Please Excuse My Dear Aunt Sally

If you paid attention in algebra class a few decades ago, you probably remember learning about Aunt Sally. Nobody knows much of anything about Aunt Sally, only that her nieces and nephews feel compelled to apologize a lot on her behalf.

The phrase you might remember hearing (or muttering to yourself as you solved equations) was, “Please excuse my dear Aunt Sally.”

This was a simple mnemonic device designed to help you remember the order of operations for solving an algebraic equation. Please Excuse My Dear Aunt Sally translates simply to Parentheses, Exponents, Multiply/Divide, Add/Subtract.

So when you initially see an equation like this, it might just look like a jumble of numbers and you have no idea where to begin…

x = 2 + (3 x 4)2 x 6

But if you’ll just follow the very important order of operations and take it one step at a time, each individual step is quite simple:

 Original equation:           x = 2 + (3 x 4)2 x 6
Parentheses:                     x = 2 + (12)2 x 6
Exponents:                        x = 2 + 144 x 6
Multiply/Divide:                x = 2 + 864
Add/Subtract:                   x = 866

You can see how carrying out the operations in the wrong order would give you a very different answer. And without the order of operations to begin with, you’d be overwhelmed trying to figure out where to even start.

For most people, navigating your financial plan isn’t a lot different—either it all just looks like a jumble of numbers and you don’t know where to start, or you think you know what you’re doing, but you end up going in the wrong order. One particular area that seems to confuse people is the question of where to save for retirement—401k, Roth, IRA…something else? Well, here’s your order of operations:

1) Company Match: Contribute to your 401k/403b/457/TSP up to the amount necessary to max out your company’s match. Don’t leave any free money on the table. If they’ll match your contributions up to 5% of your salary, make sure you’re contributing 5%  of your salary and getting everything out of them that they’ll give you.

2) Roth IRA: Assuming that you’re under the income threshold and are able to contribute to a Roth IRA, go ahead and max out a Roth for yourself (and your spouse if you’re married).

3) Back to the 401K: If you’re in a higher tax bracket and would benefit from having more taxes to defer this year (and you’ve already funded a Roth), now you can go back to the 401K and max out that account for the year. You won’t be getting a company match on these extra contributions, but you’re still contributing to a tax-advantaged retirement savings vehicle. If you’re in a lower tax bracket and you aren’t as interested in deferring taxes this year, skip this step and go to Step 4.

4) After-tax investments: If you’re maxing out a Roth IRA and your 401k and you still have money that you want to save for retirement, you can do it in any number of after-tax investments. It could be a brokerage account where you’re investing in the same types of funds that you have in your Roth and your 401K, just without the tax advantages. Or maybe you’d prefer to invest in something like rental property. Or maybe you’d rather use this money to get your mortgage paid off early.

It’s important to point out that, unlike the unflinchingly rigid laws of algebra that are always perfectly consistent in all cases, the order of operations in your financial situation might require some customization to fit your life. But if you’re navigating a jumble of numbers and trying to figure out where to start, stick with this plan of action and you’ll be on the right track.

And tell Aunt Sally that she’s excused.