Arrow's Seven Steps for Financial Management

Many financial planners and money gurus have their own “priority list” or “financial order of operations” that give people a sense of what financial steps they should be taking to get ahead, and what order they should take them in. Normally, I don’t like these types of lists because every household has their own goals, timelines, and resources that will shuffle these steps around. However, there are some general guidelines that will work for *most* people.

Arrow’s Seven Steps for Financial Management

1. Build an Emergency Fund & Cover Insurance Deductibles

An emergency fund is your family’s financial safety net. It prevents unexpected expenses like job loss, medical bills, or urgent car/house repairs from derailing your progress or forcing you to put expenses on credit cards. Arrow normally recommends 3-months of living expenses for dual incomes, 6-months for single income households, and even up to 12-months if you’re living on a fixed income.

It is also critical that families include their insurance deductibles into their emergency fund. Most “emergency” situations involve insurance (health, home, auto) and it’s necessary to have the cash available to pay your portion before the insurer pays the rest. This fund is first on the priority list because it ensures you can weather life’s unforeseen events and provides a backbone for future wealth growth.

2. Contribute Enough to Get Your Employer Retirement Plan Match

If your employer offers a 401(k) or similar plan (e.g., Simple IRA, 403(b), etc.) with a match, contribute at least enough to get the full match once your emergency fund is covered. This is “free money” and provides an immediate, risk-free return on your contributions. Skipping the match is leaving compensation on the table and can significantly impact long-term retirement savings. Not only is the match “free money” but it goes in tax-free and grows tax-free until you use the money in retirement. The compound growth and tax advantages of getting free money is massive over decades of saving.

3. Eliminate High-Interest Debt

High-interest debt (like credit cards, often at 20%+ interest) can quickly erode your finances and limit your ability to build wealth. After securing your emergency fund and employer match, aggressively pay down these balances. Just like your growth compounds in a retirement account, it compounds against you in the form of debt. Most high-interest debt like credit cards have higher interest rates than your annual gains in a retirement account. Which means that your progress towards increasing net worth is essentially nullified until you remove high yield debt. Always pay your highest interest debt first. The “snowball method” of paying debt by smallest balance just loses you money over the long-term.

4. Max Out IRAs and HSAs

Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs) offer powerful tax advantages, flexibility, and huge long-term rewards if they are maxed out each year. The details (Roth vs Traditional, deductibility, HSA eligibility) will vary by your personal details, but the “big picture” is what matters here, and this is a critical part of generating and building wealth over time. Traditional IRA’s can lower your taxes in your peak earning years, while Roth’s offer flexibility in withdrawals and tax savings in retirement. HSAs allow for triple tax benefits (deduction, growth, and withdrawal) when used for qualified medical expenses. For 2025, IRA contribution limits are $7,000 ($8,000 if age 50+), HSA limits are $4,150 for individuals, $8,300 for families (plus $1,000 catch-up if 55+).

5. Maximize Employer Retirement Plan or Increase Taxable Brokerage Savings

Once IRAs and HSAs are maxed, increase contributions to your employer retirement plan (up to the IRS limit), or, if you’re targeting early retirement, direct additional savings to a taxable brokerage account for more flexibility. This step ensures you’re building significant wealth for your chosen retirement timeline.

 Much of the advice you find online will tell you to always max your employer plan at this step, but that is a huge mistake if you’re targeting early retirement (early 50’s or younger), since that often will lead to a cashflow problem that requires you to pay penalties to access your funds, especially if you don’t have a Roth IRA where you can withdraw contributions. Even if you plan on reaching financial freedom at an early age to start a business or travel more, it might be beneficial to have more accessible funds. Brokerage funds are accessible without penalty at any age.

If you’re targeting a more “normal” retirement age (age 59.5 or older) than the tax advantages of maximizing your employer plan are massive! There is no question that the combination of tax-free growth and tax savings during your earning years is the best option for most people, especially if they have a high enough discretionary income to max their employer plan.

The critical part of step 5 is understanding your own goals and how to use your investment accounts to best target those goals.

6. Target Other Goals and Diversify Investments

With your core retirement and emergency needs addressed, focus on other priorities, such as college savings (529 plans) if you have children, home down payments, travel, donations to charity, business start-up costs etc. Once you reach this step, your retirement savings should be on track, giving you some flexibility to diversify and help others. You will be better equipped to do that if you’ve taken care of yourself first. Diversifying your investments across different accounts and asset classes helps manage risk and pursue multiple goals. In this step, it is beneficial to start diversifying your wealth. Buying more physical assets like rental property, land, businesses, or precious metals provides a buffer for a struggling economy or stock market and helps to put your wealth into buckets that don’t overlap too much with each other.

7. Pay Off Low-Interest Debt

Low-interest debt (e.g., some mortgages, federal student loans, or car loans) is less urgent to eliminate if your investments are earning a higher return. Many stock/bond portfolios earn average growth of over 7% per year, with more aggressive portfolios being closer to 9%. If your mortgage or car loan has an interest rate under that amount, you’re just leaving money on the table by prioritizing a lower return over a higher one. Paying off a 4% loan is equivalent to getting a 4% return on an investment. Many people love the feeling of being “debt free” since it provides peace of mind and can free up future cash flow.

It's not “wrong” to pay off low-interest debt if it provides peace of mind for you and your family, but from a number’s standpoint, it should be lower down on the priority list! Always be sure to compare the interest rate on your debt to your expected investment returns when making this decision.