Just Do Ten Things Right

October 31, 2024

By Barbara O'Neill, CFP®, AFC®

With so much personal finance information available (i.e., information overload), many people are seeking a “cookbook” with “recipes” (e.g., task-based instructions) to manage their money. In other words, a curated list of financial planning action steps. Need some evidence? The best-selling books, The Index Card and The One-Page Financial Plan, do exactly this and a quick scan of personal finance blogs, podcasts, and social media posts reveals common use of “teaser” titles with words like “steps,” “tips,” “ways,” “moves,” strategies,” and “ingredients.” Media outlets know that content with tactical “how to” information attracts audiences. 

Consider this post a personal finance “cookbook” for busy 403(b) plan participants. Studies have shown that lists of financial action steps can improve financial behaviors, especially when they are framed in simple, “digestible” formats. Financial tips in a list format are a visual reminder of key money management tasks.

This post describes ten personal finance action steps that span a variety of financial planning topics including cash flow, saving/investing, insurance, income taxes, and estate planning. It addresses these topics through the lens of 403(b) plan participants, including common benefits they receive and challenges (e.g., high expense vendors) that many face. It concludes with a summary of research about the power of structured financial action lists, three “need to know” facts, and six take-away action steps.

The Ten Things

Financial plans are personal and will likely involve more than the action steps listed below. However, these ten recommendations are a great base to build on to achieve financial security today and in later life.

Spend Less Than You Earn — This sounds simple but can be difficult in real life (IRL). A successful spending plan (budget) has at least flat cash flow (income = expenses) and, ideally, positive cash flow (income > expenses, with the overage available for unexpected bills and/or financial goals). For example, an increased 403(b) plan contribution. Negative cash flow (expenses > income) is a “red flag.” It means you are borrowing from somewhere (e.g., savings, credit cards, people) to make ends meet.

Positive cash flow can be achieved with increased income, reduced expenses, or a combination of both. A good place to start is tracking income and expenses for 1-2 months (using an app, spreadsheet, or written list), identifying spending leaks, and making changes to plug the leaks. For example, someone may decide to shop for clothing and household goods at a thrift shop. Someone else might start a “side hustle” to earn additional income. People generally change habits to live below their means in ways that reflect their personal values.

Strive to Pay Credit Card Balances in Full — Interest is expensive and adds to the cost of credit card purchases when balances revolve from month to month. The average credit card interest rate in late September 2024 was 20.70%! Ideally, pay credit card bills in full. If this is not possible, pay off the outstanding balance as quickly as possible. Even doubling the minimum payment (typically 3% of the outstanding balance) can make a big difference as shown below:

 

Try to Save 15% (or More!) of Your Income — T. Rowe Price and others have found that saving at least 15% of gross income annually throughout a four-decade career should produce around $1 million of savings at retirement. Seven-figure status may even occur earlier, depending on investment selection and performance. A 22-year old teacher, for example, with an average $45,000 starting salary would save $6,750 in year one, preferably in a 403bwise Green vendor 403(b) plan and/or a Roth IRA. Thereafter, the savings amount would adjust for changes in pay scale and contracts. 

If you can’t save 15% of pay initially, that’s okay. Start where you can and scale up over time. The two best times to increase savings contributions are when income increases (think: a better-paying school district or an administrative role) and household expenses end (think: child care, college tuition, and car loan payments).

Invest for the Long Term — Money grows faster over time in investments (e.g., stocks) than savings products (e.g., Treasury bills and certificates of deposit or CDs). History tells us so. Stocks, Bonds, Bills, and Inflation data from Morningstar are compelling with compound annual returns as follows: 11.8% for small company stocks, 10.3% for large company stocks, 5.1% for long-term (20-year) U.S. Treasury bonds, and 3.3% for 30-day U.S. Treasury bills.

This said, there are some basic investing caveats for 403(b) plans and elsewhere:

• Have an “investor’s mindset” and accept the volatility and uncertainty associated with investing. You cannot expect a growth mutual fund to behave like a bank CD.
• Match assets to financial goals. Consider investment products for goals that are 5+ years in the future (e.g., retirement) to reduce the risk of having to sell during a market downturn.
• Don’t invest above your knowledge or investment risk tolerance level. 
• Don’t try to time the market. Market timers have to be right twice (i.e., knowing when to get in and out of stocks), which is very difficult, even for investment professionals.
• Select inexpensive (i.e., low expense ratio), diversified stock index funds for a 403(b), if available. For example, the Vanguard Total Stock Market Index Fund (VTSAX) has a 0.040% expense ratio.

Invest in Tax-Advantaged Retirement Savings Accounts — Invest as much as you can, up to IRS limits, in a combination of tax-deferred and tax-free (Roth) retirement savings accounts. Maximum contribution limits adjust annually for inflation. In 2024, the maximum contribution for a 403(b) plan is $23,000 ($30,500 for workers age 50 +) and the maximum contribution for an individual retirement account (IRA) is $7,000 ($8,000 for workers age 50 +). If your 403(b) has matching, as some private school plans do, save at least as much as the match to receive “free money.”

Tax advantaged retirement accounts include the following: traditional (pre-tax) and Roth (after-tax) 403(b) plans, traditional and Roth IRAs, “backdoor” Roth IRAs (after-tax dollar deposits to a traditional IRA that are converted to a Roth IRA), simplified employee pension (SEP) plans (if self-employed), and health savings accounts (HSAs) if you qualify with a high deductible health plan (HDHP).

Diversify x 3 (D³)

There are three ways diversify investments to reduce investment risk and mitigate taxes:

• Investment Diversification- Select different asset classes (e.g., stocks, bonds, and cash equivalents) and different securities within each asset class.
• Time Diversification- Buy and hold quality investments (e.g., stock index funds or exchange-traded funds outside a 403(b) plan) because the volatility of investments typically decreases over long holding periods.
• Tax Diversification- Create a retirement savings portfolio of tax-deferred, taxable, and tax-free accounts that are taxed in different ways so only a portion is subject to required minimum distributions (RMDs).

Another way to diversify is multiple income streams in case one is cut off. For example, a “side hustle.” It is not uncommon for school districts and non-profit employers to cut staff when their funding is reduced. 

Protect Yourself with Adequate Insurance — Risk is unavoidable. Every day, people engage in activities (e.g., driving) with risks (e.g., accidents) that could potentially erase their accumulated savings and prospects for financial independence. Some risks for loss can be avoided (e.g., not driving in snow) or reduced (e.g., wearing seat belts) or absorbed (e.g., insurance deductibles). Large potential losses require the transfer of risk to a third party (insurance company).

Types of insurance that cover large risks include: disability insurance to protect against income loss, life insurance to protect dependents following a policyowner’s death, property (vehicle and homeowners or renters) insurance to cover repair or replacement costs and liability for damages to others, and umbrella liability insurance in increments of $1 million to protect income and assets from liability judgments. 

Practice Tax Avoidance — The term “tax avoidance” means legally taking advantage of U.S. tax code provisions to minimize taxes. Strategies to maximize after-tax income include: retirement savings plan contributions, Roth IRA conversions, contributions to flexible spending accounts (FSAs) and health savings accounts (HSAs), and claiming tax credits (e.g., child tax credit), deductions (i.e., the standard deduction or itemized), and adjustments to income (e.g., student loan interest and educator expenses). 

Other ways to practice tax avoidance are tax loss harvesting (selling investments that have decreased in value to offset capital gains from other investments), purchasing tax-free investments (e.g., Roth accounts and tax-free municipal bonds), holding investments for more than a year before selling to qualify for long-term capital gains tax rates, and gifting to qualified charities and/or individuals.

Get Your Estate in Order — It is as important to have a distribution plan for assets as it is to accumulate them. Estate plans include named personal representatives (e.g., executor, trustee), arrangements for distribution of assets following death, and advance directives if someone is incapacitated. Below are six action steps to “get your affairs in order”:

• Prepare a will and/or trust, living will (with a health care proxy), and a durable power of attorney.
• Update legal documents as needed (e.g., when a named executor or beneficiary passes).
• Discuss your wishes and share key information (e.g., net worth) with personal representatives.
• Review beneficiary designations periodically and following major life events and revise as needed.
• Select contingent (“Plan B”) personal representatives and beneficiaries (e.g., for 403(b) and life insurance).
• Make a digital assets inventory and a list of automated payments charged to a bank account or credit card.

Keep Learning About Personal Finance — Your financial education is never finished! It cannot be because there are seemingly constant changes in stock market performance, tax laws, Federal Reserve interest rate decisions, saving and investment products, and more. Being a financially savvy adult requires keeping up with current trends as they affect you personally.

Set a goal to learn one new thing every day about a personal finance topic. Find an information source that works for your time schedule. For example, I listen to financial podcasts while I exercise on my treadmill. Other information sources include books, websites, blogs (you are covered for today with this post!), seminars at work (beware: high cost vendors!) or in your community (e.g., at a public library), and media outlets (newspapers, magazines, radio, TV).

Research Results

Studies show that lists simplify complex financial concepts, making it easier for people to take action. They can also break down broad financial goals (e.g., a comfortable retirement) into smaller, more defined steps (e.g., save 15% of gross income in a 403(b) plan). A 2019 meta-analysis of studies about self-control noted that individuals provided with goal-specific financial action lists demonstrated better financial self-control (e.g., sticking to budgets and saving for future goals), leading to long-term improvements in financial health. 

People also benefit by creating their own financial action lists and seeing those of others. At a PD conference for New Jersey teachers, I asked participants to write one recommended financial tip on an index card and they were summarized and assembled into a video. Follow-up evaluations indicated that this activity was valuable.

Three (More) Things

• People spend more money when they use plastic (credit or debit cards) and don’t experience the “loss” of handing over cash. This highlights the value of cash payments or using credit cards as a convenience user.
• Small steps add up when trying to reduce expenses to save more money for retirement. Examples include: adjusting the thermostat by 1-2 degrees, turning lights off, drinking water when eating out, buying second-hand items, making coffee and lunches at home on work days, and canceling unused subscriptions.
• Three key wealth-building resources are active (e.g., salary) and passive (e.g., interest and dividends) income, time, and compound interest. Most millionaires reach seven-figure status after decades of saving.

Six Smart Strategies

No. 1: Take Care of Yourself — Virgil once noted “The Greatest Wealth is Health.” Achieving financial independence is a hollow victory if you are too ill to enjoy it. Follow recommendations for diet, exercise, non-smoking, and overall health.

No. 2: Invest in Yourself — Take steps to increase your human capital (i.e., knowledge, skills, and abilities which can increase your value to employers) through degrees, certifications, job training, conferences, and hands-on experience.

No. 3: Follow the “Rule of Three” — Spend wisely. Determine your key criteria for major purchases of products and services and compare at least three alternative vendors. A side-by-side comparison could save hundreds, even thousands, of dollars.

No. 4: Understand Future Retirement Benefits — Learn about your defined benefit pension formula and when benefits begin. Ditto for retiree health benefits. I recently counseled a former Rutgers University colleague who, not knowing the maximum pension benefit is earned after 41 years, 11 months of service, worked five years beyond that point. Don’t be that person!

No. 5: Keep Good Financial Records — Take the time to organize a user-friendly filing system for bank, investment, and 403(b) account statements, tax records, insurance policies, credit card accounts, household bills (e.g., utilities), and more.

No. 6: Get Help When Needed — Reach out for assistance with personal finance questions. Specific information sources include a: state pension plan agency, school district HR office, lawyer, fiduciary financial planner, insurance agent, Social Security Administration office, and tax preparer. Also, don’t forget about 403bwise office hours with Dan and Scott.

In Summary

The post presents actionable financial strategies to help readers on their path to financial independence. However, simply reading them will not change your financial situation. The next steps are up to you. Pick several items on the list and start incorporating them into your life.

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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.

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