The 8-Minute Roadmap To Wealth

Why Your Money Needs an Order (0:00)

Bo: If you want to build wealth, you need to know what to do with your money. And not just what to do, but in what order. Because when you do things out of sequence, it can cost you big time. I am so excited because today’s video is all about the Financial Order of Operations, also known as the FOO. It’s our nine-step system that tells you exactly what to do with your next dollar so you can maximize your army of dollar bills. We’re going to go through all nine steps pretty quickly in this video, but if you want a deeper dive into all this, head to the FOO course where we have an entire course that covers everything. We’ll link it in the description below.

Bo: Before we get into the steps themselves, there are some ground rules that we need to quickly cover. These fall outside the FOO and apply to life no matter where you are in your financial journey. Number one, generosity is step zero. We believe that giving and supporting causes that are important to you, be that with your time or with your money, is something that anyone can do. And if you’re generous with a little, it’s likely you’re going to be generous with a lot. Number two is to bedazzle your basic life. Saving for the future requires sacrificing a little bit of today for a more beautiful tomorrow. But we don’t want you living like a miser just so you can retire a little earlier. Have fun, enjoy life, but be smart about it and make sure your spending isn’t keeping you from reaching your goals. And number three, the FOO is not a straight line. Sometimes you’ll have to dip into your emergency fund and then go back and rebuild it. Or maybe you have to pause your investing because you’re saving up for a down payment on a home. That’s okay. Your financial path won’t always perfectly progress from one step to the next. Just make sure you have a plan to get yourself back on track.

Step 1: Cover Your Insurance Deductible (1:37)

Bo: On to the Financial Order of Operations. The very first thing you need to do before anything else is make sure that you can cover your insurance deductibles. Insurance is designed to protect you from financial catastrophe, but when something happens, you still have to pay a small part in the form of a deductible. If you can’t cover that amount in cash, even one emergency can derail your entire financial plan. That’s why step one is saving up your highest insurance deductible in cash, ideally in something like a high-yield savings account. So for example, if your highest deductible is your health insurance and it’s at $5,000, that’s your savings target to complete step one. And this comes before any sort of investing and even before paying off debt. Because without a cash buffer, you run the risk of making desperate decisions when, not if, things go sideways.

Step 2: Capture Your Employer Match (2:19)

Bo: Step two is your employer match. This is where the fun begins. If you have access to an employer match through something like a 401(k), this could mean getting anywhere from 50% to 100% return on your money. And that’s why once you have a starter emergency fund covered, this is the next step. A lot of debt crusaders will tell you that you have to pay off most or maybe all of your debt before you even touch investing. But frankly, that’s bad math. Even with credit card rates at 20% or higher, that employer match still beats it and it helps you jumpstart your savings for the future.

Step 3: Eliminate High-Interest Debt (2:43)

Bo: Step three is tackling any high-interest debt and getting it down to zero. As far as what counts as high-interest debt, it depends on your age and the type of debt. Sometimes cars, sometimes student loans, but always credit cards. Credit card debt is chainsaw dangerous. Definitely too dangerous to play the arbitrage game.

Step 4: Build a Full Emergency Fund (3:06)

Bo: Step four is building up your emergency fund. That’s right. Cash is so important we’ve actually designated two steps for it. For this, we want you to have anywhere from three to six months of living expenses saved up in cash. That way, in the event that some sort of emergency or job loss does happen, you can cover your needs while you get back on your feet. And the good news is that the cash from step one actually counts in step four, so you don’t have to start from zero. Once step four is done, that means you’ve got your employer match, you’ve got no high-interest debt, and your emergency fund is fully funded.

Steps 5 and 6: Maximize Retirement Investing (3:38)

Bo: Now you’re on to step five, which is all about maxing out a Roth IRA or HSA if you’re eligible. Beyond an employer match, this is the first foray into investing because these two accounts offer major tax incentives and let your dollars grow tax-free. Next, in step six, we shift our attention back to the employer-sponsored retirement account. That’s likely a 401(k), 403(b), 457, or maybe the Thrift Savings Plan. Start loading that account up beyond the employer match. We consider steps five and six done once you max out all of those accounts.

Step 7: Reach Financial Independence Savings Rate (4:11)

Bo: Now we’re getting into territory where we get a lot of questions. Step seven is called hyper accumulation. It’s all about accelerating your journey to financial independence. We suggest hitting a savings rate of 25% of your gross income, and that’s specifically for financial independence. It does not include a mortgage or any savings that are not specifically for that purpose. And it’s worth noting some people might hit 25% just by maxing out their retirement accounts, or maybe even before that. We would consider that enough to check the box on step seven.

Step 8: Fund Your Abundance Goals (4:45)

Bo: Once you’ve hit that 25% savings rate, you’re on to step eight. Broadly speaking, these are prepaid future expenses, but we also like to call them your abundance goals. This is where personal finance gets really personal. Whatever it is that matters the most to you, whether it’s early retirement, setting aside money for your kids, or maybe just living the life you’ve always dreamed of, that’s where you put this money. A lot of people feel like this is too late in the FOO to put money towards something as important as your kids’ future or toward other areas that matter so much to them. And we’re not saying that you have to wait this long. Remember, bedazzle your basic life. But we do believe it’s essential to secure your own financial future before you decide to put a large portion of your time and money elsewhere. They say it on planes all the time. Secure your own oxygen mask before helping others.

Step 9: Pay Off Low-Interest Debt (5:32)

Bo: All right, now we come to step nine: paying off low-interest debt. And it shows up this late in the FOO because most often your dollars are simply put to better use elsewhere. A 4% rate on your mortgage isn’t really a mathematical priority when right now you’re getting greater than that in your high-yield savings account. It’s difficult to say that you are truly financially independent as long as you have debt. So step nine is where you pay it off, ideally by the time you retire. And that’s the Financial Order of Operations.

Can You Skip Steps? (5:56)

Bo: All nine steps are designed to work in sequence. But sometimes people want to know if they can skip steps or go out of order. And we’re going to come break your door down if you do. Sorry.

Bo: Did it say that or did I read it wrong? Sometimes people want to know if they can skip steps or go out of order. And we’re not going to break your door down.

Bo: And we’re going to break your door down if you do. And we’re not going to break your door down if you do. Ultimately, it’s your journey. We did put each step in a specific place for a specific reason. And if you skip steps, you might be leaving money on the table, or maybe even creating some extra tax liability and headaches. At this point, you might be wondering, “What about buying a home? Where does that fall into the FOO? What about leasing a vehicle or paying for college?” We actually have our own rules and guidelines to help you make smart financial decisions as you follow the FOO. Check out the video linked here to see all of our other Money Guy rules, including when to break them. And as always, keep building towards your great big beautiful tomorrow.