Financial Wellness Nursing CE Course

Once this first (smallest) bill is paid off in full, two things happen simultaneously. First, this progress toward the end goal provides a huge psychological boost, according to Naseema McElroy, veteran nurse and founder of Financially Intentional. Second, it allows the individual to focus all their resources on their next piece of debt. This “one-at-a-time” model simplifies the process of eliminating multiple sources of debt without incurring unnecessary fees associated with a debt relief service (Cruze, 2020; Trusted Health, 2020b, 2020c; Ramsey Solutions, 2020a). The only difference between the debt snowball and avalanche methods is the order in which the debts are paid off. In the avalanche method, the debts are ranked according to interest rate, paying off the debt with the highest interest rate first. This technique involves paying as much as possible to eliminate the costliest debt first (based on the current interest rate being charged) while delivering the minimum monthly payments on everything else (Barnett, 2020). Regardless of the method chosen, Dr. Fallaw’s research indicates that the ability to remain focused intently on a single piece of debt at a time makes both methods successful (Inman, 2018).

As applied psychologist Sarah Fallaw, Ph.D., has studied individuals who are successful at accumulating wealth, the personal attributes of focus and discipline are consistent (Inman, 2018). Once the initial credit card debt is eliminated, the balance should be paid off every month to avoid interest charges. Alternatively, credit cards can be put away or canceled (Federal Trade Commission, n.d.; GHR, 2018). Student loans are standard among nurses; the average nurse graduates from nursing school with around $30,000 in loan debt (this value is between $40,000 and $55,000 for nurses who graduate with a master’s degree). Loans with higher interest rates can often be refinanced to achieve a lower rate (GHR, 2018). The Federal Reserve survey from 2019 indicates that the average student loan payment in the US is $200-$250 per month. Loan payments should be included in the monthly budget and set on auto-draft to avoid late fees (Cruze, 2020). While debt is generally considered a bad thing, most financial experts believe wise investments in a reasonably priced car and a house to be “good debt” (Inman, n.d.a).

Outside of eliminating debt, most economic experts recommend several other healthy habits to establish and maintain economic well-being. Nurses should develop personal financial priorities and stick to them. These priorities may include saving for retirement, college tuition, a house/car, or travel. The priority list should contain a mix of short-term (travel, debt elimination, saving for a down payment) and long-term (retirement savings, mortgage pay-off) goals. These goals should be collectively established with a partner. Single individuals should consider getting a financial accountability partner to maintain their focus on such priorities. Lauren Mochizuki, an ER nurse who reports paying off over $250,000 in debt along with her husband, recommends that this partner be positive (to celebrate accomplishments), honest (to speak up when their partner may lag), and trustworthy (BOA, n.d.a, n.d.b, n.d.c; Cruze, 2020; Inman, n.d.a, n.d.b; Mochizuki, 2020; Turner, 2018). All nurses should start saving for retirement from their first day of employment in the absence of debt. This should be done through a tax-advantaged account such as a 401(k), 403(b), or an IRA whenever possible. (Investment accounts are covered in more detail later.) While the average American saves just 3% of their income, most experts recommend saving at least 10%-15% of annual income (GHR, 2018; Turner, 2018). McElroy recommends establishing an emergency fund, starting with at least $1000. This fund’s end goal should be 3-6 months of living expenses (to be utilized in an emergency), which can be invested in a high-yield saving account for slow growth (GHR, 2018; Trusted Health, 2020b; Mochizuki, 2020). All the money coming in and out should be included in the budget every month or 2-4 weeks (BOA, n.d.c; GHR, 2018; Inman, n.d.a; Mochizuki, 2020). Details on saving as well as writing and using a budget are provided in later sections. 

Various safety precautions can be financially beneficial in certain situations, such as additional flood insurance (beyond the existing homeowner’s insurance), renter’s insurance, personal property insurance (for high-priced valuables such as jewelry), life insurance, and disability insurance. All insurance policies should be reviewed annually to ensure they remain appropriate (BOA, n.d.a). Marrayna Gaskins, a professional financial advisor, explains that disability insurance covers a nurse against the loss of income due to qualifying injury or illness and may be short-term or long-term. Life insurance comes in two primary forms: term and permanent (e.g., whole). Both types pay a death benefit if the insured dies while the account is active, barring specific disqualifying causes of death or circumstances. The death benefit is paid to the named beneficiary, and this stipulation should be reviewed regularly for accuracy. Term life insurance is less expensive to obtain and lasts for a predetermined time. Permanent life insurance is more costly and lasts as long as the insured pays their monthly premium. Over time, permanent life insurance accounts may accumulate a cash value; for this reason, they can be used as an investment alternative in certain circumstances (Trusted Health, 2020a). 

A recent survey indicates that just 37% of American women use a professional financial advisor, and only 14% discuss saving, investing, and financial planning frequently with friends and family (TCRS, 2019). Just as a nurse would never expect their patients to manage chronic diseases independently, nurses should explore local financial advisors/planners for more specific, tailored advice and assistance or consider who among their friends and family may be willing to share their insight (GHR, 2018; Turner, 2018). Before hiring a financial advisor, Lynn Frair, RN and self-taught financial enthusiast, recommends that the nurse should ask directly if they are a fiduciary in all aspects (i.e., they work for their client first, not themselves) and willing to put that commitment in writing before working with them. Another sign of quality within the financial advising world is national certification, as indicated by the Certified Financial Planner (CFP) designation (Trusted Health, 2020c).

There are also certain things that nurses, in particular, can do to improve their financial health. When considering new employment, a nurse should assess the hourly wage and the position’s benefits, shift differential for evenings and weekends, overtime opportunities, and potential bonuses. Does the institution offer automatic raises for education or training (e.g., specialty certification or advanced cardiac life support certification)? Do they offer other educational benefits, such as tuition discounts or reimbursement? Is there a continuing education stipend or reimbursement for national certification costs? Is good-quality malpractice insurance included? Some employers offer financial benefits directly to their employees in the form of free seminars or access to one-on-one counseling or advice at predetermined times with a local consultant. A chosen specialty should be enjoyable and inspiring but should also be stable and financially rewarding. For nurses who are exhausted from years of working 12-hour shifts at the bedside, a transition into a specialty with a promising outlook such as nursing informatics, corporate wellness, insurance, nurse consulting, or quality management may be attractive and lucrative. Discovernursing.com is a website dedicated to helping nurses find the niche that fits them best. Nurses appreciate the peace of mind and security that can come with appropriate liability and disability insurance to protect them from the unexpected. Experts suggest that nurses who decide to leave the workforce should maintain their professional licenses. Nurses can also inquire with their state about transitioning to an inactive status. It is significantly more challenging to get a license reinstated versus maintaining or reactivating it (Turner, 2018). 

Since about 90% of nurses are women, it is worth noting that women often live longer than men and should be prepared to support themselves longer financially. Also, 31% of women have spent a period of their life away from outside employment to care for young children or ailing parents, which impacts them financially throughout their career. Only 12% of American women report feeling “very confident” that they will retire comfortably. More than half of women do not expect to retire at 65 or plan to work after they retire. Less than half of survey respondents indicated that saving for retirement was one of their financial priorities (TCRS, 2019). To compound this, studies suggest that less confident individuals are therefore less comfortable managing their finances and investing their money, as well as asking for a higher salary. Dr. Fallaw recommends increasing education and knowledge regarding the financial world to calm these fears and increase economic confidence (Inman, 2018).

While most of the recommendations for financial well-being are based on math and financial data, some concepts are also rooted in psychology and sociology. As previously mentioned, listing all existing debts and eliminating them individually can provide positive reinforcement to keep saving and continue working, according to Naseema McElroy (Trusted Health, 2018b). Sociologists also note that individuals are affected by those around them, which applies to finances. Mirroring, or physiological imitation, is the human inclination to subconsciously mimic surrounding people, especially if there is a deep, longstanding emotional connection. If someone’s best friend is taking lavish vacations and planning over-the-top birthday parties for their children, the pressure for them to do these things also is real and palpable, prompting even the most dedicated and disciplined saver to veer off course. For this reason, Dr. Fallaw suggests spending time with similarly minded individuals or consciously staying away from social trends, which she refers to as social indifference. By focusing on individual priorities and attaching a reason (the why) to those priorities, people can practice gratitude for what they have instead of focusing externally on the spending habits of others (Christakis & Fowler, 2007; Cruze, 2020; Inman, 2018; Mochizuki, 2020).

Household Budgeting as a Financial Care Plan

A budget is a necessity. It outlines cash flow, which consists of all the money coming in and out during a specified time (usually a month). The budget will change and should be reviewed monthly with a spouse or accountability partner (Cruze, 2020). The first step in writing a budget is to identify the net (or take-home) income for the specified period. Initially, beginners may start by tracking their spending for the first month without predicting, changing, or altering their spending patterns. This involves recording every dollar that is spent, the date, and the associated product/service. Alternative methods for establishing spending patterns are using previous credit card and checking account statements or an online model (BOA, n.d.c; Inman, n.d.b). The term fixed expense refers to monthly costs that do not fluctuate much. This includes mortgage/rent, car payments, student loan payments, health insurance, car insurance (although for some people, this is paid annually or semiannually), and utilities (although these fluctuate, they are generally predictable). Variable expenses include those that differ over time, such as groceries, entertainment, travel/gas, and clothing/shoes (BOA, n.d.c). All irregular expenses that do not occur monthly, such as tuition, school supplies, birthdays, and holiday gifts, should also be included in this category (Federal Trade Commission, n.d.; Inman, n.d.b). Expenses should then be categorized and prioritized (Inman, n.d.b). 

Various tools or methods can help those new to budgeting prioritize and predict their expense categories. The 50/25/25 method suggests that 50% of a person’s income should be dedicated to fixed expenses (e.g., mortgage, utilities, car payment, phone bill), 25% to variable expenses (e.g., clothing, entertainment, haircuts, vacations), and 25% to savings. In this model, the savings category includes funding tax-advantaged accounts such as 401(k)s and IRAs, 529s for future education expenses, and loan payments (Inman, n.d.b). The 50/30/20 method suggests that 50% of the income should be dedicated to needs (housing, clothing, groceries, gas), 30% to wants, and 20% reserved for savings. A zero-based budget means that the entire net income is accounted for intentionally. Every dollar should be allocated, leaving no leftovers, as these tend to be spent without conscious thought or intention. An envelope-based system is predicated on the use of paper bills (cash) to establish a more transparent and controlled use of income. In this system, the allotted amount (as specified in the budget) is placed into corresponding labeled envelopes. When the money in each envelope is gone, the individual or family can no longer spend any money on that category for that month. The zero-based and envelope systems are often combined, as these systems complement each other well (Cruze, 2020; Mochizuki, 2020). 

Categories in the budget should be ranked in several ways. Most experienced budgeters advocate for ranking categories based on importance, as dictated by the collective priorities/goals established at the outset of the financial wellness journey (Cruze, 2020; Mochizuki, 2020). Some advocate for prioritizing needs (e.g., gas) over wants (e.g., a music subscription). Fixed expenses are typically the most difficult to adjust or trim (BOA, n.d.c). Others prioritize the “4 walls” or items that every individual requires to survive: food, shelter (including housing costs and utilities), clothing, and transportation. Other options include online tools and smartphone apps, such as EveryDollar, YNAB, and Goodbudget. These programs not only assist in writing a budget before the month starts, but they also help track spending throughout the month. Features that vary between these systems include electronic access to a checking account, including debit charges automatically and monthly fees for extra features (Cruze, 2020). The Federal Trade Commission (n.d.) offers a free budget worksheet. Because utilities tend to fluctuate seasonally, consider using last year’s water, natural gas, or electricity statement for the same month to predict this month’s bill instead of using the prior month (Federal Trade Commission, n.d.). Another method for keeping tabs on spending during the month is to establish separate checking accounts. A primary checking account can be used for fixed expenses, and then separate accounts can be established for each category of variable expenses (clothing, dining, travel, entertainment; Inman, n.d.b).

Trimming the budget may become necessary if the listed expenses do not fall within the current income and an increase in revenue is not readily available. Easily cut areas are usually the wants, which may include switching a cable or satellite subscription to a lower-priced streaming service, meal planning, and cooking dinner at home. Home items or clothing can be purchased at a discount or from second-hand stores. Fresh fruit from a local farmer’s market can be purchased for a fraction of the cost of high-priced (and unhealthy) prepackaged snacks, and coffee can be prepared at home instead of purchased elsewhere. Before grocery shopping, checking the pantry first can avoid duplicates, ordering groceries online for pick-up reduces impulse purchases, and leaving children at home will eliminate begging for treats as toys, as they are rarely a healthy OR financially responsible influence in the grocery store. For workweek lunches, dinner leftovers can be packed instead of grabbing a sandwich at the local café. Many products can be less expensive if purchased as generics, such as paper products, cleaning products, and over-the-counter medications. Reusable products (washable paper towels and stainless-steel water bottles) are less expensive per use and more environmentally responsible than their disposable counterparts. Recurring subscriptions and memberships should be listed and carefully prioritized or reviewed for ongoing necessity (and, when possible, shared with family or friends). Unsubscribing from email marketing lists reduces inbox clutter and the temptation of the latest clearance sale. Adding buffer categories (e.g., miscellaneous) can help keep a monthly budget somewhat flexible. If charges repeatedly fall into this flexible or miscellaneous category month after month, consider establishing this line item in a permanent category. For those who consistently overspend in an area, using cash for that category may help limit spending. Utility bills can often be improved by conservation efforts, such as fixing leaky faucets, taking shorter showers, washing clothes in cold water, installing dimmer switches and LED bulbs, and upgrading outdated appliances with HE versions when they need to be replaced. The environmental impact of these changes is also significant when practiced collectively. Although various forms of insurance are considered a fixed expense, comparison shopping initially—and some suggest annually—ensures the most competitive rates. Books can be borrowed from the library or purchased from a local used bookstore instead of a traditional bookstore. Time off can be spent in a staycation completing home improvement projects instead of paying a professional for double the savings. Couples can devise a competition to see who can spend the least amount of money during the current week/month, or both could agree to a spending freeze during which only certain essential expenses or purchases are allowed. Meatless Mondays can save money on groceries, as well as pantry and freezer clean-outs, in which households attempt to eat only the foods they already have in their pantry and freezer for a certain period. Finally, most experts encourage those who are new to budgeting to be patient and give themselves grace, as many folks struggle to get the hang of budgeting for the first 3 or 4 months (Cruze, 2020; Ramsey Solutions, 2020a).

Tax Knowledge for Nurses

Knowledge and planning are vital to handling income taxes successfully. Those who expect to owe income taxes should save ahead of time to cover this cost. Self-employed individuals should consider paying quarterly estimates (BOA, n.d.a). The US Bureau of Labor Statistics (BLS, 2020a) estimates that the median annual income of licensed practical nurses (LPNs) and licensed vocational nurses (LVNs) is $47,480 ($22.83/hour), while the mean is $48,500 ($23.32/hour). For registered nurses (RNs), the median annual income in the US is $73,300 ($35.24/hour), while the mean is $77,460 ($37.24/hour; BLS, 2020b). According to the US Internal Revenue Service (IRS, 2020), both groups appear within the third tax bracket. The 2021 IRS tax brackets are as follows:

• 10% for a single income under $9,950/year (if married, under $19,900)
• 12% for a single income of $9,951–$40,525/year (if married, $19,900-$81,049)
• 22% for a single income of $40,526-$86,375/year (if married, $81,050-$172,749)
• 24% for a single income of $86,376-$164,925/year (if married, $172,750-$329,849)
• 32% for a single income of $164,926-$209,425/year (if married, $329,850-$418,849)
• 35% for a single income over $209,426/year (if married, over $418,850; IRS, 2020)

The 2019 Federal Reserve survey concluded that almost 40% of Americans would be unable to pay for an unexpected expense of $400 without having to borrow the money or selling a personal possession. McElroy and others suggest building an initial emergency fund with at least $1,000 by saving at least 10%-15% of monthly income. Eventually, a household’s emergency fund should contain 3-6 months of living expenses. This larger emergency fund can be invested into a high-yield savings account to allow for some growth and relatively easy access in a crisis. There is some ongoing discussion among financial experts about when this investment should be made (before paying off debt, while paying off debt, or after). A balanced approach may include establishing the $1,000 emergency fund, focusing on debt elimination, and then returning to establish a more significant savings account with 3-6 months of expenses. A direct deposit into a savings account by an employer or an automated transfer from a checking into a savings account every month is the easiest way to make saving a habit (BOA, n.d.b; GHR, 2018; Trusted Health, 2020b). 

Savings can protect individuals and families from the unexpected. All investments and savings should be reviewed regularly (annually/quarterly in some cases) to ensure they continue to align with established priorities. Beneficiaries can change with marriage, divorce, the birth of a child, or the death of a spouse, so they should also be confirmed during regular checks (BOA, n.d.a, n.d.b). Significant purchases (e.g., cars, houses) should be considered carefully and timed accordingly, not made on an impulse (Turner, 2018). Separate savings accounts (or a spreadsheet indicating the amount of money designated for each purpose within a primary savings account) can help plan and track progress toward saving for necessities (school supplies, home repairs, car repairs, or medical expenses) or wish lists (vacations, holiday gifts, or a car replacement; Federal Trade Commission, n.d.; Mochizuki, 2020).

In a recent national survey, women reported a total household retirement savings of only $23,000. When asked about predicted needs for retirement savings, survey respondents indicated a median need of $500,000 for a comfortable retirement. Still, more than half of respondents admitted that they guessed to obtain this figure (TCRS, 2019). According to Gaskins, a professional financial advisor, a concrete goal is necessary when saving for retirement. For retirement savings, this is sometimes referred to as a retirement number. Gaskins explains that this number should be calculated by subtracting the target retirement age (e.g., 65) from the average lifespan at this time, which the CDC says is 80 (although women should technically be using a slightly higher number according to the CDC). As a result, retirement savings would need to last for approximately 15 years. This number of years is multiplied by the anticipated annual expenses (or desired annual income). For example, say an individual or family expects to need enough savings to support themselves for 15 years, and their yearly expenses will be around $40,000. In that case, they will need approximately $600,000 in savings to retire comfortably. If they are currently 40 years old, they have 25 years left to work (which gaskins refers to as a time horizon). Thus, they should be saving roughly $24,000/year for the next 25 years to meet their retirement goal by age 65. An adequately invested retirement account may be accelerated if it is earning consistent interest, thereby decreasing the time needed to reach the goal or reducing the amount of money that needs to be saved each year (Trusted Health, 2020a).

As referenced earlier, specific behavioral characteristics and psychological qualities have been associated with wealth by psychologists and sociologists. Dr. Fallaw outlines the six behaviors that appear most consistently in her extensive research on behavioral habits of the most affluent Americans. These behaviors include frugal spending, focus, consistent investment of time, confidence in financial decision-making, a sense of personal responsibility, and social indifference. Focus (i.e., the ability to avoid distraction and consistently work toward individual goals and priorities) and social indifference (i.e., the ability to ignore others’ priorities and spending habits) were discussed previously. Frugal spending refers to the ability to avoid spending money unnecessarily or extravagantly, even when income is more than sufficient. Spending time budgeting each month, tracking progress, and educating oneself about the world of finances is an investment in the future (TCRS, 2019). The 2019 survey by the Federal Reserve indicates that 60% of those who currently have a self-directed retirement savings account report little to no comfort in managing their investments. Steady practice, education, and curiosity can increase confidence when making financial decisions. While it is unwise to be overconfident and reckless, poor confidence tends to impair decision-making, and these delays can ultimately prove costly. Finally, Dr. Fallaw has found that those who successfully accumulate wealth view themselves in control—consistently, although not absolutely—of their fate. This sense of self-determination is often empowering and prompts individuals to take responsibility for their decisions and actions. By contrast, those who view their financial health to be predetermined and subject to the whims of fate (or the market, economy, etc.) tend toward inaction due to perceived powerlessness (Inman, 2018). 

Investing with Confidence

After eliminating debt and mastering the art of budgeting, a person’s next step in their financial wellness journey is to invest money for the future. While discipline is the most critical factor for financial success, consistency is considered the second. Investing for the future requires a calm demeanor, as the financial market tends to fluctuate. Investors who remain consistent, diversify to reduce their risk, and persevere have the most success as the market undulates. Most experts suggest making the most of any tax-advantaged accounts before investing in other brokerage accounts (Ramsey Solutions, 2020b). The following section will review various tax-advantaged accounts and their differences.

Tax-Advantaged Accounts

The most recent survey completed by the Federal Reserve (2019) indicates that one-quarter of non-retired adults in America have no retirement savings. The most common tax-advantaged accounts are designed to simplify saving for retirement. Once all debt has been eliminated, the TCRS (2019) recommends focusing savings into an employer-matched 401(k) account. Gaskins refers to this as a lifetime account, as investments are meant to grow over decades (Trusted Health, 2020a). Historically, employers provided pension plans to long-term employees. A pension plan is incumbent upon the employer to invest funds appropriately to provide for their retirees. The employee is not responsible for saving for their retirement while working and is promised a predetermined salary (or a percentage of their salary while employed) based on years of service. At this time, many industries have moved away from this system. For most working Americans, pensions have been replaced by employer-sponsored retirement accounts that are ultimately under the employee's control. Employer-sponsored accounts include 401(k) funds, 403(b) funds, and thrift savings plans (TSPs), which share many features (Ramsey Solutions, 2020c). Depending on annual income, some individuals will also be eligible for an IRS tax credit for contributing to retirement savings, called the Savings Credit (TCRS, 2019).

401(k) accounts are offered to employees of private corporations most commonly. Each employee typically has a preselected list of mutual funds from which they can choose. Many corporations offer a match option, contributing a certain percentage of funds to each employee’s account to correspond with the employee’s contributions. If this match option is available, it should be clarified and taken advantage of as soon as possible (TCRS, 2019). Some corporations set up vesting schedules, which define specific conditions that the employee must meet (usually based on years of service) to receive all of the employer’s contributions. Employee contributions are always 100% vested. Users are penalized (10%) for withdrawing the money before age 59.5. The IRS has limited contributions to any 401(k) in 2021 to $19,500 per adult under 50. After 50, the limit increases to 26,000; this is termed a “catch-up contribution.” Total contributions, including from employers, cannot exceed $58,000 (IRS, 2020; Ramsey Solutions, 2020c).

Traditional 401(k) plans allow investors to deposit income before taxes are removed (pre-tax), usually through direct deposit. This type of account is considered tax-deferred, as the money invested is a tax deduction at the time of deposit and is then taxed when it is withdrawn after retirement. A safe harbor 401(k) works similarly but with restrictions regarding mandatory contributions or matching from the employer annually. These employer contributions are usually 100% vested. A Roth 401(k) is funded with money that has already been taxed but grows tax-free, and no tax is imposed at the time of withdrawal in retirement. However, any employer contributions to a Roth 401(k) are taxed at the time of withdrawal (Ramsey Solutions, 2020c).

One-participant or solo 401(k) funds follow the same rules but are designed for the self-employed. These funds allow self-employed folks to contribute up to 25% of their annual salary in an employer match, as long as contributions do not exceed $57,000 annually. Savings incentive match plan for employees (SIMPLE) 401(k) are available for small businesses (100 employees or fewer) to offer their employees an affordable option for retirement savings. These funds function like traditional 401(k) funds but with an annual contribution limit of $13,500 for those under 50 and $16,500 for those age 50 and over. Most require employers to make fully vested contributions (IRS, 2020; Ramsey Solutions, 2020c). 

403(b) and 457(b) accounts are typically offered to employees of nonprofits and tax-exempt organizations. For this reason, these funds are most common among nurses, teachers, and government employees. They are often structured just like 401(k) accounts but may have fewer investment options, lower returns, and higher fees (Ramsey Solutions, 2020c). Frair points out that 457(b) accounts do not charge the standard 10% penalty for early withdrawal (before age 59.5; Trusted Health, 2020c). Similarly, TSP accounts are often provided to federal employees and members of the military. TSP funds typically have five fund options for users: G, F, C, S, and I funds. Dave Ramsey, a personal finance consultant, recommends a mix of 60% invested in C funds and 20% each in S and I funds (Ramsey Solutions, 2020c). 

Do-it-yourself retirement accounts are not associated with a particular employer and are often termed individual retirement accounts (IRAs). Traditional IRAs, like traditional 401(k) funds, are funded with pre-tax dollars and thus taxed upon withdrawal, while a Roth IRA is funded with taxed income and then grows tax-free for the duration. The same age-based penalties apply to IRAs for withdrawals made before the age of 59.5. Traditional IRAs also mandate minimum withdrawals starting at age 72. The IRS limits IRA contributions to $6,000 for those under 50 and $7,000 for those 50 and over. If a person’s annual income is below a certain level or an employer-sponsored 401(k) is not available, contributions to a traditional IRA can serve as a tax deduction. The IRS limits the ability to contribute to a Roth IRA for individuals making over $124,000 ($196,00 for married and filing jointly). For those who exceed the limits, a backdoor Roth IRA is a legal solution. Individuals or married couples can contribute up to the $6,000 annual limit in a traditional IRA and then convert that fund into a Roth IRA. However, individuals should not deduct this amount off their taxable income and must be prepared to pay taxes on this amount when filing their federal income taxes that year. Similar to above, SIMPLE IRAs and simplified employee pension plan (SEP) IRAs are available options for employees of small businesses if offered by their employers. SIMPLE IRAs’ contribution limits mirror those listed above for SIMPLE 401(k) funds; typically, these funds require the employer to contribute. Only small business employers contribute to SEP-IRAs, up to 25% of the employee’s annual salary to a maximum of $58,000 annually (IRS, 2020; Ramsey Solutions, 2020c).

To optimize these investment accounts’ tax benefits, McElroy and Frair suggest that most employees should first contribute to their 401(k) to maximize their employer’s match (usually 3% but up to 6% of their salary). After this amount has been met, the type of account determines the next step: those with access to a Roth 401(k) should continue to fund this account until they reach the annual limit ($19,500 in 2021) or budget. Suppose an employer offers a traditional 401(k) fund, and an employee meets the income restrictions to contribute to a Roth IRA. In this case, a Roth IRA can be funded next, up to the allowable limit ($6,000/year). After this point, the employee can revert to saving within their employer-offered traditional 401(k) fund until they reach the annual limit or budget. A traditional IRA can then be used for any additional retirement savings if desired. Although most contributions to a traditional IRA are tax-deductible, this is not always the case. If an individual (or a couple) has access to an employer-sponsored 401(k), all (or a portion) of their contributions to a traditional IRA may not be tax-deductible if their income is over a specific limit, as set by the IRS (over $66,000 for an individual or $105,000 for a married couple filing jointly; IRS, 2020; Trusted Health, 2020b, 2020c; Ramsey Solutions, 2020c).

Figure 1

Decision-Making Tree: Maximizing Tax-Advantaged Savings Accounts

Taxable Investment (Brokerage) Accounts

First, a couple of key terms should be explained. A stock is simply a piece of a company that can be purchased or sold via an open market exchange, such as the New York Stock Exchange. Stocks tend to be more volatile and offer a higher rate of return. Bonds are loans to a particular entity that grow at a slower pace. Bonds tend to be less volatile and offer a lower rate of return. Brokerage firms are groups of professional investors who provide brokerage funds for individual investors, typically a mix of purchased stocks and bonds owned by a large collective of investors. Some of the most reputable brokerage firms in the US include Vanguard and Fidelity, among others. An index fund is a brokerage fund that consists of a sampling of various stocks from a particular index, such as the Standard and Poor’s (S&P) 500. The expense ratio of a fund is a complicated method of disclosing its associated fees. Lynn Frair says that she aims for an expense ratio below 1% when assessing potential funds (Trusted Health, 2020c). 

Individuals who have maximized their tax benefits (see tax-advantaged plans above) and are still eager to continue accumulating extra capital may want to consider investing outside of IRA and 401(k) accounts with some basic investment strategies to build confidence. As mentioned earlier, a lack of confidence can be detrimental to financial health, so individuals should educate themselves, start low, and go slow (Inman, 2018). The most obvious advantages to brokerage accounts include flexibility, as countless options are available for investing, as well as a lack of contribution or income limits. There are also no withdrawal age limits. A clear disadvantage of this type of account is the need to pay taxes on any capital gains accumulated at the time of withdrawal (Ramsey Solutions, 2020c). Asset growth simply needs to exceed inflation, which varies from 1% to 3%, to prove financially beneficial. Four essential funds are available: growth and income funds, growth funds, aggressive growth funds, and international funds. A diversified portfolio with 25% of each type may help reduce the risk of extreme highs and lows as the market “breathes.” Investor behavior patterns typically fall into the following strategies:

• Value investing is based on the premise of buying stocks when they are least expensive or undervalued.
• Growth investing is based on purchasing stocks of younger companies with more significant growth potential.
• Active trading (or momentum investing) is based on the rapid turnover of different stocks, with frequent trades and a fast-paced short-term strategy.
• Dollar-cost averaging is based on the consistent investment of small amounts of capital regularly over time, regardless of performance or overall market activity.
• In the buy-and-hold approach, stocks are purchased and retained for an extended period in anticipation of long-term growth. 

Each person should determine their strategy, which is primarily based on age, target retirement age, goals for retirement, existing capital, and individual level of risk tolerance. Growth and income funds often blend growth and value stocks. Growth and aggressive-growth funds are best suited for those interested in growth investing, which can be challenging to predict. Exchange-traded funds (ETFs) are typically best for people who want active trading and may not be ideal for wealth-building. Dollar-cost averaging and the buy-and-hold strategy are best suited for long-term investors who may have decades to save before retirement (Trusted Health, 2020a; Ramsey Solutions, 2020b). Investment experts often recommend avoiding headlines or fixating on the markets’ ups and downs. If the market has reacted in a way that has caused prices (and therefore values) to drop, waiting is often prudent. Generally, the market will turn around and come back up. For those who feel the need to react, Lynn Frair suggests buying more stock when prices are down and resisting the urge to sell (Trusted Health, 2020c).

Achieving Financial Independence

Those who reach financial independence have developed enough capital to use their gains (the growth of their wealth) to support living expenses, allowing them to retire early or significantly reduce their work hours and responsibilities. The recommended capital required to do this varies from individual to individual. Still, it can be summarized using what McElroy refers to as the 4% rule. Suppose a person can accumulate 25 times their annual expenses and invest that money wisely in a balanced and diversified portfolio with a reasonable rate of return. In that case, they could deduct 4% of their portfolio to support living expenses for more than 30 years before running out of money. However, this is difficult to accomplish due to various factors (e.g., economic burdens, family responsibilities, unforeseen health concerns), requiring an individual to save as much as 50% of their monthly income consistently to accumulate the needed capital (Trusted Health, 2020b). 

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