3 Advanced Techniques to Elevate Your Financial Strategy

This advice is important, and shouldn’t be dismissed. You can’t reach major success without mastering the basics (and in fact, more than a few financially successfully people could still benefit from a review of the 101 level of financial education from time to time!).

But at some point, you need more. Basic tips can get you started in the right direction, but eventually, you might find yourself asking about more advanced techniques to push your financial strategy to the next level.

If that’s you, consider these 3 advanced moves to make if you find yourself wondering how to elevate and optimize your financial strategy for what’s next.

Balance How You Allocate Your Dollars for Tax Advantages

A common piece of advice for people in their 20s and 30s, who are starting out in their careers and at the beginning of their journey to financial success, is to contribute to a Roth IRA.

The money you contribute to this account is “after-tax” money, meaning you pay taxes on it in the current year. In exchange, when you go to withdraw funds in the future (for your retirement, for example), that money does not count toward your taxable income.

The idea is that you are likely in a lower tax bracket today than you will be in the future – so putting money in a Roth IRA now will give you a way to access tax-free money later, when you’d otherwise be taxed at a higher rate.

You have probably also heard that you should use employer-sponsored retirement accounts like 401(k)s or 403(b)s in order to succeed financially. Given that these accounts have much higher contribution limits than Roth IRAs ($19,500 in normal contributions for 401(k)s in 2021, versus $6,000 for Roths), people tend to pile into these as their income increases – and continue to do so until they hit the max limit annually.

Contributing money to a Roth is a good idea in general. So is maxing out a vehicle like a 401(k). But there are some caveats around taxes to consider:

1. Tax law (and tax rates) can change at any time. You don’t want your financial strategy reliant on an existing law staying as-is for the rest of time, because there are no guarantees. Given that you do not have direct control over tax laws now or in the future, it’s smart to strike a balance between the various tax-advantaged account types you use. If you’ve maxed out your 401(k) for years, you may have a huge chunk of your net worth that you plan to tap into once you retire that will be subject to income taxes in those future years.
2. Roth IRAs come with income limits. If you’re asking about “what’s next” and wanting to advanced moves to make to optimize your financial strategy, there’s a good chance your income is high enough to prevent you from contributing directly to a Roth IRA even if you wanted to… so the advice to put money in a Roth feels a little moot.

The fact that we don’t know what tax laws will look like in the future is a good reason not to throw all your money into any one type of account – be that a Roth IRA or tax-deferred retirement accounts such as 401(k)s or traditional IRAs. You want to strike a balance between what you need to pay in taxes today versus what you can defer until tomorrow.

But how do you accomplish striking the balance that point #1 above seems to advocate for, if you run into problems with point #2 and cannot contribute directly to a Roth IRA due to income limits?

Backdoor Roth conversions may provide the answer.

This is an advanced move to add to your financial strategy, and one that is probably best done with the help of a financial professional to avoid mistakes that could result in penalties from the IRS. But generally speaking, you can perform a conversion if you open a traditional IRA, contribute up to the max allowed for that tax year, and then convert the funds in the traditional IRA to a Roth IRA.

Since the money is initially contributed after-tax, there is no tax on the conversion. There is also no income limit for this strategy and you can do this annually.

(You may need to avoid this strategy entirely, however, if you currently have tax-deferred money in an existing traditional IRA or SEP IRA. This technique then becomes more complicated and less beneficial. Again, in all cases, it is probably best to consult with a tax professional and/or financial planner before you attempt any conversions.)

Roth conversions can get tricky to manage, but the good news is that’s not the only way to get money into accounts that receive the same tax treatments as Roth IRAs.

Another option may be to leverage after-tax 401(k) contributions or a Roth 401(k), assuming your employer’s retirement plan provides you with the ability to do this. You may want to contact your employer to verify exactly how your plan works and if there are any limitations.

Improve Your Investment Strategy

You can’t ignore your specific investment strategy if you want to level up your overall personal financial strategy. It’s fine to start with a simple approach, and advancing your strategy is not the same as adding complications.

But at some point, you should question the complexity of your portfolio and ensure the path you started out on is still appropriate for the end result you want to reach.

People make countless innocent mistakes that hamstring their efforts to invest well, including:

• Using a set-it-and-forget-it indexing strategy, which may not be optimal as your assets grow: …which does not mean you need to stop using low-cost mutual funds and ETFs, or switch to an active management strategy! A secondary mistake here is thinking Vanguard index funds or active stock picking are the only two investment paths available; you can be a passive investor and add more nuance to your portfolio than using 3 index funds for everything may allow
• Accidentally leaving money in cash instead of investing: This can happen anywhere – from your retirement accounts to personal taxable investment accounts. This is another common mistake we see “set it and forget it” investors make. You don’t need to constantly monitor your portfolio, but if you say you want to advance your financial strategy, you must pay attention. Not catching a mistake like this over time is a huge opportunity cost of missed returns.
• Thinking a portfolio is diversified, when it’s anything but: Investing in the S&P 500 is not diversified, because it exposes you to a little over 500 US companies. That’s it. (There are thousands of publicly-traded companies in the US alone, which this index misses entirely.) Investing in Vanguard’s Total US Stock market is not diversified, because it misses the entire global stock market! The US only makes up about half of the global market.
• Failing to acknowledge the real risks of concentration: Having a lot of exposure to a single company’s stock isn’t inherently a bad thing… but we often see people with positions that over-expose them to concentration risk. This is especially true for folks that have equity compensation. You can easily tie both your livelihood (your income) and too much of your portfolio into one company, which leaves you open to some big financial damage should something negative happen to that company in the future (or, if the company is fine… and you simply lose your position there).

So what can you do if you’re looking to advance your financial strategy by improving how you invest? Feel free to take a page from our book as professional financial planners and investment managers.

We follow a strategic asset allocation investment philosophy and focus on globally-diversified portfolios designed to minimize costs and deliver appropriate risk-adjusted returns.

We are not active traders or stock-pickers; while we do maintain a passive investment philosophy, we also do not default to an indexing strategy that you simply “set and forget.”

Our approach is to develop strategies for each client, aligning portfolios to your goals and preferences for risk. We dig deeper into the asset class and investment vehicle decisions to ensure that we are optimizing your exposures to areas we believe will perform best over the long-term.

Rather than simply following what the global index shows for weightings, we dig deeper into asset classes and investment vehicles to ensure that we are optimizing our exposures to areas we believe will perform best of over the long-term.

Part of this involves seeking “tilts” toward certain groups of equities. Again, we are not active managers or stock-pickers, but we are looking for more nuance than just following a broad index, considering small tweaks that could be made to enhance potential return.

There is no guarantee that this will occur in the future, of course, but research lead by Eugene Fama, a Nobel laureate, gives us reason to believe that small cap, value, and profitability tilts can outperform over time.

We leverage the world of mutual funds and ETFs to build our portfolios in-house (which, admittedly, is easier to do when you also have an in-house investment strategist, an experienced CFA®, and this is one of the many reasons to consider working with a professional team rather than DIYing forever).

Finally, we select the proper vehicle for each asset class based on what we believe to be best in-class solution according to our unique strategy and philosophy. This process helps clients achieve investment goals without taking on unnecessary risks along the way.

Increase Your Savings Rate

Even if you already feel good about what you contribute to your long-term investment accounts (like retirement accounts and brokerages where you intend to keep the money for 10 or more years to give it time to grow), “save more” is almost always a valid answer when you find yourself asking, “what else can I do to elevate any personal financial strategy?”

That doesn’t mean you always have to save more, but it’s an option to consider if you feel you’ve done everything else in your control to grow your assets but still have some financial power available to use.

Our baseline recommendation for clients is to save 25% of gross household income per year. We only count dollars contributed to long-term savings and investments toward this total; money set aside for something you want to buy in the next few years is really just delayed spending, as those funds aren’t contributing to your overall asset growth or wealth-building efforts.

Increasing that savings rate to 30% or even 40% of gross income is an advanced move to be sure – but it pays off in the form of more flexibility, more choice, and more progress toward major milestones like financial freedom.

In terms of how to do it, you have a few options:

• Reduce your fixed costs or discretionary spending to free up cash flow that you can then redirect to savings and investment contributions
• Increase your income (which you can do in a number of ways; we outlined some potential paths for doing so here)
• Reconsider how you leverage your equity compensation if you have it; one strategy is to systematically sell shares of company stock as you are able to do so and reinvest the proceeds into a globally-diversified investment portfolio

Try These Approaches to Elevate Your Financial Strategy

These are just a few ways to look into pushing your current financial strategy to more advanced levels. Depending on your specific situation, you could have even more opportunities to optimize your personal finances.

And remember, going from a good plan to an advanced or optimized one does not necessarily require massive shifts or highly complex maneuvers. Making small tweaks, adjustments, and changes along the way can add up to big impacts over time.

Simply maintaining intense consistency is an incredibly powerful way to increase your probability of success and grow your wealth to reach your goals. Feel free to explore all the advanced moves that apply – but at the same time, don’t neglect the simplest things that can move the needle for you in meaningful ways.