Order of Operations for the Average Investor

So many people come to my team wondering what their next step is along their wealth building journey. While there is no one “perfect path”, this is a general idea of our “Order of Operations” to help your family grow in a responsible and durable way.

This is not specific advice, but rather a loose framework to help you understand what the next steps may be for your situation. Before taking action, always consult a financial professional about your individual situation.

Here we go!

1.?Contribute to get the match in your 401(k)

If your employer has a 401(k) with a match, it’s foolish not to take advantage of that free money! Most employers will do something that looks like the following:

• “We will match 100% of the first 3%, then 50% of the next 2%”

That translates to “If you put in 5% of your earnings, we will give you 4% on top”.

This is a phenomenal deal and is part of what has made the 401(k) such a successful vehicle for investors. If you’re starting out in your first job, or the first time you’re able to start investing, this is a great option because it’s automatic so long as you’ve opted in.

***Pro-Tip: Make sure you know how it’s being invested. I’ve seen too many people who thought they were invested but were in all cash, or not invested the way that they needed to be for their goals. When in doubt, ask!

1a. Build your personal savings account to cover 3-6 months of expenses

I’m calling this 1a because it should be done alongside your 401(k) building. Where investment accounts can help with growth, you’ve got to have a durable foundation to build on, and a robust savings account is the best way to have immediate access to money given an emergency.

We recommend between 3-6 months of expenses as a rule of thumb, depending on your situation. If you’re a dual income household, 3 months may work better, however if you’re single or a single income household, shoot for 6.

This helps in the event of losing a job, having a short-term disability that prevents you from working, replacing a roof or HVAC unit, among other things.

2.?Obtain proper insurance coverages (life, health, P&C)

I could argue that this should be #1, because no matter what you build, if it’s not protected it can vanish in an instant.

Each of these insurance classes helps you protect against different potential threat, and occasionally they work in concert with each other.

Having a basic term life insurance policy outside of work can be a smart decision for a couple reasons:

• You may not be able to take your work policy with you
• There may be exclusionary clauses or other fine print in a work policy you’re not aware of
• The policy is yours, and usually has more customizability and opportunity to convert to permanent should the need arise

With health insurance, a lot of it comes down to your family’s needs. Health insurance is extremely important in America and working with an individual agent to help ensure proper coverage and deductibles can save you thousands a year. Always check the marketplace versus your company policy!

As far as P&C goes, getting a review every other year is a good rule of thumb. Companies no longer reward you for being a long-time customer, so always be on the lookout for deals! Any time you get a new car, a new home, or have any other major changes (looking at you, boat owners….) take a look at coverage and see what an independent agent can do for you!

3.?Max out a Roth IRA

Alright, so we’ve got your 401(k) going, proper insurance in place, now we get to talk potential tax strategies. The Roth IRA can complement your 401(k) extremely well because it’s a mirror image when it comes to taxes.

The Traditional 401(k) and IRA give you a tax deduction on the current year’s taxes, but you owe on the amount you’ve put in AND the growth you’ve made over your career. Roth-style accounts are the inverse – you pay taxes on the money today.

There are two main ways to accomplish this depending on your company.

• You can fund it from your bank account
• You can elect to have your company deposit it directly from your paycheck

Aaaand the government doesn’t take anything in retirement. Pretty good deal if you ask me.

This gives you flexibility in retirement to help control your tax rate by measuring distributions from each style of account so there are no surprises come April!

In addition, a Roth IRA’s contributions can be accessed whenever you want, and as of the writing of this article, $10,000 of what you’ve put in AND made from growth can be used to purchase your first piece of real estate.

4.?Contribute to Non-Qualified Brokerage Accounts

Now that your retirement investments are cooking, let’s talk about liquidity. If you’re in your 20s/30s/40s, you need to prioritize your options, as life will continue to change in front of you. Non-Qualified (a fancy way of saying “not for retirement”) accounts provide you with investment growth and liquidity, whereas Qualified (“for retirement”) accounts are locked up until you’re 59 ? years old.

These accounts can be used in a myriad of ways – grow them to help achieve family goals - purchasing real estate, taking vacations, creating memories, anything under the sun.

The big piece to consider with these is that they are taxed as you earn in the account, meaning that after a certain size, you’ll need to account for investment-based income annually.

5.?Max out your 401(k)

Once you’ve got qualified and non-qualified accounts all up and running, you’re probably a bit farther along in your career, and have some more cash flow available to you. At this point, consider increasing your 401(k) contributions to the maximum yearly amount ($20,500 per year as of writing this article in 2022).

This will do 2 things for you:

1. Provide you with a $20,500 tax deduction ($41,000 if both spouses can do it!)

2. Give your family a significantly sized asset to utilize later in life

6.??Diversify into different investment classes

Now that your stock-based portfolio has grown and is cooking, it might be time to consider what else is out there. Things like real estate, taking stake in businesses, or other income-generating opportunities that are presented to you.

These sorts of deals require intense scrutiny and up-front capital and should only be entered into after consulting a professional.

7.??Invest in your community

To be fair, this is a cheat number as you should be doing this all along the way.

Whether it’s opening a business, volunteering with non-profits, tithing with your local place of worship, or anything else, you should always be lifting others up.

If you’re fortunate enough to have checked all, or even most of the above boxes, getting involved in the community has returns that can’t be measured on an annual report.

If you’d like help achieving any of these steps, my team is ready to assist.

#BuildWithBrophy

Diversification does not guarantee against loss. It is a method used to manage risk.

Financial?Professionals do not provide specific tax/legal advice and this information should not be considered as such.??You should always consult your tax/legal advisor regarding your own specific tax/legal situation.

Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods.

Qualified distributions must meet a five-year holding period and satisfy one of three additional requirements: reaching age 59 1/2, disability or death.??Five years is measured from January 1 of the year of your first Roth(k) contribution.??Plan provision may impact withdrawal availability.

Investors' anticipated tax bracket in retirement will determine whether or not a Roth account versus a traditional retirement account will provide more money in retirement. Generally, investors who are in a higher tax bracket at retirement relative to their current tax bracket while making contributions to a Roth account benefit more than an investor who is in a lower tax bracket at retirement.

For a Roth IRA, earnings withdrawn prior to reaching age 59? and/or not meeting the five-year holding period may be subject to a 10 percent penalty in addition to income tax. After-tax contribution amounts are generally returned income tax free; however, for Roth conversions, if converted amounts are not held for the five-year period, distributions may be subject to a 10 percent penalty

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