HSA In the Baby Steps?

David and his wife are just starting their total money makeover. His school offers a matching 401(k) and a health savings account (HSA). Should he begin putting money into this after Baby Step 1?

QUESTION: David in North Carolina is a teacher, and he and his wife are just starting their total money makeover. His school offers a matching 401(k) and a health savings account (HSA). Should he begin putting money into this after Baby Step 1?

ANSWER: I would hold off through Baby Step 3. When you finish reading the book, you’ll see that we walk you through it in The Total Money Makeover, but the thing is this: You don’t need to be doing investing when you don’t have an emergency fund, and you sure don’t need to be doing investing while you’ve got a pile of debt you’re working your way through.

Baby Step 1, as you know, is $1,000 in the bank, and Baby Step 2 is paying off all your debts except your home, listing them smallest to largest and attacking them in that order using what we call the debt snowball. Then Baby Step 3 is you go back to the $1,000 account and finish it as a fully funded emergency fund. From a financial planning perspective, that is when you’d start investing, because otherwise, your 401(k) that you’re investing in will turn into your emergency fund if you have an emergency and don’t have an emergency fund. You’re going to cash that puppy out, and the government’s going to kick you in the teeth and take a 10% penalty plus your tax rate, and you’re going to wish you hadn’t done it. It’s not a good thing to invest in your 401(k) until you get those three things done.

Now, David, that also assumes you guys are going to get after it—that you’re not going to wait 10 years or something. You’re going to tear into this. You are going to have a total money makeover, right?

Then when you’re debt-free, you’ll be finishing your emergency fund and starting your 401(k) and your HSA at that time, but in the meantime, you’ve got health insurance in place. You just have a very large deductible, and you don’t have any money. You’ve got some debt to clean up and an emergency fund to build. Those are your foundational blocks that you lay before you do anything else.