The Real Financial Order of Operations - Part 1 of 2

Tyler Gardner (0:00)

Look at how much money you're not throwing away by paying off high interest debt first. You know what builds confidence? Keeping more of your money. You know what doesn't? Paying an extra thousand dollars in interest over two years because you wanted to feel like you accomplished something. These, to me, are the non-negotiables, the foundation. If you get these steps right, everything else becomes easier.

Hello, friends. This is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Welcome back to Your Money Guide on the Side. I'm Tyler Gardner, and if you're new here, welcome to the only personal finance podcast that treats you like an adult, capable of understanding both compound interest and some of my occasional literary references. We're sitting now at episode 40, which in podcast years is roughly equivalent to making it through the first act of a Dickens novel. Lots of setup, occasional suffering, but guess what? We're getting somewhere. Today, we're talking about something every financial guru claims to have figured out, including myself, the order in which you should handle your money. The problem is, most of these systems were designed by people who have either never been broke or have spent so much time in the Dave Ramsey cinematic universe that they think paying off a $200 credit card before a $20,000 one at the same interest rate is somehow a winning strategy because it, quote, builds confidence. You know what else builds confidence? Not lighting money on fire.

So today, I'm giving you my preferred financial order of operations, a framework that works whether you're making $40,000 a year or $400,000 a year, whether you're 25 or 55, and whether you believe in the efficient market hypothesis, or think you can time the market because you read three articles on Seeking Alpha. And because once I started writing this down, I somehow couldn't stop from finding more components to address. You're welcome. Once again, this is a two-part series. So today, we're covering the foundational steps. These are the non-negotiables that need to come before anything else. Next episode, we'll tackle the more nuanced decisions around emergency funds, taxable accounts, and debt strategy. And yes, I did just exclude emergency funds from the non-negotiables, and I will be more than happy to explain the reasoning as we progress. But before we dive in, as always, if this show has been helpful to you, or if you just enjoy hearing someone be mildly sassy about index funds from time to time, the best way you can help me out is by leaving a review on Apple Podcasts or Spotify, or sharing this episode with a friend who needs to hear that their financial advisor's 1.5% fee is not, in fact, industry standard. As a starving financial artist, I need and appreciate all the help I can get, and I value deeply having received over a thousand reviews within the first six months of this show's being live. You all are amazing, and it makes it all worth it. Thank you, and now let's get into it.

The Order of Operations, step number one. Put your own oxygen mask on first. I've always loved the quiet wisdom of airline safety instructions. Simple, almost absurdly obvious lines that somehow contain the entire philosophy of a good life. Put your own oxygen mask on first isn't just about altitude. It's about adulthood. We cannot help others if we're gasping ourselves. That's why I spend two hours each morning working out, physically and mentally, before I ever check in email, pick up a phone, or go out in public. The same is true in personal finance, especially in personal finance. So we'll start the same way airlines do. And I hope you're paying more attention than you are during Delta's safety video. Please choose to take care of yourself financially before you take care of your kids. I know. I know. You love your children. Or maybe you don't. That's not what this show is about. If that's what you're thinking through, turn off this podcast and go listen to Good Inside by Dr. Becky. But for those who are still here, yes, your kids might be the light of your life. You do just about anything for them. But you know what doesn't help them? You're being broke at 67 because you funded their 529 plan while carrying $8,000 in credit card debt at 22% interest. Every time you're on an airplane, assuming you still fly commercial like the rest of us common folk, the flight attendant will give you this same oxygen mask speech. Put yours on first, then assist others. This isn't because the airline industry is staffed by Ayn Rand enthusiasts. It's because you cannot help anyone if you're unconscious. The same applies to money. Your kids can get scholarships. They have more labor opportunity and potential earning power ahead of them. Or they could be like yours truly and choose to go to a state school. They can take out reasonable student loans. But you know what they can't do? Take out a loan for your retirement. And I see this all the time. Parents who are contributing to a $5.29 while they have no additional cash on hand, no retirement savings, and a Discover card balance that would make a loan shark blush. The intention is beautiful. The execution is financial self-immolation. Here's the thing. If you're financially stable, you're in a much better position to help your kids down the road if they need it. If you're broke, you become their problem. And if you've looked at the job market recently for college grads, you'd know kids will have enough problems without having to think about funding your ultimate health care needs. And I don't mean that cruelly. I mean it mathematically. An adult child supporting a struggling parent is both emotionally and financially devastating. So before we talk about anything else, before we optimize tax-advantaged accounts or debate whether to pay off the mortgage early, we need to establish this. Your financial stability comes first. Not because you're selfish, but because it's the most responsible thing you can do for the people who depend on you. Put your own oxygen mask on first. Then we'll talk about everything else. Okay, now that we can all take a breath together. Step number two. It sounds simple, but it is crucial. Pay off your credit card debt first. Your first step now is to do every single thing you can, and throw every single penny you can at your credit card debt. I don't want you to manage it. I don't want you to strategically pay it down using some snowball method. I want you to obliterate it. And yet every time I say this, someone in the comments brings up the debt snowball method. You know the one. Pay off your smallest debts first, regardless of interest rate, because checking items off a list gives you a psychological boost. Let me be clear. The debt snowball method is financial astrology. It's a horoscope for people who think Susie Orman and Dave Ramsey descended from Mount Sinai with some form of divine wisdom that the rest of us could only dream to one day inherit and practice. Paying off your smallest debt first, regardless of its interest rate, feels good in the same way eating an entire sleeve of Oreos feels good. Momentarily satisfying, but ultimately you're worse off. Here's the math, which unlike feelings, doesn't care about your level of confidence. If you have a $500 debt at 15% and a $5,000 debt at 22%, paying off the $500 first because it's smaller means you're continuing to pay 22% interest on five grand while you slowly chip away at something that's costing you way less. Congratulations. You've successfully prioritized theater over economics. And the argument I hear is always the same, but Tyler, people need wins. They need to feel progress. Okay, fine. You want to feel progress? Look at how much money you're not throwing away by paying off high interest debt first. You know what builds confidence? Keeping more of your money. You know what doesn't? Paying an extra thousand dollars in interest over two years because you wanted to feel like you accomplished something. And although I never like speaking ill of other creators, if there is some self-proclaimed financial expert out there telling you to establish an emergency fund that pays you 4% on your money before tackling your 25% credit card debt that is eating you alive, well, that should be just about enough to give you a sense of what it means when someone has to self-proclaim their own expertise. Your credit card debt is your emergency, period. You cannot and will not out-invest 22% interest out the door. Thus, you're setting yourself up to be losing money each and every day going forward. So, here's the move. Every extra dollar you have goes toward the high interest debt first. Not the smallest, not the one that feels the worst, the one that's costing you the most money. Pay it off, all of it, as fast as humanly possible. And that will make you feel far better in the long run. Then, and only then, do we move to step three. All right, we need to pause here and talk about something deeply boring but absolutely non-negotiable. Step number three is going to be insurance. I know, I'm sorry. Talking about life insurance is like discussing tire pressure. It is not fun, no one wants to do it, but if you ignore it, things can go very badly very quickly. Here's the deal, and it's the only litmus test you need for this. If other humans depend on your income, spouse, kids, aging parents, that one friend who always forgets their wallet, you need life insurance. Specifically, term life insurance, not whole life or universal life, or whatever other commission generating product your cousin, who just got his insurance license in 20 minutes from getmybrokerslicense.com, is trying to sell you at the family barbecue.