Dangers of Not Following the Financial Order of Operations

September 11, 2020

Money doesn’t come with an instruction manual, and it can be difficult to know how to optimize every dollar. The basics are simple enough; saving for retirement is good, high-interest debt is bad, but what about beyond the basics? High-level financial mistakes, like putting your kid’s college fund before your retirement or paying off low-interest debt too early, can be just as costly as missing the basics. Here are several common Financial Order of Operations mistakes you’ll want to make sure to avoid.

1. Paying off low-interest debt at a young age.

Low-interest debt prepayment is the last step in the Financial Order of Operations. This is not to say that paying off debt isn’t important, but prioritizing low-interest debt, like your mortgage, before getting your financial life in order can be costly. Before paying off low-interest debt, make sure you have your deductibles covered, are getting your employer match, have no high-interest debt, maintain an adequate emergency reserve, are making Roth IRA/HSA contributions if eligible, are maxing out other retirement options (like your 401(k)), have begun hyper-accumulating (the ultimate goal is to be saving 20% to 25% (or more) of your gross income for retirement), and prepaid future expenses, like college tuition. After all of that comes low-interest debt prepayment. 

We realize that not everyone will be able to (or even want to) pay the minimum amount on low-interest debt until they reach the last step of the Financial Order of Operations. If you are still on earlier steps of the Financial Order of Operations but don’t like the thought of paying the minimum amount on your mortgage, it’s okay to round up your payment or pay a little extra every month as long as you aren’t neglecting other areas of your financial life. Low-interest debt isn’t the same for everyone, either; a 30-year mortgage may be more appropriate for young investors with a long time horizon, and those buying their second or third home may choose a 15-year mortgage. By retirement, you should aim to be completely debt-free.

2. Saving for your kid’s college before taking care of yourself.

College tuition is expensive, and lifting that burden off of your kid’s shoulders is a great goal. However, you need to make sure your own financial life is in order before saving for college or any other prepaid future expenses. It is the next-to-last step in the Financial Order of Operations, so you should have a secure financial future before saving for your kids. There are many different ways to pay for college; there are scholarships, state aid programs for students with good grades, need-based financial aid, tuition reimbursement from employers, student loans, and more. There aren’t any scholarships or need-based financial aid available for retirement, and you probably don’t want your children to be your retirement plan.

3. Missing your employer match.

The second step of the Financial Order of Operations, right after having your largest deductible covered, is getting your employer match. Not all employers offer an employer match, or even a retirement plan, but if yours does you should take advantage of it. You’ll have difficulty finding immediate 100% or 50% returns on your money anywhere other than with your employer match. Getting the employer match out of order could be extremely costly to your future retirement.

4. Not covering your largest deductible.

The Financial Order of Operations begins with having your largest deductible covered. This is the minimum required to begin to get your financial life on track. Without having your biggest risks covered, it’s impossible to properly build wealth. Covering your largest deductible means making sure an unexpected event will not derail your financial life. Catastrophic events come in all shapes and sizes, and they could happen to your home, health, car, or more. Insurance will normally partially, but not completely, protect you against those losses. It’s important that you can make up the difference and keep your finances on track.

In our latest show, we give real world examples of how not following the Financial Order of Operations can go wrong. In addition to the show, available below, make sure to download our free Financial Order of Operations resource. Our Financial Order of Operations course is now available for pre-order and launches October 1st. The course includes 12 video lessons with Brian and Bo, easy-to-understand worksheets that walk you through each step, and access to a private Facebook group and private live streams with Brian and Bo, available only to course participants.

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