Learn the financial order of operations you should be following, including when to build out your emergency fund and when you should prioritize your financial goals like your 401k and Roth IRA.

Following the financial crisis of 2008, we’ve enjoyed one of the most historic bull runs in the history of the US economy — where the Dow Jones rose over 351% and we saw 4 different companies hitting the $1 trillion dollar mark — Apple, Microsoft, Amazon, Google.
It was an amazing, 11 year run — until this year, in late February of 2020, where the Global Health pandemic paused the our economic growth and we had a decline period in the market.
In just one month, we saw the stock market drop about 37%, small businesses get crippled by the social distancing & quarantine efforts and unemployment numbers skyrocket to more than 40M.

But the scariest thing to learn, throughout all of this, was that the majority of Americans weren’t prepared for this economic down turn. In a recent financial study by Bankrate, it was shown that nearly 4 out of 10 US adults had no emergency savings, and of the ones that did have one, it wouldn’t be enough to fully cover any emergency over $1000.
So to address that today, in this article, I’ll be going over the financial order of operations you should be following, including when to build out your emergency fund and when you should be contributing to investment vehicles like your 401k and Roth IRA — to make sure you are building your financial foundations in the most optimized way.

Welcome to Daniel’s Brew — where I cover personal finance, investing, and career development topics.
How to Set Financial Goals
Before we dive deep, let’s take just a few moments to introduce a concept called a Financial Blueprint.
Income, Budgeting, Financial Allocation, Retirement/Exit Plan — are typically the 4 components of a strong financial blueprint.

This blueprint, is essentially your plan that defines how you are going to earn and grow your incoming cash flow, how you’ll manage that cash flow day-to-day (which determines how much you save), which then feeds into how you allocate/invest and grow your wealth, and lastly, your plans on how you want to retire and use your nest egg — and then eventually how you want to leave your assets behind, when all is said and done.
Today, we’re going to be covering specifically the order of operations in which you should manage your Financial Allocation, but just know that these 4 things all work in tandem — and its critical that they work together to build out your master financial blueprint. But that’s a topic for another article.
Ok — so let’s dive into the financial order of operations in which you manage your wealth.
1) Steady Income
So the very first thing that you need — the very first goal that you have to reach in managing your finances, is obviously to establish a steady source of income. Now, as I mentioned before, we are focusing on the Financial Allocation component of the blueprint, but everything starts with income, so I’d be remiss if I didn’t take a few moments to touch on this first.

You see, the greatest financial plan in the world — remains just a plan if you can’t start it with a source of cash flow. It’s like planting all of the seeds in a garden, but not having a source of water — it’ll look great on the surface, but nothing will grow.
Now, if you’re currently at a younger life stage, like you’re in high school or college, this might be a little bit difficult as your main job is to be a student and to excel in your academics. But the initial starting block of any kind of financial plan is to have this cash flow — so if you’re not employed and you’re not a student, then your first order of business is to find a good job.
2) Checking/Savings
Now — moving onto the next step, once you start earning money, the first step in your financial plan is to have a checking account & a high yield savings account that can serve as your home base for your income — to accumulate your money and pay for all of your basic living expenses. This would include rent, food, essential utilities, transportation — like public transit costs or if you have a car, then the minimum monthly car payment and the cost of basic health insurance (which is hopefully provided by your employer, through payroll deduction.)
What percentage of your net income you will need to dedicate to your basic living costs will vary by where you live and what type of employment you are in and what your lifestyle is. And as you progress upwards in your life & career stage, the goal is for that percentage to become lower and lower, but if you’re just starting out on your career and financial journey, if you total living costs are less than 75% of your net income — I’d say you are doing decently.
3) Initial Survival Fund
Once your basic living costs are covered, the next immediate thing you’ll want to plan for in your financial order of operations — is an initial survival fund. Now, note that I call it an survival fund, because this fund is an smaller, earlier version of what will eventually become your emergency fund — but it’s not exactly the same thing.
Again, if you’re early in your career and financial stage, you won’t likely have a ton of excess income leftover, after you’ve covered your basic living costs. So in this initial survival fund, I’d recommend that you allocate only enough money — to pay for just 1 month of living expenses (rent, car payment, essential utilities — basically just enough money to keep the roof over your head and food on the table).

One other critical thing you’ll want to account for in this survival fund — is the cost of covering your medical insurance deductible. Most emergencies have to do with some kind of physical or medical situation — so you’ll want to make sure that you can cover at least the immediate medical costs that you owe, in this case. Could you pay the deductible for an ambulance ride to the ER or a critical procedure you need to have done immediately — these are the types of things you’ll want to consider in the initial set up of the survival fund.
4) 401k Match
The next step in your financial blueprint would be to take advantage of your company’s 401k match.
Until you start making a very high income, I’d recommend that you start by contributing only enough money into your 401k to get the full company match, and no more. It’s free money, so you’ll want to make sure you get all of it, but since it goes into a retirement account you won’t be able to touch it until age 59 1/2, putting in more than what you need for the company match might not be prudent, early in your life stage. If you’d like to learn more about 401k in detail, check out my other article on the beginner’s guide to 401k, here.
5) HSA (Health Savings Account)
After that, in your financial plan, you should consider contributing to your Health Savings Account, if your company offers one. A health savings account or HSA is a great financial vehicle to have. It’s the only vehicle that is triple tax advantaged, which means the money you contribute into the account is tax free, it also grows tax free, and if you use it for qualifying medical expenses — you can also spend that money tax free.
How it works is that you typically sign up for a high deductible health insurance plan with your employer that includes an HSA account and you contribute to this account through your company’s payroll deduction program, very much like the way you contribute to your 401k. As a result of this process, a separate health savings account is opened up for you — and you typically receive a debit card that you can use to charge qualifying medical expenses towards. And as I mentioned before, since the majority of financial emergencies have to do with some type of physical or medical situation — having an HSA is actually like having a secondary survival fund. If you’d like to learn more about HSAs in detail — check out my overview article here.
6) Emergency Fund
Now, once you have basic living costs, survival fund, 401k match and HSA all checked off — this is the point where I would say that you’ve graduated from a basic survival financial stage to a more progressive financial life stage. At this point, you’re now ready to bolster that survival fund and turn it into a more proper emergency fund.

Now there are several schools of thought behind this concept but the philosophy I subscribe to is that your emergency fund should be able to carry you through a period of income loss — meaning if you lose your job, this emergency fund should cover you for as long as you need to find new employment. That timing differs for everyone — so I’d recommend that you take an introspective look and determine what that appropriate time period is for yourself and what that translates to, from a dollar value standpoint. But for me, I’m comfortable with a 6 month cushion — so as long as I’ve got enough money saved in my emergency fund to cover 6 months worth of living costs for me and my family, I feel secure. You may want to have more or less than that — depending on your particular situation.
And it may take you a little while to save up enough to cover your full emergency fund — but that’s ok, as long as you are working towards completing this step before you go on to any other steps in the plan. You’ll want to make sure this foundational piece is secure — especially if you’re moving up in your life stage as well and you’re just now starting a family or looking to buy a home, or things like that etc.
7) Roth IRA
Roth IRA is the next thing that you’ll want to turn your focus towards.
Second to only to the HSA, the ROTH IRA is the next most advantageous investment vehicle because it’s double tax advantaged — towards the distribution end. How it works is that you contribute after tax dollars into this account and it grows tax free and it can be withdrawn tax free, as long as you are over age 59 1/2 and you’ve had the IRA open for at least 5 years. This is why it’s double tax advantaged.
The other reason why this needs to be the next one you start, is because there is a little bit of urgency in the fact that you can only contribute to the Roth IRA if you fall under a certain income level. For 2020 that number is $139k for individuals and $206k for those married and filing jointly. In the course of your career, over time, it might be likely that you’ll end up exceed this income limit if you’re a rock star or you have a partner and you guys are both working full time together. So you’ll want to put away as much money into this account as possible before you get to the point where you pass beyond your eligibility. I’d recommend contributing the IRS max here if you can. For the calendar year of 2020, that’s $6000 if you’re under the age of 50, and $7000 if you’re above that age. If you’d like to learn more about Roth IRAs in detail, read my previous article on the subject, here.
Now, let me pause here for just a second and talk about the importance of growing your income/cash flow.

Having cash flow is very important as you know — none of this works without an income. But equally important is that your income grows over time. Eventually as you progress along your financial blueprint, you are going to get to a point where you need to bring in more money to get to the subsequent levels and vehicles of allocation. That’s why the perfect pair to a strong financial blueprint is strong work ethic and dedication to your primary source of income. The compounding effect of your investments grows faster and larger, the bigger the basis you have. So whether it’s chasing the next promotion or building up a side hustle, working hard to increase your income goes hand in hand with your financial blueprint.
8) 401k Max
Now — from here on, once you are maxing out your Roth IRA, the next priority you’ll want to tackle is to max out your 401k contributions. Now back in step 4, we already started contributing the minimum we needed to in our 401k, to get the full amount of the company match — but now it’s time to up your contributions to the IRS contribution max. The reason this is an important step here, is that once you’ve got your basic/fundamentals covered, at this point, your goal should be to reduce your taxes as much as possible, and bolster your 401k account as soon as possible, so you can reap the benefits of compound interest, later down the road.
A common question you might ask is, “Why didn’t we just max out the 401k when we activated step 4, to get the company match? Why did we split the 401k step in half and add in the HSA, Emergency fund and the Roth IRA, in between?”
It’s a good question — and to answer that we refer back to at a benefits compare chart.

Remember, the HSA is the most optimized investment vehicle, at a triple tax advantage and then the Roth IRA is a close 2nd at a double tax advantage. But the reason why we did separated the 401k (with match vs without match) is because depending on how your company match portion works, you could effectively double your 401k contributions for the year with the company match value.

Let’s walk through an example of how a typical 401k match program works: This is Vickie — she’s a Social Media Manager at a large fortune 500 company. Let’s say Vickie’s company offers her a dollar-for-dollar match of her 401k contribution up to the first 5% of her total payroll deduction amount. If her salary is $65k at the time of contribution, then in each paycheck, she would have 5% deducted pre-tax — until she hit a total of 5% of her regular salary, which would be $3,250 for the year. Simultaneously, at each payroll deduction, her company would also add in an equal match of those same dollars and deposit that into her 401k account — thereby making her total $6,500s at the end of the year. That’s twice her out of pocket contribution! This is what I mean when I say that your contributions can double based on the company match benefit of your 401k plan. (If this was a little hard to follow in this article, click here to see my video on the topic.)
So now, when we go back to this benefits chart, the 401k match portion has the added benefit of a dollar for dollar match — which effectively doubles your money and also has the tax advantage that 401k normally gets.

This gives the 401k match portion of your investment a much higher, immediate return on investment — which is why we separated that particular section and elevated it ahead of the HSA, emergency fund and Roth IRA. But now that we’ve completed those other three steps as well, it’s time to come back & complete this step — and max out your 401k.
9) ESPP (Employee Stock Purchase Plan)
Next, in your financial order of operations, is ESPP.
If you happen to work for an employer that offers you an employee stock purchase program, this would be the right stage in your financial journey to take advantage of this. An ESPP is a benefit that most large employers have where they offer their employees the opportunity to purchase company stock at a discount.

Typically, how this works, is that when you enroll in your company’s ESPP, an after-tax payroll deduction happens at each paycheck and those funds are held until the end of every quarter or every half, depending on the cadence of your company’s ESPP program. Then for each period, the company will review their stock price, pick the lowest price the stock has hit during that time, apply a discount amount and then use your ESPP payroll deduction sum to purchase as much of the stock as possible and deposit that into your brokerage account. It’s a great way to purchase your company’s stock at a heavily discounted rate — which gives you immediate equity when it’s placed in your brokerage account.
10) Traditional IRA
And the last step, is to open up and contribute to a Traditional IRA.
If you’ve progressed through your career and financial stages thus far, to this level and checked off the prior nine steps in this order of operations — then you’re likely to be pretty seasoned in your career and financial planning as it would have taken some time to get to this point. And that means that you’re also very likely to be in a career stage where you are earning close to or more than the IRS income limit to contribute to a Roth IRA. As mentioned above, the income limit for Roth IRAs in 2020, is $139k for individuals and $206k for those married and filing jointly. So at this stage, the next prudent course of action is to open up a Traditional IRA and redirect your contributions from your Roth IRA to your new Traditional IRA. That way you can still take advantage of the $8,000 contribution amount that the IRS allows for Individual Retirement accounts within a calendar year.
So that’s it — that rounds out my prescription of the order of operations you should following in your financial plans.
Now, I know I left of a few other vehicles and options, like 529s and deferred comp programs, etc — but those are very specialized financial tools that are meant for a specific purpose or targeted at higher income brackets, so I didn’t feel like they were as applicable to the mention in this article.
In closing, let me leave you guys with just one thought.

“You can’t go back and change the beginning, but you can always start where you are and change the ending.”
-CS Lewis
This is true of almost anything in life — including your financial situation.
Wherever you are on this journey — if you’re not fully satisfied with where you are, just know that it’s never too late make a change. Recognizing that you need to adjust a few things in your financial management and taking action on those things is always the right thing to do. It’s never to late to make sound financial decisions — and I hope this guide both inspires you and gives you some insights on how to do that.
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**** Disclaimer *****
The content here is strictly the opinion of Daniel’s Brew and is for entertainment purposes only. It should not be considered professional financial investment or career advice. Investing and career decisions are personal choices that each individual must make for themselves in accordance with their situation and long term plans. Daniel’s Brew will not be held liable for any outcome as a result of anyone following the opinions provided in this content.