As financial advisors, it is our job to examine your financial circumstances from a wide-angle lens, consider your financial picture comprehensively, and help you connect different pieces through financial planning analysis and strategies. It can be difficult to remain objective and focus on the big picture. This is an entirely human reaction and even quite common. When faced with a difficult question or situation, you might come up with an easy solution with relatively minimal positive impact on your finances. For example, you might feel like you are not saving enough, so to spend less money, you drive 20 minutes out of your way to save five cents per gallon on gas. While these minor things may provide a temporary sense of relief, they often do not significantly improve your financial situation. Instead, below are ten strategies that can actually have a tangible impact on your finances:
1. Form a Solid Financial Foundation and Build Off of It
Just like anything else, certain fundamentals of financial planning universally apply to everyone. All too often, these basics can be overlooked and ignored. However, those building blocks are essential to form a base for your financial plan so you can layer on other strategies. Here are some examples:
Have an emergency fund of three to six months' worth of expenses,
Have short-term, intermediate-term, and long-term goals,
Diversify your investments across various asset classes to manage your investment risk,
Understand your risk tolerance and time horizon,
Track your income and expenses to understand your cash flow,
Create a balance sheet outlining your assets, your liabilities, and your net worth, and
Automate your finances wherever you can.
2. Create a Budget and Stick to It
For many, budgeting is a nonstarter – it is not something we like to think about, let alone actually do. But by taking control of your finances, you can experience a sense of relief and empowerment. You have to take responsibility for your spending and the unnecessary purchases you make so you can understand that nothing will change unless you change your behavior. The program will work if you do it! Remember that budgeting is an individualized process and looks different for each person. Finding a budgeting solution you can work with and will work for you is crucial. There are many different strategies, including traditional budgeting, the 50/30/20 method, the 70/20/10 approach, the 60% solution, the pay-yourself first philosophy, the zero-based budget, the 'no-budget' budget, the envelope system, and the values-based budget. To learn more about these popular budgeting strategies, check out 9 Budgeting Tactics You Can Use to Take Control of Your Spending.
3. Maximize Your Company Benefits
Employees' compensation packages are a lot like an iceberg – you may only focus on what is visible above the water (your salary) and neglect to see what is below the surface (your benefits). Data from the U.S. Bureau of Labor Statistics shows that benefits make up a little less than one-third (around 30%) of employees' total compensation. Consequently, many employees rush through picking their benefits every November and miss out on some great opportunities available to them. More than likely, your benefits are not just your health insurance, dental insurance, and retirement plans. There may be things like commuter stipends or free parking, legal assistance, tuition reimbursement and support, professional development programs, employer stock plans, adoption assistance, mental health counseling, and so much more!
Do not be one of those people who only take a few minutes to review your benefits every November. Take your time to make sure you are maximizing them.
4. Prioritizing Paying Off High-Interest Debt
Debt can be a heavy millstone for many people, but getting out of debt is a tremendous milestone for everyone. It can easily seem that debt is just an accepted part of adult life, and we are perpetually shackled to consequences we do not fully understand. However, by prioritizing and paying off high-interest debt, you experience not just an accomplishment but a freedom that is truly liberating.
If you do not already have a plan to pay down your debt, it is easy to get started. First, take a sheet of paper, a journal, or a spreadsheet and list all your debts, including the kind of debt (mortgage, credit card, student loan, etc.), the issuer, the interest rate, your monthly payment, and the loan term. This will help you to visualize everything so you can prioritize what you want to pay off first.
Then, use the 'snowball' method of paying off loans with the smallest balance first, moving on to the next smallest, and so on. The amount will 'snowball' and get larger and larger, and the rate at which your debt is reduced will accelerate. This method provides a psychological boost as you metaphorically (or physically) cross off debts one by one from your balance sheet, which can motivate you to continue. Conversely, you could utilize the 'avalanche' method whereby you first target your debts with the least favorable terms and prioritize paying those off first. This method saves you more money in interest in the long run and, therefore, reduces the total amount you pay.
5. Form Good Money Habits
It is easy to overestimate the importance of one defining moment of massive action leading to success. We often neglect the value of small daily improvements and put unnecessary pressure on ourselves to make an earth-shattering change in our lives. However, the difference little advancements make in the long run is astounding. Mathematically, if you get 1% better at something each day for a year, you will be 37 times better by the end of that year. As James Clear writes in Atomic Habits:
"Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them... It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent."
So, what are some examples of good money habits?
Limit impulse purchases for things you do not really need,
Live below your means and spend less than you make,
Do not try to time the stock market. Align your portfolio with your risk tolerance and timeline and ride the investing waves,
Avoid chasing trends, and do not fall for get-rich-quick schemes, and
Save as much as you reasonably can.
If you can form good money habits, you are not just on your way to financial freedom but opening up a world of possibilities and opportunities. Good money habits have the power to transform your financial future and bring you closer to your goals.
6. Take Advantage of Tax-Efficient Strategies
By overlaying tax-efficient strategies with your financial plan, you can better optimize your overall finances, reduce your tax burden, save significant money in the long run, and keep more of your hard-earned money working for you. Some of these strategies include:
Maximizing the use of your tax-advantaged accounts, including 401(k)s, IRAs, 403(b)s, 457s, SEP IRAs, and Health Savings Accounts.
Making after-tax contributions to Roth accounts so you make tax-free withdrawals in retirement,
Understanding and strategically deploying tax deductions and tax credits, including tax-loss harvesting,
Placing investments in accounts that offer the best tax benefits (e.g., income-producing investments in tax-deferred accounts and tax-efficient investments in taxable accounts), and
Utilizing charitable giving and smart estate planning strategies to minimize taxes on wealth transfers.
7. Review and Adjust Your Insurance Coverage
Life is full of risks, and insurance offers you the option to transfer some or all of that risk off of you in exchange for a periodic payment. The decision as to whether you should purchase certain insurance boils down to deciding what risks you are okay with and ones you would like someone else to take care of. To figure this out, ask yourself, "What keeps me up at night?"
You might worry about what will happen to your family if you are gone. When your family depends on you financially, ensuring you have sufficient life insurance coverage is always necessary.
You may also worry about being unable to perform your highly technical job if you can no longer perform it. Be sure to check your disability coverage to alleviate the stress this may cause.
Perhaps you fear sustaining an injury or falling ill suddenly. Make sure you have adequate medical coverage, and if relevant for your age, long-term care coverage. Also, whenever you travel overseas, check your existing health insurance policy to see if you are covered. You will likely have limited coverage, so be sure to look into ways to supplement your coverage while you are abroad.
Being successful financially requires you to be a good risk manager. In doing so, it means having a plan when bad stuff happens. While insurance is a way to replace economic loss, it cannot replace emotional loss – but it sure can help. Do not let the emotional aspects of these decisions derail your planning. Take the time to answer what keeps you up at night and figure out how to ease that stress, potentially with insurance.
8. Establish a Comprehensive Estate Plan
You did it! You spent a lifetime accumulating all of your assets, and have built up a substantial amount of wealth. However, this is only half the battle. At its core, estate planning is about preparing for unforeseen personal circumstances and honoring the legacy you want to leave to your loved ones. You want to ensure you have a plan to distribute your assets should something happen to you. Without one, the fruits of your labor may have difficulty getting to those you choose to leave your money to. Moreover, upon your death, it may come at a high cost to your heirs and is slower and less efficient than had you crafted a sound, comprehensive estate plan. Check out the 3 Essential Estate Documents Everyone Should Have.
9. Regularly Review and Update Your Financial Goals
As mentioned previously, having short, intermediate, and long-term goals is one of the building blocks of financial planning. These goals should be reviewed regularly and updated as your circumstances change.
Be careful, though; goals should be challenging but achievable. However, financial planning is about the journey rather than the destination. Avoid getting caught in the mental trap of when goals create an either-or situation in which you either achieve your goals and are successful or fall short of your goals and are a disappointment. Like most things in life, financial success is a moving target that looks different for each person and can even vary drastically for you personally year-to-year. It is doubtful that your path through life will follow the exact trajectory you originally had in mind. Make sure your goals are dynamic and flexible to adapt to changing circumstances and use them as guidelines to help you achieve a fulfilling life.
If you need help implementing these strategies or guidance on how to achieve your financial goals, check us out! You can schedule a complimentary, no-obligation call with us here.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.