Follow the Financial Order of Operations

State-specific flags

The checklist — 12 steps

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1. 1.Confirm your Needs budget is covered before applying the FOO

   The FOO governs dollars **above** your Needs budget — rent/mortgage, utilities, groceries, insurance, minimum debt service, transport, childcare, medical. If Needs aren't yet covered by take-home pay, FOO priorities don't apply; fix the income / expense gap first (that's the Profit First Personal playbook, not this one). Pull three months of statements, confirm Needs < take-home, and compute the monthly Savings-bucket surplus that the FOO will route. Write that number down — it's the input to every step below.

2. 2.Step 1 of the FOO — capture the full employer 401(k) match

   This is the highest-return dollar in the entire stack: an employer match is an immediate 50–100% return on contribution, which no other step can touch. Log in to your payroll portal (Fidelity NetBenefits, Empower, Principal, Vanguard, Schwab Retirement — whoever administers your plan), find the match formula in the Summary Plan Description, and set your elective-deferral percentage to **at least** the match threshold (commonly 3–6% of salary to get a 50% or 100% match on the first 3–6%). Under SECURE 2.0 Act of 2022, newly established 401(k) plans must auto-enroll at 3% minimum and auto-escalate 1%/year to at least 10% — but legacy plans (pre-2023) may not, so verify. If your plan offers a Roth 401(k) option, the match itself will typically land in the pre-tax bucket regardless of where your contributions go; SECURE 2.0 § 604 lets the match be Roth if the plan document is amended to allow it. Do not skip this step — leaving an employer match on the table is the single most expensive mistake in personal finance.

3. 3.Step 2 of the FOO — eliminate high-interest debt (≥ ~7% APR)

   After capturing the match, attack any debt carrying an interest rate that rivals or exceeds historical equity returns — credit cards (typically 18–29% APR), personal loans, unpaid medical collections, payday loans, and private student loans above ~8%. Mathematically, paying off a 22% APR credit card is a guaranteed, tax-free 22% return; no investment reliably delivers that. Two competing methods, both effective: **avalanche** (pay minimums on all debts, then all surplus to the highest-APR debt first — mathematically optimal) or **snowball** (pay minimums on all, then all surplus to the smallest-balance debt first — behaviorally easier for most people). CFPB's free debt-payoff worksheets model both. Keep a small starter emergency fund ($1,000–$2,500) in a HYSA during this phase so that a flat tire doesn't re-trigger the credit card cycle. Mortgages at current rates and federal student loans at fixed ~6% are NOT step-2 debts — they compete with step 9 (taxable brokerage) and get prioritized situationally.

4. 4.Step 3 of the FOO — build a 3–6 month emergency fund in a HYSA

   Once high-interest debt is cleared, build a liquid emergency reserve covering 3–6 months of Needs-budget expenses (NOT gross income — you only need to cover the non-optional bills). Dual income, stable W-2 careers, low job-market risk → target 3 months. Single income, commission-heavy comp, 1099 / self-employed, specialized role with thin local market, or chronic health condition → target 6 months (12 for very volatile situations). Park this in a HYSA — as of 2026 the top HYSAs (Ally, Marcus, Wealthfront Cash, SoFi, Capital One 360) yield roughly 3.75–4.50% APY. FDIC-insured up to $250k per depositor per ownership category; NCUA insures credit-union equivalents on the same terms. Do NOT invest this money in equities — when you need it, you typically need it in a down market. This is insurance, not investment.

5. 5.Step 4 of the FOO — max the HSA if HDHP-eligible

   If you're enrolled in an HSA-eligible High-Deductible Health Plan (2025 HDHP minimums per IRS Rev. Proc. 2024-25: deductible ≥ $1,650 self / $3,300 family; out-of-pocket ≤ $8,300 / $16,600), the HSA is the most tax-advantaged account in the U.S. tax code: deductible in, tax-free growth, tax-free withdrawals for qualified medical expenses per 26 USC § 223 and IRS Publication 969. **2025 limits:** $4,300 self-only / $8,550 family; **2026 limits:** $4,400 self-only / $8,750 family (verify against the IRS Rev. Proc. announcement); catch-up (age 55+) $1,000. Prefer payroll contributions via a § 125 cafeteria plan — they avoid federal + state income tax AND the 7.65% FICA bite, the only retirement vehicle that dodges FICA. If not HDHP-eligible, skip step 4 entirely and go to step 5. Full execution details live in the separate HSA playbook — this step of the FOO is the priority placement; the how-to is there.

6. 6.Step 5 of the FOO — max the Roth IRA (or backdoor Roth)

   Per 26 USC § 408A and IRS Publication 590-A, the Roth IRA contribution limit is **$7,000** for 2025 and 2026, plus a **$1,000** catch-up at 50+ (verify 2026 against the IRS announcement). Direct contributions phase out at MAGI: 2025 single $150,000–$165,000, MFJ $236,000–$246,000 (per IRS Notice 2024-80; confirm 2026 figures). Above the phase-out, use the **backdoor Roth** — contribute to a non-deductible traditional IRA, then convert to Roth (IRS Notice 2014-54 blessed the flow). **Critical pre-check:** if you hold ANY pre-tax traditional IRA / SEP-IRA / SIMPLE-IRA balance, the pro-rata rule under 26 USC § 408(d)(2) makes the conversion partly taxable. Clear pre-tax IRAs first by rolling them into a 401(k) (a "reverse rollover") if your plan accepts it. Open the Roth at Fidelity, Schwab, or Vanguard — no fee, any-fund lineup. Roth contributions (not conversions, not growth) can always be withdrawn tax- and penalty-free at any age per IRS Pub 590-B, making the Roth double-duty as a secondary emergency backstop once the primary fund is built.

7. 7.Step 6 of the FOO — fill the remaining 401(k) up to the elective-deferral limit

   After the Roth IRA, return to the 401(k) and contribute up to the full IRS elective-deferral limit — **$23,500** for 2025 per IRS Notice 2024-80; catch-up $7,500 at 50+; the SECURE 2.0 Act of 2022 § 109 "super catch-up" adds a further enhanced catch-up for ages 60–63 (verify the exact 2025/2026 figure against IRS guidance). Verify 2026 limits against the IRS Notice when released. Pre-tax vs Roth 401(k) choice: if your current marginal rate > expected retirement marginal rate, prefer pre-tax; otherwise prefer Roth. Most dual-income professionals in the 22–24% bracket should split or lean Roth given historical tax-rate trends. Use your payroll portal to bump the deferral percentage; re-check each January when the IRS announces new limits so you hit the max without early cut-off (plans stop withholding once you hit the annual cap, so front-loading Q1 can leave Q4 match-less unless your plan has a "true-up" provision — check the SPD).

8. 8.Step 7 of the FOO — Mega Backdoor Roth if your plan allows it

   The **Mega Backdoor Roth** uses the 26 USC § 415(c) overall defined-contribution limit — **$70,000** for 2025 (verify 2026 against IRS announcement) — which is higher than the $23,500 elective-deferral limit. The gap (minus any employer match) can be filled with **after-tax (non-Roth)** contributions, which are then converted to Roth either in-plan or via in-service withdrawal to an external Roth IRA. Requires TWO plan features: (a) the plan document permits after-tax contributions on top of pre-tax / Roth deferrals, AND (b) the plan permits in-service withdrawals or in-plan Roth conversions of the after-tax sub-account. Read the Summary Plan Description word-for-word, or call the administrator. If only (a) is present, earnings on the after-tax bucket accumulate as pre-tax — messy at rollover (pro-rata rules apply). Plans that support the full Mega Backdoor are the clearest alpha in the FOO stack: a dual-income household maxing both partners' Mega Backdoors can move another ~$40k/year into Roth space.

9. 9.Step 8 of the FOO — Employee Stock Purchase Plan (qualified § 423)

   If your employer offers an ESPP qualified under 26 USC § 423 with a 5–15% purchase discount (typically 15%) and a **look-back** provision (purchase price = lower of grant-date or purchase-date FMV, minus the discount), participating is almost always accretive — a 15% discount on a 6-month holding period is an annualized return of roughly 30%+ on rotated capital. Contribute up to the IRS annual ESPP cap ($25,000 of grant-date value per calendar year under § 423(b)(8)). Disposition choice: **qualifying** (held 2 years from grant + 1 year from purchase) gets favorable long-term capital gains treatment on most of the gain per 26 USC § 423(c); **disqualifying** (earlier sale) treats the discount as ordinary compensation income on the W-2 plus short- or long-term gain on the rest. Most households in the FOO should sell ESPP shares **promptly on purchase** (disqualifying disposition) to lock the discount as guaranteed alpha and AVOID building a concentrated position in employer stock — the tax cost of the disqualifying disposition is real but small relative to single-employer concentration risk. If ESPP shares grow past ~10% of net worth, accelerate diversification; this is where the bridge-to-pro section applies.

10. 10.Step 9 of the FOO — taxable brokerage for anything remaining

    Every dollar above steps 1–8 lands in a taxable brokerage account. Open one at Fidelity, Schwab, or Vanguard (or use the brokerage arm of whichever custodian already holds your Roth). Fund it with a recurring monthly ACH from your Savings sub-account. Invest in broadly diversified, low-expense-ratio index funds — FZROX / FXNAX / FZILX at Fidelity; SWTSX / SWAGX / SWISX at Schwab; VTSAX / VBTLX / VTIAX at Vanguard — or a single target-date index fund. Tax-efficiency matters more here than in retirement accounts: favor index funds (low turnover), avoid high-distribution actively-managed funds, and hold ≥ 12 months before selling to qualify for long-term capital gains (taxed at 0% / 15% / 20% under 26 USC § 1(h), plus 3.8% Net Investment Income Tax under § 1411 above MAGI thresholds). Use **tax-loss harvesting** in down markets to offset realized gains + up to $3,000/yr of ordinary income per 26 USC § 1211(b). A taxable brokerage is also where early-retirement bridge capital accumulates if you plan to retire before 59½ — it has no withdrawal-age restrictions at all.

11. 11.Automate the whole stack with recurring transfers on payday

    Manual FOO execution fails over time — set it and forget it. The load-bearing automations: (a) 401(k) deferral percentage set in payroll portal (covers steps 1, 6, 7); (b) HSA payroll contribution set in payroll portal if offered (step 4); (c) ESPP enrollment set during the open-enrollment window (step 8); (d) recurring ACH from Savings HYSA → Roth IRA (step 5) on payday + 2 days, typically $583/month to hit $7,000/year; (e) recurring ACH from Savings HYSA → taxable brokerage (step 9) for the residual. Once automations are live, a raise mostly funnels to Savings automatically via your Profit First percentages, and the FOO keeps routing correctly with zero decision-making per paycheck. Re-verify each January when the IRS announces new contribution limits — you'll typically need to bump the 401(k) percentage and the Roth monthly transfer to hit the new caps.

12. 12.Annual FOO checkup — rebalance priorities as life changes

    Put a recurring January calendar block (90 minutes) to re-verify the whole stack. Checklist: (1) new IRS limits applied to 401(k), Roth IRA, HSA, ESPP — verify against the current year's IRS Notice / Rev. Proc.; (2) employer match formula unchanged (plans amend more often than you'd think); (3) plan still offers Mega Backdoor if you were using it; (4) Roth MAGI phase-out cleared or triggered → switch to backdoor as needed; (5) HDHP enrollment still intact (step 4 disappears the year you leave the HDHP); (6) emergency fund still covers 3–6 months Needs (recalc after any Needs-budget change — move, baby, pet); (7) taxable brokerage allocation still aligned to target (rebalance if drift > 5 percentage points); (8) state-law changes affecting the stack (especially AL's HSA decoupling + DC-taxation position, VA's age-65 retirement subtraction, WV's income-tax phase-down). Life events (marriage, divorce, baby, relocation across state lines, job change) trigger an off-cycle review immediately — do not wait for the annual slot.