missing
from a taxable account.
The reason that I put this taxable investment account
below things like real estate and a business,
is that if you're maxing out your IRA, HSA and 401K,
then you already have a ton of money tied up
in the actual stock market
that investing more into it through a taxable account
might not be the best idea.
Investing in a business and, or real estate
is another way to diversify your overall net worth
and investments away from the stock market.
And this is going to be really helpful for you
as you get closer to that retirement age,
so you don't have all of your eggs in one basket.
I love the stock market and I am not knocking it,
but I love diversification a lot more.
The second one on this level is alternative investments.
Think of this like anything we didn't talk about already.
They're going to be very specific to you and what you know,
so I can't necessarily name any of them off right now.
Maybe you know something about, we'll say,
investing in art, or jewelry or something obscure like that.
Here's what I'm doing with my money this year.
I'm maxing out my employer's 401K up to the match.
Then, I'm maxing out my HSA.
After that, I am setting $500 per month aside
into my Roth IRA, through M1 Finance.
Next is where it gets a little nuanced.
I'm splitting the rest of my money between my 401K,
and saving up for a rental property.
Leading up to this year, I was maxing out my 401K
and I still had money left over which I was using
to invest in taxable accounts
and putting some into my savings account.
Since I want to start investing into real estate,
there's two ways that I could have gone about this.
Number one, I could have continued to max out my 401K
and used the left-over money to save for a rental property.
Or number two, I could still contribute to my 401K
a pretty healthy amount still, but not max it out,
and be able to save a lump sum of cash faster
for that first rental property.
I've chosen to go with number two.
Now the reason for that is because I have a plan
to own a certain amount of rental properties
within the next 10 years,
so the faster I can get the first one under my belt
and get this whole process started the better.
And the easier, honestly, that the rest of 'em will be.
To be clear, I'm not necessarily saying
that any of it will be easy,
but I just know that the first property is the hardest
if you've never done it before.
And I've never actually done it before.
Other than that, I'm just trying
to hold the least amount of cash as possible.
Not counting my emergency fund, of course.
Because cash sitting in my bank account
isn't making me money
and I want my money out there working for me.
I should also mention that I do have a taxable account
that I contribute to every, single month,
but that's specifically ear-marked for my future car fund.
I'll throw a link in the description of this video
to another video of me describing what I'm doing
and how I'm doing it so you can get an idea
of what the heck is Jarrad's car fund.
In the description of this video,
you can go pick up your free investing platform guide,
you'll also find a ton of resources to help you out
with all of your personal finance and investing needs.
Check out the financial independence retire early videos
right here to your left.
Please make sure to Hulk smash
that thumbs up button as well.
I'll see you in the next one, friends.
Adios.