Savings Order of Operations

In math and in computer programming, the order of operations defines how you solve problems and prioritize the order in which you perform procedures.  In the spirit of, “You can do anything, but not everything,” below is my Savings order of operations for 2020.

1. 401K Contributions
This cuts our taxable income and lets us save for retirement. With all of the ways to access retirement funds early, if needed, this is our #1 item.

2. Roth IRA / Backdoor Roth IRAs / Mega Backdoor Roth IRAs
We dance around the eligibility limits for Roth IRAs, but these tax-advantaged accounts are better than regular taxable accounts.  We have a fairly large cash position, so it’s not necessary that we access this money quickly.

3. HSA
This ends up happening no matter what through employer deductions, but I’ve changed my thinking about the HSA vs. Roth IRAs in the past few years. If I can’t fund a Mega Backdoor Roth via normal cash flow / income (and I rarely/never can), I will pull money from the HSA to do it. Once the money is in an HSA, pulling it out to put into a Roth IRA offers the same benefits without the recordkeeping headaches.

4. Kids’ college funds
This ends up being weirdly tied with #2 and #3 above. My savings target is the maximum untaxed amount for our state, per kid (so $4K each). I’ve saved “extra” over the past few years, and also sort of cheat this since I simply fund it with invisible-to-me Dependent Care FSA reimbursements.

5. Mortgage Prepayment
We have a 15-year mortgage already and our rate is amazing (3.125%), but I still do not like that huge balance hanging out there.  Ideally, we’d contribute extra and then recast – protecting that awesome low interest rate while having annual payments that are slightly less onerous.

6. Taxable Investment accounts
We don’t usually made it this far down the list, but this would be tied with #5.  We would probably go for #5 unless the market drops a large amount.

 

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