What is the Financial Order of Operations (FOO)?
Managing money often feels overwhelming, but having a clear system in place can simplify the process. Much like the acronym PEMDAS is used to remember the correct order of operations in math (Parentheses, Exponents, Multiplication, Division, Addition, Subtraction), the Financial Order of Operations (FOO) provides a structured approach to handling your finances.
The Financial Order of Operations is a step-by-step guide that helps individuals prioritize their financial actions. Whether you’re just starting your career, managing debt, or planning for retirement, FOO offers a clear strategy to maximize your financial health.
Why You Need the Financial Order of Operations
Did you know that nearly 60% of Americans don’t have enough savings to cover a surprise $1,000 expense? Budgeting, paying off debt, and saving for the future are key challenges many face, and this is where the Financial Order of Operations becomes invaluable. FOO brings clarity to your financial decisions, helping you navigate the complexities of managing money effectively.
No matter where you are in your financial journey, FOO can guide you. Whether you’re managing high-interest debt, building an emergency fund, or trying to optimize retirement savings, this system will direct you toward the best use of every dollar.
How to Use the Financial Order of Operations
The Financial Order of Operations is a nine-step system designed to help you make informed decisions about how to allocate your money. Each step builds on the previous one, ensuring that you tackle your financial priorities in the most efficient way possible.
Here’s a breakdown of how FOO works:
1. Protect with Insurance – Before diving into investments or paying off debt, ensure you have adequate insurance coverage to safeguard against unforeseen events.
2. Max Out Employer Match – Contribute enough to your employer-sponsored retirement plan to capture any matching contributions. This is essentially “free money.”
3. Pay Off High-Interest Debt – Focus on eliminating high-interest debt (like credit cards) to free up money for savings and investing.
4. Build an Emergency Fund – Save at least three to six months’ worth of living expenses to cover unexpected financial challenges.
5. Invest in Tax-Advantaged Accounts – Contribute to accounts like IRAs or Roth IRAs, taking advantage of tax benefits while building wealth for the future.
6. Invest Beyond Retirement Accounts – Once you’ve maximized tax-advantaged accounts, consider additional investment opportunities to further grow your wealth.
7. Save for Major Goals – Start saving for life’s big expenses, like buying a home or funding your children’s education.
8. Pay Off Low-Interest Debt – Address lower-interest debts, such as mortgages or student loans, once high-interest debts have been cleared.
9. Enjoy Financial Freedom – With a solid foundation in place, you can enjoy the financial freedom to spend, save, and invest according to your goals.
What to Do with Your Next Dollar?
Should you invest it, pay off debt, or save for future needs. By following the nine steps, you’ll prioritize your spending, saving, and investing based on your unique financial situation.
Key Takeaways
- Maximize Your Finances with FOO – Learn the key principles that make FOO an essential tool for financial success.
- Detailed Breakdown of the 9 Steps – Understand the step-by-step process of the Financial Order of Operations to enhance your financial strategy.
- Is FOO Right for You? – Evaluate whether the Financial Order of Operations aligns with your financial goals and needs.
- Compare Wealth-Building Models – Explore how FOO stacks up against other popular wealth-building strategies.
Origins of the Financial Order of Operations (FOO)
The Financial Order of Operations (FOO) traces its origins to our very first YouTube video, which we released back in 2017. This video laid the foundation for what would evolve into the powerful nine-step plan we now refer to as the Financial Order of Operations. Over the years, FOO has remained largely unchanged because it is a flexible and dependable approach to managing your finances. Whether you’re just starting out in life, building up your savings, or planning for retirement, FOO is designed to work for you at any stage.
First, What Are the 5 Ground Rules for FOO?
Before diving into the nine steps of the Financial Order of Operations, it’s important to understand the five fundamental ground rules that underpin the Money Guy philosophy on building wealth. These principles are crucial for mastering FOO and will make each step of the process much more achievable.
Ground Rule #1: Generosity Isn’t a Step in FOO
Generosity is a key part of life, but it’s not one of the nine steps in the Financial Order of Operations. Giving back to your community—whether through money, time, or skills—should be an integral part of your life, regardless of how much you earn. By sharing your talents and time, you contribute to making the world a better place.
Ground Rule #2: Aim to Invest 25% of Your Gross Income
While investing 25% of your income for retirement may seem challenging, this is the goal we strive for. It’s not always easy or fun, but with the right tools and knowledge, you can gradually work toward reaching this goal. Remember, consistency is key, and while it might take time to achieve, the long-term benefits of investing this portion of your income will be worth it.
Ground Rule #3: Debt Should Be Treated with Caution
Debt can be a heavy burden. The mere thought of debt should prompt caution. We advocate for the responsible use of debt, and following our Money Guy debt rules will help ensure you’re not overwhelmed by financial obligations. Understanding how to manage and minimize debt is crucial in the Financial Order of Operations.
Ground Rule #4: Enjoying What You Do Makes Everything Easier
While not everyone is passionate about their job, finding purpose and enjoyment in your work can make a big difference. The environment and people you work with can influence your overall happiness. A job you enjoy can make financial management easier and help you stay motivated as you follow the steps of the Financial Order of Operations.
Ground Rule #5: Life Is Short, So Make It Count
Life is short, so it’s important to enjoy each phase. While being smart with your money is essential, it’s equally important to ensure that you’re living life to the fullest. Striking a balance between financial responsibility and enjoying your life will help you avoid the trap of becoming a miser and missing out on meaningful experiences.
Our Favorite Financial Order of Operations Resources
If you know someone starting their financial journey, here are some helpful tools and products to guide them through the Financial Order of Operations:
Free One-Sheet Guide
For a quick reference to the Financial Order of Operations, download our free FOO PDF guide to help you stay on track.
Millionaire Mission
Brian’s New York Times bestselling book, Millionaire Mission, not only covers the nine steps of the Financial Order of Operations but also dives into his personal journey, backed by data, research, and charts. It’s a comprehensive resource for anyone looking to take control of their financial future.
FOO Instructional Course
Ready to level up your financial knowledge? Our Financial Order of Operations course offers instructional video lessons, FAQs, private live streams with Brian and Bo, an exclusive Facebook group, and homework assignments for each step. This online course is a one-time purchase of $249 and will guide you through the entire FOO system.
Deep Dive into the 9-Step Financial Order of Operations (FOO)
The Financial Order of Operations (FOO) is a core concept at Money Guy, so much so that we designed our very first course around it. The FOO course includes video lessons from Brian and Bo, homework for each step, private YouTube live streams, and access to an exclusive Facebook group to guide you through each stage.
The 9 Steps of the Financial Order of Operations
You can dive directly into any of the nine steps of the Financial Order of Operations:
1. Deductibles Covered
2. Employer Match
3. High-Interest Debt
4. Emergency Fund
5. Roth IRA/HSA
6. Max-Out Employer Plans
7. Hyperaccumulation
8. Prepay Future Expenses
9. Prepay Low-Interest Debt
FOO Step 1 – Deductibles Covered
The first step in the Financial Order of Operations is to cover your insurance deductibles. When life throws a financial curveball, having your deductible covered ensures that you’re not caught off guard. Deductibles can apply to your health insurance, car insurance, homeowner’s insurance, and other types of coverage, depending on your situation.
Do I Need to Save for All My Deductibles? Or Just One?
To complete Step 1 of the Financial Order of Operations, focus on saving enough to cover the highest deductible you have. The main risk is one unexpected emergency, and while it’s possible to face multiple emergencies, you will address that risk in Step 4 (building an emergency fund).
What is an Insurance Deductible?
This can apply in various situations, such as a car accident, home damage, or a medical emergency.
Why Not Choose the Lowest Deductible?
While a lower deductible may seem appealing because it means insurance starts covering costs sooner, it often comes with higher premium costs. Additionally, if you’re a fan of Health Savings Accounts (HSAs), choosing a high-deductible health insurance plan is essential, as it enables you to contribute to an HSA, providing valuable tax benefits.
How Do I Know I’ve Completed Step 1: Deductibles Covered?
To complete Step 1 of the Financial Order of Operations, you need to ensure that you have enough funds in a liquid savings account to cover your highest insurance deductible. If you’re unsure about what your deductibles are, simply review your insurance policy documents for each of your active policies.
FOO Step 2 – Employer Match
Securing your employer match is a crucial part of the Financial Order of Operations. In fact, it’s prioritized before tackling high-interest debt. While high-interest credit card debt may have interest rates around 20% or higher, an employer match can provide returns of 50% to 100%, making it a powerful tool in building wealth.
What If I Don’t Have an Employer Match?
If you’re self-employed or work for a company that doesn’t offer a retirement plan, you won’t have access to an employer match. Don’t worry—completing Step 2 of the Financial Order of Operations doesn’t require you to find a new job. If no employer match is available, simply proceed to Step 3.
What Am I Missing Out on If I Don’t Take Advantage of the Employer Match?
Not securing your employer match is like leaving free money on the table. This step involves sacrificing a small amount of income now for a much larger return in the future. A quick look at the chart below illustrates how much you could gain in retirement by taking advantage of your employer’s match.
Are Employee Stock Purchase Plans (ESPPs) Part of My Employer Match?
If your employer offers a discount on their stock through an Employee Stock Purchase Plan (ESPP), you can count that discount toward your employer match. However, if you have high-interest debt, it’s important to ensure that the discount you’re getting on employer stock outweighs the cost of the debt.
Is My Employer Match Guaranteed?
When you contribute to receive your employer match, it’s important to understand that the matching funds may not always be available if you leave your job early. While your contributions are always yours, employer matching funds often have a vesting period, meaning that if you leave before that period ends, you could forfeit some of those funds. Make sure to review the details of your plan to avoid leaving money behind.
How to Know You’ve Completed Step 2: Employer Match
To complete Step 2 of the Financial Order of Operations, you need to ensure you’re contributing enough to your employer-sponsored retirement account (such as a 401(k)) to receive the full match. For some people, no contribution is necessary to get the match, while others may need to contribute a percentage of their income—typically between 5% to 10% or more.
FOO Step 3 – High-Interest Debt
High-interest debt can significantly hinder your financial growth, which is why it’s prioritized in the Financial Order of Operations. Eliminating high-interest debt frees up more funds, allowing you to focus on saving and investing for your future.
Does My Mortgage Count as High-Interest Debt?
In 2024, many homeowners face mortgage rates above 6% or even 7%. While these rates are on the higher side, mortgages are generally considered lower-interest debt. This is because mortgages are secured by a home, which is typically an appreciating asset, unlike car loans or credit card debt. Additionally, mortgage interest may be deductible if you itemize your tax deductions, which effectively lowers the true interest rate.
Does a 0% Interest Rate Credit Card Count as High-Interest Debt?
Although a 0% APR credit card may seem like a good deal, it’s still considered high-interest debt in the Financial Order of Operations. This 0% rate is usually a temporary promotional offer, and once the introductory period ends, the interest rate can soar to 20% or more. Therefore, carrying any balance on a credit card, even at 0%, should be avoided. Any consumer debt, regardless of its current interest rate, should be tackled in Step 3 of the Financial Order of Operations.
Which High-Interest Debt Should I Pay Off First?
If you have multiple high-interest debts, you may wonder where to start. From a financial standpoint, it’s most effective to pay off the debt with the highest interest rate first. Afterward, focus on the next highest interest rate, and continue this process until all debts are cleared. However, if the idea of eliminating a debt entirely motivates you, consider using the “debt snowball” method, which involves paying off the smallest debt first. This can help you stay on track and build momentum as you eliminate your debts.
How Do I Know I’ve Completed Step 3, High-Interest Debt?
Once all of your high-interest debt is paid off, you can move on to the next step in the Financial Order of Operations.
FOO Step 4 – Emergency Fund
Building a 3-6 month (or more) emergency fund is a crucial step in the Financial Order of Operations. Having an emergency fund ensures that you’re prepared for unexpected expenses and keeps you on track with your financial goals.
Is My Deductibles Covered Fund Part of My Emergency Fund?
Yes! Your deductibles covered fund is included in your emergency fund. These two funds are not separate, so your savings for covering insurance deductibles will give you a head start when building your emergency fund.
How Do I Determine What to Save for My Emergency Fund?
When calculating your emergency fund, focus on your monthly expenses rather than income. Start by determining how much you spend on essential expenses each month, then multiply that by the number of months you want your emergency fund to cover (typically 3 to 6 months). This will give you the amount you need to save to ensure you’re financially prepared for unexpected events.
What Account Should My Emergency Fund Be In?
For an emergency fund, we recommend using a high-yield savings account. These accounts offer better interest rates than traditional brick-and-mortar banks, allowing your money to grow over time. Online banks, in particular, often provide the best rates. Websites like Bankrate can help you find top-rated savings accounts and see how much you could potentially earn annually with your chosen bank.
How to Know You’ve Completed Step 4: Emergency Fund
To complete Step 4 of the Financial Order of Operations, ensure you have saved enough to cover three to six months’ worth of essential expenses. However, if you face unique circumstances—such as being the sole income provider in your household or working in a specialized field where job searches may take longer—consider building a larger emergency fund to ensure financial security.
FOO Step 5: Contribute to a Roth IRA or HAS
Maximizing contributions to your Roth IRA and Health Savings Account (HSA), if you are eligible, is Step 5 in the Financial Order of Operations.
What If My Income Is Too High to Contribute to a Roth IRA?
If your income exceeds the limit for direct Roth IRA contributions, you may still be able to contribute through the backdoor Roth strategy. This strategy can have unintended tax consequences, so it’s important to carefully consider your options and consult with a financial professional if you’re unsure about the process.
How Do I Use an HSA?
HSAs offer great flexibility and can be used for a variety of purposes. While many people use their HSA as a fund for current medical expenses, the best way to leverage an HSA is by keeping the funds invested and saving your receipts for future reimbursement. There is no expiration date on reimbursing yourself for eligible medical expenses, so you can allow your HSA balance to grow over time.
What If My HSA Grows Too Large by Retirement?
If your HSA balance becomes too large and exceeds your expected medical expenses in retirement, you can still withdraw funds for non-medical purposes. However, those withdrawals will be taxed just like any traditional retirement account. This means you can continue to use the HSA as a retirement savings vehicle, even if medical expenses no longer justify the full balance.
How to Know You’ve Completed Step 5: Max Roth IRA/HSA
To complete Step 5 of the Financial Order of Operations, you need to ensure that you are fully maximizing contributions to both your Roth IRA and HSA. If you’re eligible for these accounts, make sure you’ve reached the contribution limits for both. If you’re not eligible for a Roth IRA due to income limits or lack a high-deductible health plan for HSA contributions, you can skip this step and move on to the next phase in the Financial Order of Operations.
FOO Step 6 – Max-Out Employer Plans
Step 6 of the Financial Order of Operations involves maximizing your employer-sponsored retirement accounts, such as 401(k)s, 403(b)s, and 457 plans. This can be a challenging step due to the large amount of money needed to fully contribute to these accounts, but it’s an essential part of securing your financial future.
Can I Have Too Much Saved in Employer Accounts?
If you’re maximizing your employer-sponsored retirement accounts, it’s possible to accumulate a substantial amount of savings by the time you retire. However, if you plan to retire early, you might face challenges accessing these funds before reaching retirement age. In such cases, utilizing a taxable brokerage account, introduced in Step 7, can be an effective strategy to gain earlier access to your retirement savings.
Can I Contribute More Than the Max?
For individuals under 50, the annual 401(k) contribution limit is currently $23,000. This limit applies to your personal contributions and does not include employer contributions. If your employer offers after-tax contributions and allows in-service distributions or conversions, you may be able to increase your tax-free retirement savings by utilizing the “mega backdoor Roth” strategy, potentially allowing you to contribute even more.
What If My Employer Plan Has Poor Investment Options?
Even if your employer-sponsored retirement plan offers limited investment choices, it’s still beneficial to contribute. The tax advantages offered by these accounts typically outweigh the drawbacks of limited options. Additionally, if you leave your employer, you can roll over your funds into an IRA, Roth IRA, or your new employer’s plan, which may offer better investment opportunities.
How to Know You’ve Completed Step 6: Max Employer Accounts
Once you’ve maximized contributions to your employer accounts, you can move on to the next step in the Financial Order of Operations. However, in some cases, you might be able to complete Step 6 without fully maxing out your employer accounts. If you’re not earning a high income but can manage to invest 25% of your income, even without hitting the contribution limit, you can proceed to the next step in the FOO.
FOO Step 7 – Hyperaccumulation (Invest 25%+)
Step 7 of the Financial Order of Operations focuses on hyperaccumulation, which is the strategy of investing 25% or more of your income for retirement. This step is crucial for building significant wealth and preparing for a financially secure future. Depending on your income and financial goals, hyperaccumulation may take place within your employer-sponsored accounts, through the mega backdoor Roth strategy, or in a taxable brokerage account.
Why Should I Prioritize Retirement Savings Over Paying for My Kids’ College Education?
We like to use the analogy of putting on your own oxygen mask first in an airplane emergency, before helping others. The same logic applies to your finances: you need to prioritize securing your own retirement before worrying about funding your children’s college education. If you don’t save enough for retirement, your children may eventually have to support you in your later years. Unlike college education, which can be funded through loans or scholarships, there are no such options for retirement.
How Do I Know I’ve Completed Step 7, Hyperaccumulation?
You’ve successfully completed Step 7 of the Financial Order of Operations when you are investing 25% or more of your income toward retirement. However, this percentage could vary if you started saving later in life or have plans for early retirement. In those cases, hyperaccumulation may require you to invest even more than 25% to meet your financial goals.
FOO Step 8 – Prepay Future Expenses
This step is a critical part of securing your family’s financial future. You may choose to save for college through a 529 plan, UGMA/UTMA custodial account, or even a custodial Roth IRA if your child has earned income.Perhaps you dream of owning a vacation home in Florida, embarking on a month-long European adventure, or starting a real estate investment portfolio.
How Should I Save for My Kids’ College?
One of the best ways to save for your children’s education is by utilizing a 529 plan. These plans offer significant advantages, including state tax deductions, tax-deferred growth, and tax-free withdrawals for qualified higher education expenses. A 529 plan remains a top choice for many families when it comes to saving for college, as it combines flexibility and financial benefits.
How Do I Know I’ve Completed Step 8, Prepay Future Expenses?
Unlike other steps in the Financial Order of Operations, Step 8 is more flexible. Your specific goals will determine how much or little you need to save. Whether you have minimal savings requirements or are planning for large future expenses, Step 8 is about setting aside funds for long-term goals—it’s tailored to your unique financial journey.
FOO Step 9 – Prepay Low-Interest Debt
Step 9 of the Financial Order of Operations is all about eliminating low-interest debt, such as mortgage debt. While it’s important to focus on high-interest debt earlier in the process, low-interest debt may become a priority later in your financial journey. For some, paying off student loans may also be a key goal, depending on your life stage.
Does the Financial Order of Operations Work for Everybody?
Whether you’re in debt, just starting your savings journey, or a millionaire looking to optimize your wealth, this approach will guide you through the essential steps for financial success. It’s perfect for individuals with varying financial situations, from those with negative net worth to those aiming to refine their retirement plans.
Is the Financial Order of Operations Good for Students or Those in Their Early Career?
Yes! The Financial Order of Operations is particularly beneficial for those beginning their financial journey. It starts with essential steps like creating an emergency fund and paying off high-interest debt. As you progress, it naturally leads to investing for retirement and achieving larger financial goals. For young professionals, FOO provides a structured path toward financial independence.
Is the Financial Order of Operations Good for Families?
Absolutely. The Financial Order of Operations is a great tool for families, especially those with young children. It helps you prioritize multiple financial needs, such as saving for your children’s education, investing for retirement, and managing family expenses. With a clear plan, you can balance all of these priorities and ensure your financial future is secure.
Does the Financial Order of Operations Work for Those in the Middle of Their Career?
No matter where you are in your career, the financial order of operations works for everyone. If you’re behind on retirement savings and need to catch up, the FOO can guide you. Similarly, if you’ve been investing for years and now want to optimize your strategy, the financial order of operations can help you prioritize your next steps. It’s adaptable for every stage of your financial journey, ensuring that you make informed decisions to secure your financial future.
Will the Financial Order of Operations Work for Me if I’m Retired?
The financial order of operations is not limited to just your working years. If you’re entering retirement with financial goals still to accomplish, such as paying off debt or reaching other milestones, the FOO will help you prioritize your remaining goals. However, if you’re entering retirement debt-free and have met all your financial objectives, you’ve effectively “graduated” from the financial order of operations!
Is the Financial Order of Operations for Kids or Young Savers?
While the majority of the financial order of operations doesn’t apply to children, it’s important to note that young savers who earn income can still benefit from one major step: contributing to a Roth IRA for retirement. As children grow into adulthood and take on financial responsibilities, the FOO can guide them in managing their finances wisely and investing for their future.
Does the Financial Order of Operations Work for Businesses and Entrepreneurs?
The financial order of operations can be adjusted for entrepreneurs, though it may look slightly different. As a business owner, you won’t have access to employer-sponsored retirement accounts like traditional 401(k)s, but you can still contribute to Roth IRAs, HSAs, and solo 401(k)s. Entrepreneurs need to focus on covering personal and business risks, and maintaining a substantial emergency fund is an essential step in the financial order of operations.
Criticisms of the Financial Order of Operations – Our Response
No system as effective and widely used as the financial order of operations is without its critics.
Half of the Steps Don’t Apply to Me – Why All the Unnecessary Steps?
While the steps of the financial order of operations apply to a large portion of the population, not everyone will complete every single step. For instance, if your employer doesn’t offer a retirement plan, steps 2 or 6 may not be relevant. The FOO is flexible and can be adjusted to suit your individual needs while keeping you on track for long-term financial success.
Alternatives to the Financial Order of Operations for Wealth Building and Personal Finance Planning
If you’re considering alternatives to the financial order of operations, let’s compare it with some of the most popular personal finance plans available.
Financial Order of Operations vs. Dave Ramsey’s Baby Steps
Dave Ramsey’s 7 Baby Steps is another popular method for managing personal finances. However, there are significant differences between Ramsey’s approach and the financial order of operations. One key distinction is the debt prioritization approach: Ramsey advocates paying off all debt (except for your mortgage) before saving for retirement, while the FOO recommends securing your employer match and investing 25% or more for retirement first.
The financial order of operations prioritizes retirement savings over low-interest debt, such as student loans, because the potential investment returns from low-cost index funds often outweigh the interest rates on such debts.
Financial Order of Operations vs. Reddit’s Prime Directive
The financial order of operations shares similarities with Reddit’s Prime Directive, a seven-step plan for managing finances. Both plans emphasize building an emergency fund and tackling high-interest debt. However, the Prime Directive focuses on building a full emergency fund before seeking employer matching funds or tackling debt, whereas the FOO places the employer match as a higher priority. Additionally, the financial order of operations recommends a savings rate of 25% or more, which is higher than the Prime Directive’s suggestion of 15% to 20%.
Conclusion
The Financial Order of Operations (FOO) is a powerful tool for anyone looking to take control of their finances. By following the nine steps in the correct order, you can prioritize your financial actions effectively, eliminate debt, build wealth, and achieve financial freedom. Whether you’re starting your financial journey or fine-tuning your current plan, FOO offers a clear strategy for optimizing your financial health. By incorporating the fundamental principles of FOO, you can build a solid foundation for long-term success while still enjoying life’s experiences along the way.
FAQs
1. What is the Financial Order of Operations (FOO)?
The Financial Order of Operations (FOO) is a step-by-step guide that helps individuals prioritize their financial actions. It provides a structured approach to managing money, focusing on key areas such as insurance, debt repayment, savings, and investing. FOO is designed to help individuals maximize their financial health by following a proven system for wealth-building.
2. Why is the Financial Order of Operations important?
FOO simplifies the process of managing your finances, ensuring that you tackle your most important financial goals first. It helps you build a strong foundation by prioritizing tasks like paying off high-interest debt, building an emergency fund, and investing for retirement. This approach is crucial for long-term financial success and provides clarity in making smart financial decisions.
3. How does the Financial Order of Operations work?
The FOO works through nine steps that prioritize financial actions. These steps range from ensuring adequate insurance coverage and taking advantage of employer match programs, to investing in tax-advantaged accounts, paying off debts, and saving for major goals. Each step builds on the previous one, creating a clear and logical path to financial freedom.
4. What are the five ground rules for FOO?
The five key principles for the Financial Order of Operations are:
- Generosity isn’t a step in FOO but should be a part of life.
- Aim to invest 25% of your gross income.
- Debt should be managed carefully.
- Finding enjoyment in your work makes financial management easier.
- Life is short, so balance financial responsibility with living fully.
5. How can I get started with the Financial Order of Operations?
To start with FOO, assess your current financial situation and begin by following the nine steps outlined in the system. You can also refer to resources like the free FOO guide, the “Millionaire Mission” book, or enroll in the FOO instructional course for more in-depth guidance.
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