Order Of Operations, But For Retiring Early

As a teacher, I am constantly told about how valued my job is, yet how severely underpaid I am as well. While this is great in saving face and making me feel good, these words do not yield any actual monetary value in my bank account. Because of this, I am taking control of my own life and finances, thinking about ways to increase my value and set myself up for future success.

As someone who graduated from a private college with $60,000 in student loans, I certainly have blemishes on my own financial freedom clock. However, I have decided that living in this perpetual state of payments and crippling debt is not for me. Throughout this financial journey I have gone on, I have tried to spread the powerful message. While not exactly in the way of the 12 disciples, I have found my calling, my purpose. As someone who has seen friends make countless mistakes in terms of their financial future, it pains me to see them complain about how they have no money, yet they blow their savings at the bar or on a new shiny thing (truck, iPhone, video game system, etc). I have tried time and time again to “show them the light”, so to speak. Unfortunately, those who do not want to learn are going to be stuck in their ways until they get frustrated enough with their situation to research or reach out.

In thinking about this, I have thought about my role, and what I can do to break down financial independence into a more manageable sort of checklist for beginners. This reminded me of the coveted order of operations in my math class, or as most of us recall, PEMDAS (Please Excuse My Dear Aunt Sally), or some other variation.

In terms of finances, I would like to do something similar. Starting slow is the first step in this transformative process. If you don’t even know where your money is going each month, you likely are not ready for higher-level tactics, such as tax optimization and tax gain harvesting.

Because of this, I will take a stab at breaking down my thoughts on the proper order of operations to get one’s finances in order and feel more confident going forward.

This checklist, if followed even remotely close, will help individuals truly increase their wealth and feel more prepared for whatever life may throw at them. Without further ado, the step by step process is below.

Here are the steps boiled down if you don't want to keep reading:

1. Figure out how you spend per month on necessities

2. Figure out how much you spend on lifestyle inflation (things you don’t truly need but like to have)

3. Look for ways to increase your retirement contributions in a 401k, 403b, or Roth IRA

4. Look for ways to cut your expenses, especially those in Step #2

5. Look into investing any leftover money into a brokerage account (Invest in VTSAX with Vanguard and research Tax Gain Harvesting as an option to lower your tax bill)

If you are still interested in a few more details, keep reading below.

1. Find out how much you spend per month on necessities

(A rough estimate):

The reason for this is to figure out how much your current life costs. This does not necessarily need to take into account one-off purchases, such as life events like marriage, a car breaking down, or other random events that do not occur on a regular basis.

To do this, start with the basics. Estimate how much you spend on the necessities month to month to simply live:

• Housing (rent or mortgage)

• Food (simply groceries, not going out)

• Utilities (lights, water, trash, A/C, heat, internet, etc)

• Insurance (car, home, renters, term-life, etc)

• Transportation (gas and maintenance)

With these taken care of, you technically would be able to live on that amount. It would not be a glamorous life, but it would allow you to live nonetheless.

2. Calculate your other monthly expenses

(again, a rough estimate is fine):

Following this, you can now focus on other things that are not strictly necessary to live but rather enhance your lifestyle. This will often include the following at a minimum:

1. Clothing

2. Going out (restaurants)

3. Subscriptions

4. Online shopping and other randomness

Having the costs from #1 and #2 calculated are a great starting point, especially if after looking at this number you see that you are extremely close to being paycheck to paycheck (which may have been further impacted by COVID in recent months).

Let me remind you that anyone at any income level can be paycheck to paycheck.

Often we assume those touted as “millionaires” are those who make millions of dollars each year. In reality, those people could very easily have worse saving habits than the general population, especially if all of their income goes to paying for expensive vacations, mortgages on mansions, luxury cars, and other things of that nature.

3. Look for ways to increase your retirement contributions.

While our current society focuses on spending every dollar that comes our way, try to shift your mindset. Instead of comparing your car to what your neighbor has in their driveway, look rather to think about how you can set up yourself for future success. This can be done in many ways, but the simplest ways are to do the following:

1. Begin or increase your 401k or 403b contributions (simply getting the match at your company is good, but there is no reason to settle there).

   1. At the very least, get the match. And while this usually is only 1 - 5% of your income, this is in fact free money.

   2. The maximum contribution to a 401k or 403b for 2020 is $19,500. This works out to be $1,625 per month. While most of us won’t scratch the surface of this amount, strive to get closer to this number. You can do it!

2. Open a Roth IRA.

This is an after-tax account, which means that after you have paid taxes and have that paycheck sitting in your bank account, those dollars can go to this. The best part about this is that it grows completely tax-free since you have already paid taxes on it. You can even pull out the money you put in without a penalty, AND when you reach 59 and a half, you can take every last dollar out, without paying any taxes!

1. Open a Roth IRA with Vanguard in an S&P 500 fund. In the simplest explanation, by putting your money into this fund you pay the least in fees, which I would everyone hates.

2. The maximum contribution for 2020 is $6,000. This works out to be $500 per month.

4. Look for ways to cut your expenses, especially those in Step #2.

For example, last summer I spent $700 on going out, IN ONE MONTH! I love to go to bars and restaurants, and this certainly can be seen in the amount I spend. This summer, I have cut this down to the tune of only $100 - 200 a month. I am still able to live this great life, but with less money coming out of my paycheck. (Hint: Only go to places with happy hour deals).

5. Look into investing any leftover money (if possible) into a brokerage account.

These are accounts that you put money into after you get your paycheck, similar to a Roth IRA. These are the ones you see advertisements for, such as Robinhood, WeBull, Schwab, Fidelity, Ameritrade, etc.

1. Open a brokerage account with Vanguard. Again, they have the lowest fees.

2. If you make less than $100,000 as a couple filing taxes jointly, or an individual making less than $52,000, start researching Tax-Gain Harvesting. This will save you so much money in taxes years down the road, which I assume your future self will thank you for.

Again, these steps have just scratched the surface of what can be done to set yourself apart from others and work your way towards financial freedom. However, implementing even a couple of these steps will help you save thousands, and potentially hundreds of thousands of dollars, over your working career.

Reach out if you have any questions on how to go about any of these steps, as well as any other questions. I am on Facebook and Instagram, and you can also contact me at azollner95@hotmail.com, or even shoot me a text at 612-559-5092! I will answer just about anything.