“Do what works for you.”

I have been reading quite a few personal finance blogs. Most of the blogs have one thing in common. People have made sound choices and have been able to either work their way out of debt or have retired early.

Many of them have higher than normal salaries and they follow the simple rule make more / spend less. This is the simple basic rule that everyone should follow, but when you have achieved that what else can you be doing?

Spending quite a bit of time reading the posts on r/leanfire, I have been focusing on how to achieve the goal of retirement without having to work a job until I drop dead. There was one really good thread that laid out the steps to get to lean fire:

1. Build an emergency fund
2. Contribute to your companies 401(k) to their match
3. Pay off high-interest debt
4. Max out your retirement accounts
5. Contribute to a Health Savings Account (HSA)
6. Start a Roth IRA
7. Build an investment account
8. Pay off your mortgage

These are steps that anyone should follow and the order may change a bit but the advice is sound.

The difference is the advice behind each of these steps somewhat depends on where you are in life.

Build an Emergency Fund

This is a must first step. Every personal finance blogger will agree. Dave Ramsey indicates that you need to start with $1000 and then begin to pay off the high-interest debt. While $1000 may pay off that sudden issue with your car or may cover an unexpected medical expense, it will not cover rent for the month or a major car repair.

I did not start paying down my high-interest debt until I had enough in the bank to cover three months of expenses. This may not be the ideal advice. Many that are struggling during this pandemic would have benefited from three months of expenses. It was also psychological to have a bit of a cushion in my account.

The interest you pay on debt is money not earned. The sooner you are able to pay it off the more you can put towards saving. Again, whatever works for you, whether having that $1000 or building three to six months of expenses helps you pay it down, the sound advice is to get rid of it as fast as you can.

Make Sure You Match Company Contributions

The next step is to contribute to your 401(k) especially if your company matches your contribution up to a certain percentage. This you can do at the same time as building your emergency fund. You should absolutely be taking advantage of the tax-deferment.

My company matches up to three percent of my contributions so when I started the journey to pay down debt I set it at three percent and forgot about it. Since I am closer to my goal of being debt-free I added another two percent and will continue to add as I pay down further.

This past year I ended up with a $3500 tax bill. This was because I failed to account for my daughter turning 17. I just thought she was a dependent until she was 18. I have already adjusted my w-4 but thought it would be better to reduce my tax liability by increasing my contributions.

I also realized just recently that while my wife has a pension through her employer she can also contribute to a 457 plan. I just added an additional three percent to her contribution and will increase this as we pay off the last of our high-interest debt.

Pay Off Your High-Interest Debt

Your debt is an emergency. The typical US household in 2017 had over $135k in debt. This is up from $50k in 2000. The amount of debt we carry nearly tripled while our income has only grown by a third.

This is an astonishing amount of people that carry a lot of debt. Some of this could be student loans or car loans, but the reality is that this should be paid off as soon as you can.

The question is how to pay off this debt effectively. There are several methods that work for paying down debt. The avalanche method lists debts in order of their interest rates from high to low. You start with paying the highest interest rate first and pay the minimums on all the rest.

In the long run, this will save you the most on interest since you are paying the highest interest rate first.

The second is the snowball method. This method lists debts from lowest amount to highest. It is more of a psychological method since you end up having small wins. As you pay off each debt you put that money to the next one until each is paid off. The small wins come from the fact that you pay off the smaller amounts quickly.

Whatever method you choose paying down debt should be a top priority.

Max Out Your Retirement Accounts

Once your high-interest debt is paid off you can start contributing more towards retirement. You should of course build up your emergency account to get it to the six months of expenses but you can still start contributing more to retirement at the same time.

This is to take advantage of the tax incentives that putting money into these accounts can offer. If you can max out the accounts you should. The current max per year is $19,500 for 401(k) and 457 accounts and $6000 for a Roth IRA. This changes at 50 where the max for a 401(k) is $26,000 and a Roth is $7000 to allow you to catch up if you are behind.

The main advantages of one over the other are 401(k)s and traditional IRAs are tax-deferred but if you withdraw early you will pay taxes on the income. With a Roth IRA, you do not get taxed on the growth and can withdraw without penalty at any age. You do contribute to a Roth after-tax and therefore it does not reduce your adjusted gross income but does reduce your tax liability.

My job allows me to contribute to a 457 plan which is another tax-deferred plan available to government employees. I can contribute $19,500 per year to that plan as well. This would make my overall retirement contribution if I have the three types of accounts mentioned here to be $45,000 per year. If I started today with zero and contributed $3750 a month towards retirement I would have $1.7 million by the time I want to retire. This is assuming a seven percent return each year.

Contribute to an HSA

If you are one of the many that have a high deductible health plan than you have access to a Health Savings Account (HSA).

An HSA is a tax-deductible savings account that allows you to pay for any health-related expenses. You can contribute $3,500 for individuals and up to $7,000 for families. Some or all of the money that you can contribute can be invested so you can earn money on your contributions if you do not use them each year.

You can also add an additional $1000 each year if you are 55 or older. An HSA is a good benefit if you have a high deductible plan and can add to what you are already putting away for an emergency fund. An alarming 65 percent of all bankruptcies in the US are due to medical debt.

Start a Roth IRA

If you have not already done so when you max out your pre-tax contributions to your retirement accounts adding a Roth IRA to your portfolio is important to take advantage of the additional tax savings.

As mentioned in the previous paragraph there are no penalties for early withdrawal with a Roth but another advantage is that you can continue to contribute if you are past 70. This is something that a traditional IRA or a 401k does not offer.

Adding a Roth gives you more financial stability for your retirement.

Build an Investment Portfolio

It is easier than ever to invest. With most traditional brokerages offer low-cost trading and low start amounts, most people with $100 can enter the investment market.

Apps such as Robinhood or Acorns can give access to the market to many that traditional investing had shut out previously. You can start with an account at Fidelity, Vanguard or Schwab with as little as $100 and start buying investments.

Of course, the danger of this is many people do not understand how to invest and these apps do not always explain how the market works. There is an inherent risk in investing so only invest money that will not be needed right away. This does not mean that you can’t start investing before you do everything else, it just means make sure you do not invest your emergency fund or your mortgage payments.

I started using Ally Invest. I made the mistake of opening both a managed portfolio and a self traded account. With the managed portfolio, Ally directs my investments based on how much risk I want to take. With a self-traded account, I do the research and invest where I want.

I settled on Exchange Traded Funds or ETFs. ETFs are funds that distribute their options in a few different investments. These can be targeted to more tech companies or some of the larger corporations or even socially responsible companies.

The ETFs I chose did well for the first few weeks. As the market slid in the last few days I lost a bit. I am not planning on cashing out quickly. I will stick with my investments until things start to turn around again. I am confident they will.

Pay Off Your Mortgage

If you have already completed all the steps above the last thing that you should do is pay off your mortgage early. If you are able to put even one extra payment a year to your mortgage you can pay down your principal and cut years off your mortgage.

There are a few ways to do this, you can pay it in one lump sum each year or distribute evenly over the twelve months. Distributing evenly will actually save a bit more money by reducing the principal each month.

Another option is to round up your payment each month. You may not reach that full payment but it can still reduce your principal and therefore reduce the terms of your loan.

Of course, some people argue that it might be better renting. You have to calculate the cost of ownership and weigh that difference to renting. There are tax incentives to owning a home but if you do not have 20 percent to put down on the home you will pay mortgage insurance. So you need to calculate a mortgage payment, taxes, insurance, and mortgage insurance and compare that to rent and renters insurance.

In most cases owning a home can still be beneficial as it will hopefully appreciate, but if there are major repairs needed it can cost more. You also need to make sure the market is on the upswing. We purchased our house at the height of the housing bubble and lost money as the home needed major repairs when we sold it.

While most financial advice comes from sound sources, not all advice is perfect for everyone. No one will argue that you need to pay down debt and save for retirement, but how you do that may be unique to your situation. You should never stop living just to save every penny for retirement.

Good luck on your journey. The steps taken should always be forward.