If you’re a frequent reader of sites like this, you probably have a great grasp of the fundamentals that make up good financial advice. You know you need to save; you understand the importance of managing cash flow and paying down debt (or avoiding it in the first place); you seek to learn more about investments so you can get your money working to grow wealth for you.
In other words, you’re likely ahead of the curve compared with the average person, who doesn’t seek out ideas and tips to improve their money-management skills. But even when you’re doing well with your finances, wouldn’t it be nice to find ways to level up? To go from good, to better, to best with your financial plan?
You can make sure you’re optimizing your strategy by evaluating these three major aspects of your financial life — and making small tweaks and changes along the way so that you’re confident you’re doing the best you can with the resources you have.
Choose the Most Efficient, Effective Ways to Repay Debt
The basic good money move to make when you have debt is to create a plan to pay it off. Simple, yes, but many people never actually put a plan down on paper. Therefore, they lack the clarity needed to make strategic moves that would either save money — or enable the ability to use debt as leverage to build wealth.
Once you have a plan, the better move to make is to make sure you prioritize your debt repayment by interest rate. In other words, you need to order your debt repayment by attacking the highest-interest rate debt first (while making sure to at least pay the minimums on any balances you owe). If you’re serious about making the best financial moves, this is the strategy for you since it will be the most cost-effective way to debt freedom.
But when you get down to only lower-interest rate debts to repay, like student loans or mortgages, you may want to re-evaluate the plan. The optimal strategy may not be aggressively paying down everything until you owe nothing (although total debt freedom (opens in new tab) is quite emotionally gratifying).
Instead, you want to consider how you may be able to leverage your debt in order to grow your wealth. For example, perhaps the only loan you have left to repay is a mortgage and your interest rate is 4% or lower. Given that, the optimal move may be to use that mortgage as leverage — and instead of paying it down quickly, use the money in your cash flow that you would have paid toward the debt and contribute it to an investment instead.
If you can reasonably expect to earn a higher return than the 4% interest you pay on your mortgage, maintaining your existing loan repayment schedule and putting extra dollars toward some kind of asset that is likely to appreciate at a greater rate could be the smartest move to make.
Evaluate How to Best Save for Your Future
You’ve heard it a million times: Contribute at least enough money to your retirement account to get an employer match! There’s a good reason this piece of financial advice is repeated ad nauseam. It’s a good move to make and ensures you capture the full value of your compensation package (rather than leaving money on the table through an unclaimed match to your retirement plan).
And if you don’t have an employer-sponsored plan? Then the baseline good money move for you to make is to take initiative and open up your own traditional IRA or Roth IRA, and contribute to that instead. If you’re self-employed, you can also look at other IRA options, including SEP IRAs or SIMPLE IRAs, or retirement accounts like solo 401(k) plans.
Regardless of the retirement plan you have, the better move to make once you have it is to not just contribute — max it out! Work up to making the maximum allowable contribution to the retirement account you’re using. The more you save now, the easier it will be to fund your future retirement and lifestyle.
If you want to optimize your retirement savings, you can consider making after-tax contributions to your tax-deferred accounts. This isn’t possible for everyone, but if you have a retirement plan, call the plan provider to ask about your options. Some allow you to contribute above normal limits so long as you’re using after-tax money, and some also allow in-service withdrawals to convert that after-tax money to a Roth portion of the plan.
Another option is to ensure you’re contributing to both tax-deferred accounts and tax-advantaged accounts. This helps balance the temporal weight of your tax liability — or how you’re taxed today vs. how you’re taxed in the future. If you’re over the income limit for contributing to a Roth, you can still manage this by doing backdoor Roth conversions.
Focus on Growing Wealth (and Not Just for the Long-Term)
Once you’re repaying debt and saving for the future, it’s time to consider how you can build additional wealth that you can use throughout your life — and not just in your golden years. How do you do it? Invest!
Opening a non-retirement investment account (also called a brokerage account) and investing in low-cost index funds using a buy-and-hold strategy is a good baseline move to make if you want to elevate your financial plan beyond just saving cash (opens in new tab) and putting money away for retirement. Having a non-retirement account gives you more freedom and flexibility as to how you can use your money, and when.
A better move, once you get your investment account up and running, is to use a globally diversified portfolio that is risk-adjusted for your specific needs and goals. Many people assume buying into something like an index fund that tracks the total U.S. stock market is sufficient… and it might be OK. But it’s not truly diversified, considering the U.S. market only makes up about half of the entire global market in which you could invest.
Ready to optimize? There are a lot of things you can do to fine-tune your investment portfolio (without dipping your toes into the dangerous waters of active management, stock-picking or market timing; these are generally things you want to avoid (opens in new tab)).
Here are some more sophisticated strategies that you can use to dial in your portfolio and ensure you’re doing the best you can to grow as much wealth as you can without taking on too much risk along the way:
- Invest in tax-efficient vehicles to optimize after-tax returns.
- Rebalance periodically — and consider taxes when you’re doing this, as well.
- Use tax-loss harvesting when appropriate.
- Consider how tilts toward certain style boxes or asset classes could better align your portfolio with your goals and appetite for risk.
Reducing taxes where you can is definitely a major part of making the most of the returns you earn and keeping more money in your pocket. If you want to make sure your comprehensive wealth management plan is truly optimized, don’t ignore the tax implications of your investments — and make sure you’re also making some of these other higher-level moves along the way.
Eric Roberge, CFP®, is the founder of Beyond Your Hammock (opens in new tab), a financial planning firm working in Boston, Massachusetts and virtually across the country. BYH specializes in helping professionals in their 30s and 40s use their money as a tool to enjoy life today while planning responsibly for tomorrow.
Eric has been named one of Investopedia's Top 100 most influential financial advisers since 2017 and is a member of Investment News' 40 Under 40 class of 2016 and Think Advisor's Luminaries class of 2021.
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