4 Ways to Instantly Upgrade Your Financial Plan

Even though the financial marketplace has become saturated with new products, there’s something elegant about committing yourself to the basics.

Here, we’ll discuss four steps to instantly upgrade your financial plan.

1. Max out your tax-advantaged accounts

Since everyone has a different set of circumstances, it’s good to remember that some people will have more tax-advantaged space than others. In other words, some people may have access to an employer 401(k) plan while others won’t, and some people will be able to contribute directly to a Roth IRA while others won’t.

Before investing in taxable investment accounts, it’s a good idea to contribute the maximum to your 401(k) or 403(b), which is now $20,500 ($27,000 if you’re over 50) for calendar year 2022. At the same time, if the option is available to you, it’s smart to also max out contributions to a Roth IRA, which are limited at $6,000 for 2022 ($7,000 if you’re over 50).

Money invested in tax-advantaged accounts can save thousands in taxes over the long run, so try to use as much space as you can before opting for other investment buckets.

2. Sell single stocks that haven’t panned out

If you’ve bought one or more single stocks and the results have been less than stellar, there is some benefit to cutting your losses early and reaping a tax benefit.

It’s important that investors know that they can lock in investment losses and deduct up to $3,000 from their incomes on their tax returns. Losses in excess of $3,000 can be carried forward indefinitely, so you’ll receive a tax benefit every year until the entire loss amount has been exhausted.

Once you’ve made the decision to sell, you can redeploy the same money into broadly diversified index funds, like ETFs or mutual funds. These securities can be had at extremely low cost, and allow you to spread your money across different sectors, industries, and geographies. These investments also limit your exposure to any one company.

Image source: Getty Images.

3. Don’t look down on cash

While many people deride cash as a low-earning investment, cash serves many purposes that make for a healthy financial picture overall.

Cash provides a feeling of psychological security when markets turn south, and it also prevents you from selling stock to cover short-term emergencies. Selling stocks after they’ve declined is a good way to limit long-term growth prospects, so it’s imperative to always have enough cash on the sidelines.

Moreover, having enough cash serves as a reminder that the stock market is a risky place. While long-term returns have been strong, there is really no telling what the market will do over the next one, two, or five years. A cash buffer is there to protect you if future returns end up being lower than anticipated.

4. Be a DIY investor

Saving money on fees by handling your investments on your own is an important step to keeping as much of your returns as possible. Even a 1% annual fee, which sounds innocuous, can have a deleterious effect on a growing investment portfolio — especially over long periods.

As an example, imagine two people: Beth and Joe. Also imagine that both start with $10,000 and both plan to invest for the next 40 years. They both add $8,000 every year to their investments.

The below table shows the difference in investment returns for Beth, who managed her own investments at 8%, and for Joe, who outsourced his investment management and paid a 1% fee. Assume the investment manager used the same funds as Beth.

Starting Investment

Annual Addition

Annual Return
Ending Investment After 40 Years

Calculations by author.

Needless to say, Joe’s decision to outsource his investments cost him quite a bit in the long run, and Beth is likely able to retire much earlier. It’s truly remarkable that such a small difference in annual return can cause such a wide gap in the ending investment results, but the numbers speak for themselves.

Clean up the gaps

A sound financial plan, like any plan, is only as good as its weakest aspect. Making sure you reap the low-hanging fruit is one of the best things you can do to increase the probability of long-term investment success. If any one part of your plan has weaknesses, try to take incremental steps to improving it — but realize the best plans are those that make small positive steps over time.

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