You’ve already done the hard work to build a solid financial foundation. You have likely established a healthy emergency fund, mapped out a strategy to pay down debt, built good credit, and secured the proper insurance coverage. Now that your income is rising and your career is advancing, you might feel like you're ready for a new level of planning. It's time to move from simply building security to creating a roadmap that gives you the power of choice and total control over the life you want.
Define what money means to you
Once you master the art of setting SMART-ER goals, it's time to dig a little deeper. We encourage you to start thinking about your values and specifically what meaning you want to give to money in your life.
As you level up your income, your roadmap expands and offers you a higher number of choices. When you take the time to define the life you want, you can see how money is there to support it. This puts you in control of the decisions that help you live well.
Get proactive about your taxes
It's an unavoidable reality that higher income leads to higher taxes. However, you don't have to just accept a higher bill without a strategy.
What you're looking for here is a change to your marginal tax rate. If your new income pushes you into a higher tax bracket, the planning decisions you make may need to change. It's also important that you don't overlook your withholdings. When you truly understand your taxes, you put yourself in control. You can create a strategy to reduce your taxes today and in the future.
Stop lifestyle creep before it starts
It's completely okay to want to spend your hard-earned money on a few things for yourself. That reward is part of why you work so hard. However, "lifestyle creep," which is sometimes called expense creep, is a real challenge.
Your best course of action is to be proactive. You want to create a spending roadmap that puts you in control of your cash flow rather than wondering where it all went.
Nail the 20 in the 50/30/20 framework
This is your best chance to reach your 20% savings goal, which we view as the target for good financial health. The trick is to pay yourself first. We recommend you save first and then spend what is left.
Commit to putting 20% towards your longer-term goals before spending the rest on other categories. This simple habit keeps your savings rate high even as your spending naturally increases.
Look beyond your employer-sponsored plan
Once you have the basics down, here are four ways to level up your investment strategy.
1. 401(k)
You should look to max out your plan contributions for the tax break and added retirement savings. Before you do so, make sure you consider the plan fees, your investment options, and your liquidity needs.
2. Backdoor Roth IRA
For high earners, direct Roth contributions aren't always an option. This is where the backdoor Roth IRA enters the picture. The strategy involves contributing to an IRA, choosing not to deduct it on your tax return, and then converting the account to a Roth IRA.
This is a powerful move, but be careful. Make sure you understand what other IRA assets mean for your taxes and that you don't run into the pro-rata rule.
3. Taxable brokerage account
A taxable account is funded with after-tax dollars and is subject to taxes each year. There are good strategies to minimize your taxes here, but you need to pay attention to details. You need to consider dividends, capital gains, how to manage losses (and avoid wash sales), and how to use tax-efficient investments like exchange-traded funds.
4. Health savings account (HSA)
Most HSAs give you the ability to invest your cash. However, this doesn't mean you should invest every single dollar. We suggest having a plan for how much cash you need for near-term health costs and what you can invest for long-term growth.
Invest in your own growth
The most important investment is you. You're likely just getting started, and you want to level up your career, your financial knowledge, and your personal life. Here are a few tips to help you get to the next level.
Invest in your future
Don't hesitate to invest in your personal and professional growth. Put some money to work on yourself. You might hire a life or professional coach, learn new skills, take new classes, or pursue a new professional designation. You can also make time for travel and experiences. Remember that money is a tool to put you in control of the life you want.
Give back
This isn't necessarily about getting your name on a building, though maybe that will happen one day. This is about finding a cause you believe in. You can give back to your community through your time (volunteering), treasury (money), and/or talent (expertise). You will make great connections, and you'll find that giving is a great way to bring meaning to your money.
The final word
You have a lot of choices regarding relationships, travel, career, and how to save and invest. Your roadmap for your money needs to look at all facets of your life, not just your bank account. Smart decisions are important, but your planning should put you in control of the life you want to live.
The Facet difference
At Facet, we believe financial planning is about more than just investment returns. It's about how your money interacts with your values, your career, and your family. That's why You'll work with a CFP® professional who works with you to build a comprehensive roadmap for your entire life. Our flat-fee membership model means we never charge a percentage of your assets, so our advice is objective and focused on helping you thrive.
