At the 2017, Financial Planning
Association (FPA) meeting, Dr. Greg Geisler from the University of Missouri-St.
Louis presented research on a hierarchy of steps to maximize wealth. In
other words, if people have discretionary income to save or reduce debt, what
should they do first?
According to Geisler, Step #1 is
to contribute to a matched employer 401(k) retirement savings plan and/or a
health savings account (HSA). Interestingly, thetax savings on many employees’
contributions to an HSA increases wealth by more than an employer match on the
same employees’ 401(k) contributions.In such
cases, the maximum allowable HSA contribution should be made prior to the employee
contributing to a 401(k).
After deposits to a matched 401(k)
and HSA, which were called Steps 1a and 1b, Geisler suggests the following
order of wealth-maximizing actions:
¨Step #2: Pay off high-interest debts in order
of their after-tax interest rate. For example, various credit cards.
¨Step #3: Put savings into a 529 higher education savings account
if an individual is a resident of a state that offers tax savings for
¨Step #4: Make unmatched contributions to an
employer retirement saving account.
¨Step #5: Pay off moderate after-tax interest
rate debts in order of their after-tax interest rate. For example, low-interest
rate credit cards and an auto loan, home equity loan, and student loans.
¨Step #6: Make deposits to taxable
This hierarchy is not “set in stone,” however.
There may be excellent non-tax related reasons for not following these financial
steps in exact order, such as saving for a house down payment and building an
Many people find it difficult to
manage their finances on weekdays. Between work, commuting, and/or children’s
school activities, there is precious little time. What to do? Carve out one
hour of time over the weekend (or another day, if your days off fall on
weekdays) to do at least one financial management task.
Here are some suggested strategies. Checking your credit report should take no more than 10 minutes. Go to www.annualcreditreport.com and enter the required data or download a mail-in
form. To reconcile your checking account balance, go
online for the balance or use your most recent bank statement.
Net worth calculations involve subtracting the
value of debts (what you owe) from assets (what you own). This will involve
pulling account statements and checking newspaper ads or websites to determine
the value of your home and personal property. To prepare a spending plan, project your future income and
Got a little extra time this weekend?
Take some time to learn something new about personal finance or do one thing to
improve your finances.
In an earlier blog post, I cited research by Morningstar behavioral economist Sarah Newcomb that links a
focus on the future with increased savings. Sounds simple enough, but the “f-word”
(future) can be vague and scary to many people. It is easy to postpone action
today for something that might be two or three decades down the road. For this
reason, some people prefer to use the words “now” and “later” instead of
What to do? Use tools and techniques that
develop your future-mindedness. Below are five ideas:
Achieve success for motivation to move on to bigger goals. For example, if you
complete the 30-Day $100 Savings Challenge a few times, you might ramp up the savings target to $200.
Backwards Thinking- Write
down on a post-it note, on a board or wall, where you want to be and where you
are now. Then, working backwards, insert post-its to identify all needed steps
in between the two points.
Planning- Do the same thing as
Backwards Thinking, but in reverse. Work forward from where you are now to
where you want to be and use post-it notes to identify all needed steps in
between the two points.
to Powerful Stories-
Google “Powerful Personal Finance Stories” and you will find inspiring stories about people like you who took small steps to turn their financial lives
a Glimpse of Your “Future Financial Self”- Research has shown that people who see themselves as an older
person save more money. Web sites like Age
Me and Change
My Face can show you what you look
like as an older person and give you a better appreciation of your “future
In last week’s post, I noted that your
personal identification information (PII) is now basically “out there” in perpetuity.
In addition, proactive measures such as fraud alerts on credit cards and credit
freezes will not deter non-credit related frauds such as tax refund identity theft
and health insurance fraud. For that, we are simply told to “be vigilant,”
probably for the rest of our lives. Hacked data can remain dormant for years
before it is actually misused so you can’t let down your guard. Below are five vigilant
practices to follow for insurance and taxes:
Your Income Taxes Early-
Beat fraudsters to your tax refund. They now have the name, address, and Social
Security number of 143 million Americans, which is everything needed to file a
fraudulent tax return.
your tax withholding, using a new W-4 form, to get a smaller refund or no refund;
you’ll have little or no money stolen if someone uses your PII to claim a
fraudulent tax refund.
for Suspicious Activity-
Beware of “red flags” for tax ID theft such as a tax notice from an unknown
employer. If you receive such a notice, contact the employer to explain that
someone stole your identity.
of Phony IRS Pretexting-
Remember that the IRS rarely contacts taxpayers by phone and never by e-mail.
Remember, the Equifax frausters have lots of information to sound convincing.
Delete or hang up.
Medical Bills and Explanation of Benefits (EOB) Statements- Scrutinize bills and EOBs to look for
medical services that were not received by you. Medical identity theft is very
serious and can potentially lead to death if a fraudster’s medical history
(e.g., blood type and allergies) is co-mingled with a victim’s.