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When To Invest in Your 401k, Roth IRA, HSA, and Taxable Investment Account - YouTube
Channel: Jarrad Morrow
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if you eventually want to achieve
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financial freedom or even financial
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independence then you need to know how
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to invest your money properly you know
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how there's a certain order that you
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need to go through when you want to wash
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dishes in a dishwasher rinse the dishes
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off so there's no food on them load them
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into the dishwasher add dishwasher soap
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run the dishwasher unload the dishes if
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you skip the steps of rinsing off the
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dishes or I don't know forgetting to add
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soap then you'll end up with plates and
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silverware that aren't clean it's the
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same thing with investing your money if
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you do it wrong
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there's a certain order that you need to
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follow with investing just like there
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are certain steps that you need to go
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through to have clean dishes if you
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skipped one of those steps without
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knowing why you were skipping a step
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then you're going to pay for it later
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down the line unfortunately your
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investments aren't as forgiving as your
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dirty dishes are in this video I'm gonna
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go through the order that you should be
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investing to ensure that you have the
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maximal amount of money so you can
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achieve financial freedom or even
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financial independence in the future my
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older brother called me up recently
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asking me some questions about investing
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and as we had this conversation I caught
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myself going through these exact steps
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with him so I figured I'd share it with
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you hey I'm Jarrod with an A and on this
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channel we talk about all things
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personal finance investing and we try to
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have some fun in the process
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if you don't have access to any of these
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on the list then just skip that step and
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move on to the next one don't completely
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ignore it though because at some point
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it may be available to you so you should
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at least be aware of what you're gonna
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do other than that you should not jump
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around from step to step
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do not pass go and do not collect $200
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think of this process like a row of
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buckets that you need to fill up once
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the first one is filled up then you move
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on to the next one and then the next one
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and so on at some point in this video
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I'll go through how I'm personally
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working through this whole process
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obviously nothing in this video should
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be taken as investment advice stick
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figure drawings is what I do
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professionally so this video is for
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informational and entertainment or
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entertainment purposes only please do
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your own research and don't listen to a
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stick figure guy like me the first thing
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you need to think about is building up
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an emergency fund now this should
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technically
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be done as early in the process as
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possible but it can be built up while
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you are still investing and going
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through the following process it's kind
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of tough for me to give you any sort of
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timing because it's smart to start
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investing as quickly as possible but
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that emergency fund is going to save
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your butt more often than you know this
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is one of those gray areas that you'll
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have to decide for yourself after I paid
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off all of my $82,000 debts I chose to
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build up my emergency fund and invest at
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the same time I had mine fully funded
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within about eight months so I was okay
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with that with it taking that amount of
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time so I could ramp up my investments a
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lot sooner the stability of your job and
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whether or not you have a family will
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give you an idea of how much you need to
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carry if you have a steady job like a
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teacher then you might be fine with
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we'll say three to six months worth of
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expenses now if you have a sales job
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where income can drastically change
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throughout the year then a six to
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12-month emergency fund would work best
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for your situation all of this money
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should be put into a high-yield savings
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account do not under any circumstances
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invest this money I know it's going to
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be extremely tempting because the stock
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market has done nothing but go up over
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the past ten or eleven years and you
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feel like you could be earning so much
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more if it was invested in the market
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but playing the stock market in the
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short term is a loser's game you have no
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clue when you'll actually need the money
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since it's there for emergencies so you
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have to assume it will be invested for
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the short term the next step in the
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process is to invest up to your
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employers match there is no gray area
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with this one under all circumstances
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you should be doing this no matter what
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people like Dave Ramsey tell you let's
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say your employer gave you 30 days
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vacation every single year and if you
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didn't use that vacation by January 1st
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then you would lose it would you make
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sure that you used it all by January
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first of course you would those are free
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days that you can't get back once the
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option is off the table
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after January 1st it's the exact same
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thing as a 401k match if you don't
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invest enough for them to match today
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then you can't go back and get that free
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money from them later
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the line $3,000 per year employer 401k
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match invested for 30 years at a 7%
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return comes out to over two hundred
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eighty thousand three dollars this is a
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part of your compensation just like your
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salary and all of the other benefits you
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receive from them so take advantage of
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that free money one thing to note is
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that all the money and employer
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contributes for you goes into a
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traditional 401k so for example if you
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are currently investing in a Roth 401k
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then they will still match your
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contributions but but it will go into a
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traditional 401k this is how it is
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everywhere so you can't change it you
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just got to deal with it and be happy
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with the fact that they're giving you
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free money
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the next investment bucket that you need
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to complete before moving on is maxing
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out a health savings account this is the
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ideal bucket especially if you treat it
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like it's a tax-free retirement account
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not many people think about it in this
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way because on the surface it looks like
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it's for medical expenses which is
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technically true but how you interact
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with it changes everything and leaves
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you leaves you with insane amounts of
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money in retirement I made a whole video
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going over how to maximize an HSA where
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I break everything down and show you the
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process that I'm going through to make
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this happen I'll throw a link to that
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video in the description so you can
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watch it after this video to take a
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deeper dive
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just a quick high-level summary the way
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to do this is to contribute to your HSA
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every year and avoid touching that money
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until you're retired that means that
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you'd pay all of your medical expenses
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out-of-pocket instead of withdrawing
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money from your HSA account to pay for
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them right now to really take advantage
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of this you'll need to make sure that
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the money in your HSA account is
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actually invested so it has a chance to
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grow if you are single maxing out your
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HSA for just one year letting it stay
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invested for 30 years assuming a 7%
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return and never investing another dime
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would turn that 35 35 hunt for three
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thousand five hundred and fifty dollars
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into over twenty seven thousand dollars
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of tax-free money you actually save on
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paying taxes three different times so
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it's a triple tax savings you
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don't pay taxes on the money when it's
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going into the account you don't pay
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taxes on the investment gains so in our
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example that we just talked about you
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don't pay taxes on the $23,000 gains and
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you don't pay taxes when you withdraw
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money from the account for medical
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expenses sorry I should have said that
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it's very rare that the IRS gives you a
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chance to legally skip out on paying
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taxes once let alone three different
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times so that's why this is such a
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powerful account if you use it properly
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there's more you need to know before
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doing this so go watch the video that I
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mentioned just a minute ago for all the
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details
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oh hey how's it going I'm in the middle
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of editing the video you're watching
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right now and I forgot to say something
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please Hulk smash that thumbs up button
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after those last couple are filled up
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the next bucket you need to max out is
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your IRA don't call it an IRA I hate
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when people call it an IRA it is an I
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are a not IRA IRA is like a girl that
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used to live down the street from me it
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was honestly really tough for me to put
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an HSA before a Roth IRA because I loved
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everything about a Roth IRA but that
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triple tax savings you get with an HSA
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is just too good to pass up and not get
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your beaut too first if your income is
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over the Roth IRA limit then this would
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be the time for you to look into
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contribute into a traditional IRA and
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converting it to a Roth IRA using a
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backdoor Roth IRA not IRA if you were
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eligible to invest in a Roth IRA then go
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for it the reason I say that is because
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none of us have any idea of what the tax
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rate is going to be in the future so I
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always say to put the tax pay the taxes
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now so the money can grow tax-free
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forever but once again that's just my
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opinion
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do your own research and do what you
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want plus dealing with required minimum
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distributions from a traditional IRA is
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a little annoying the reason that IRA is
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the next best thing to max out before
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you go back to investing in something
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like your 401k is because you have full
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control over everything you choose where
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you want to invest and there are a lot
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more options for you to choose from when
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it comes to equities to invest in with
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the 401k you're locked into having to
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use the platform your employer sets up
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for you you have to deal with the fees
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that
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charge you and your investment options
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are limited to only the ones that they
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offer the one major problem with
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investing in an IRA is the fact that it
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is self-directed so you have to take all
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of the initial steps to set one up and
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most people don't do this now I think
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that's either because they don't know
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about it or even know how to do it this
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can be a little bit intimidating if you
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don't know what you're doing I'm hoping
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to get something out there to help you
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with this soon but until then I've put a
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video a video together walking you
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through the things that you need to
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think about before opening a Roth IRA
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that I'll link up down in the
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description now we're heading into the
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territory of it depends which one of
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these four you choose is all going to
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depend on you you could potentially do
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all four at the same time or do a little
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bit of each or just do one but I would
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put them all on the same level just in
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case someone wants to choose one the
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first of the three is going to be maxing
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out your 401k up to the limit allowed
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which is right now $19,500 per year you
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would deduct $19,500 from whatever you
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contributed up to your employer match
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and that's what you would contribute in
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this portion or this bucket whether you
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invest in a traditional or a Roth 401k
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is going to be up to you now some people
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who are pursuing financial independence
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will contribute to a traditional 401k
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then roll it into a traditional IRA then
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convert it to a Roth IRA now that level
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of detail is way beyond the scope of
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this video so just have an idea of which
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type of 401k that you'll put money into
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if you are not sure then don't let that
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stop you from moving through this step
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just contribute to one while you spend a
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few weeks or a few months figuring it
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out you're not going to make or break
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your future one way or the other while
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you gather more information but you will
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if you are not investing at all another
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option at this level would be to invest
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in real estate or start putting money
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aside to invest in real estate at some
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point in the future I have friends who
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are bypassing their 401k just to buy
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real estate because that's how they want
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to generate money for themselves in
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retirement and I don't see an issue with
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this at all the people I know who have
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had a lot of success with real estate
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investing do it two ways the first way
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is that they buy make improvements on
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then sell that property to make a profit
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there's a lot more that goes into this
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sort of thing so you might want to talk
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to someone who successfully doesn't
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before giving it a go the second way is
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you could also think about investing in
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real estate through the buy-and-hold
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method where you purchase an investment
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property then rent it out as a way to
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build a consistent stream of cash if
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investing in physical real estate on
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your own isn't something you're
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interested in but you still want some of
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your money invested into real estate for
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a diversification purposes then you
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could always go the route of using a
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crowdfunded real estate platform I
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personally recommend and currently
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invest in fundrise I made videos on them
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that I'll link up down in the
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description if you want to learn more
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about fund rise in general the third one
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on this level would be to invest money
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into a current business you have or
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start setting money aside to start a
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business I love it when people build a
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business on the side with a full-time
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job I honestly wish that everyone did
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this because there are so many benefits
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the tax benefits alone are insane and
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make me wonder why everyone doesn't
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start a business having additional
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income outside of your full-time job
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also gives you a little safety net in
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case something happens where you got
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laid off it's a great way to ensure that
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you at least have a little bit of money
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coming in just to get you buy another
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benefit a lot of people don't mention is
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that it gives you something to do that's
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more productive than just sitting around
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and watching television or YouTube
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videos all the time if you actually
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enjoy what you do and it starts to
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become your entertainment as opposed to
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work I work a full-time job and I also
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make money running this YouTube business
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and in other ways as well I genuinely
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enjoy teaching people like you about
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money and investing so while some people
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look at it as work I look at it as
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entertainment that I just so happen to
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get paid for the fourth thing you could
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do at this level or this stage is
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starting to pay down your mortgage or
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start saving for a home some people have
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the desire to pay off their mortgage
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because it helps them sleep better at
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night and there's nothing wrong with
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that I personally have no desire to do
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this because my money is better invested
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somewhere else or I can get a higher
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return if you want to do this then
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absolutely go for it
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wouldn't call you stupid for doing it
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the next to take us to the next level
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down just like the last four you can
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choose which route you want to go I'm
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sure that everyone's been wondering when
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I was gonna mention this one and that is
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your taxable investment accounts
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unfortunately this is probably the
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account that most people invest in first
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which is completely wrong and I hate
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that this is the case I put some of the
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blame on popular investing apps like
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Robin Hood who only offer taxable
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accounts and no retirement accounts like
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Roth IRAs it's important to take care of
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things like your retirement accounts
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before touching your taxable accounts
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because there's many tax benefits to
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investing in an IRA a 401k and HSA that
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are completely missing from a taxable
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account the reason that I put this
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taxable investment account below things
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like real estate and a business is that
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if you were maxing out your IRA HSA and
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401k then you already have a ton of
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money tied up in the actual stock market
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that investing more into it through a
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taxable account might not be the best
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idea investing in a business and over
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real estate is another way to diversify
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your overall net worth and investments
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away from the stock market this is going
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to be really helpful for you as you get
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closer to that retirement age so you
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don't have all of your eggs in one
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basket
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I love the stock market and I am not
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knocking it but I love diversification a
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lot more the second one on this level is
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alternative investments think of this
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like anything we didn't talk about
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already they're going to be very
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specific to you and what you know so I
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can't necessarily name any of them off
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right now
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maybe you know something about will say
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investing in art or jewelry or something
[900]
obscure like that here's what I'm doing
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with my money this year I'm maxing out
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my employer's 401k up to the match then
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I'm maxing out my HSA after that I am
[910]
studying five hundred dollars per month
[912]
beside into my Roth IRA through m1
[915]
finance next is work it's a little
[917]
nuanced I'm splitting the rest of my
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money between my 401k and saving it for
[922]
a rental property leading up to this
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year I was maxing out my 401k and I
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still had money left over which I was
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using to invest in taxable accounts and
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putting some into my savings account
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since I want to start
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investing in real estate there's two
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ways that I could have gone about this
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number one I could have continued to max
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out my 401k and use the leftover money
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to save for a rental property or number
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two I could still contribute to my 401k
[946]
a pretty healthy amount still but not
[948]
max it out and be able to save a lump
[951]
sum of cash faster for that first rental
[954]
property I've chosen to go with number
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two now the reason for that is because I
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have a plan to own a certain amount of
[960]
rental properties within the next ten
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years so the faster I can get the first
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one under my belt and get this whole
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process started the better and the
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easier honestly that the rest of them
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will be to be clear I'm not necessarily
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saying that any of it will be easy but I
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just know that the first property is the
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hardest if you've never done it before
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and I've never actually done it before
[979]
other than that I'm just trying to hold
[981]
the least amount of cash as possible now
[983]
not counting my emergency fund of course
[985]
because cash sitting in my bank account
[987]
isn't making me money and I want my
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money out there working for me I should
[992]
also mention that I do have a taxable
[994]
account that I contribute to every
[995]
single month but that's specifically
[997]
earmarked for my future car fund I'll
[999]
throw a link in the description of this
[1001]
video to another video of me describing
[1003]
what I'm doing and how I'm doing it so
[1006]
you can get an idea of what the heck is
[1008]
Jarrett's car fund in the description of
[1010]
this video you can go pick up your free
[1012]
investing platform guide you'll also
[1014]
find a ton of resources to help you out
[1016]
with all of your personal finance and
[1018]
investing needs check out the financial
[1020]
independence retire early videos right
[1023]
here to your left please make sure to
[1025]
Hulk smash that thumbs up button as well
[1027]
I'll see you in the next one friends a
[1029]
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