Plug the Gaps in Your Financial Life

A few weeks ago, I discovered that one of my smartest friends has been making some bad decisions with his money.

“Yeah,” he told me after he confessed he was letting hundreds of thousands of dollars sit stagnant in a personal checking account earning non interest at all.. “I know I need to open a high-yield savings account, but I haven’t had time to research the best ones.”

Setting aside the fact that he could have asked me and I could have sent him to the post we wrote on the Best High Yield Savings Accounts, this person should know that investing your savings into any HYSA is always preferable than letting it sit in cash. Not only does he have a PhD in Economics, but he works in venture capital for a living!

Even the most brilliant people do irrational things when it comes to money.

Maybe you don’t think you understand finance well enough and worry you’ll make a bad investment.

Maybe you’re a perfectionist, like my friend, so you waste time and energy conducting exhaustive research rather than settle on an option that is good enough.

Maybe you’re overwhelmed by the number of options available and don’t know where to start.

Or maybe you’re easily distracted by the Next Big Investment Craze or trying to pick the next unicorn stock that you ignore the basics–like opening a high-yield savings account so any extra cash you have laying around can earn a high amount of interest (over 5% as I write this!).

I see the latter happen a lot this time of year. People start the year with big goals and invest all their time and energy into launching or growing their businesses, doubling down on side hustles, analyzing the stock market, and all manner of other–and, yes, valuable–endeavors.

But in all the excitement, they ignore the basics that are guaranteed to help them grow their wealth exponentially with relatively little time and effort.

I encourage you to take the next couple of weeks to check in with yourself. Spring–and tax season–is around the corner.

What better time for a little reset?

5 Things To Do Right Now

1. Set Up or Assess Your High-Yield Savings Accounts

If you’ve read Financial Freedom or have been following my blog for awhile, you know that I recommend keeping most of your long-term savings in the stock market–preferably in the form of a low-fee index fund that tracks the performance of the total stock market.

However, because of the up and down nature of the stock market and tax consequences of withdrawing from these accounts, you’ll want to keep a portion of your cash on hand in case of emergencies or shorter-term needs, like a vacation or a wedding.

Any money you’ll need in the next 5 years or less you should consider keeping it in high yield savings account.

High-yield savings accounts allow your money to earn significant interest (up to 5% right now, though it can vary widely depending on the account itself and the timing) while still letting you withdraw the money quickly and without penalty if you need it.

Make sure you have enough cash in the account to cover at least six months of your expenses in case of an emergency. I am more conservative and keep two years of expenses in my cash account as a buffer for my financial life. If you don’t have any emergency fund yet,, set up automatic deposits every month until you reach your goal.

If you set up your emergency fund account awhile ago, take some time to recalculate how much you would need if your sources of income dried up. A lot can change in a few years; what you saved then might not be enough now. This is especially true considering the record-setting inflation we’ve experienced over the past couple of years. It’s never a bad idea to have a little extra cash in a savings account earning you 4% or 5%.

We keep an up to date list on Bank Bonus of the Best High Yield Savings Accounts if you ever want some recommendations.

2. Open a Brokerage Account for Longer-Term Savings

Once you have enough money saved in your HYSAs for short-term expenses or emergencies and you’ve maximized your tax advantaged contributions to your 401(k), 403(b), and IRAs, then start investing any additional savings into a standard brokerage account.

Brokerage accounts allow you to invest directly into the stock market, which can help you generate higher returns than an HYSA. However, since the increased reward comes with increased volatility, brokerage accounts are great for money you won’t need for at least 5 years.

There is also no limit on how much you can invest in a brokerage account, so it provides an efficient way to grow your wealth once you’ve maximized your contributions to your retirement accounts.

Don’t overthink this process. You can open a brokerage account in as little as ten minutes through a brokerage house like Vanguard or Fidelity. While some firms offer lower rates or better customer service, the differences are largely insignificant if you go with one of the big names.

It’s much better to get your money growing quickly rather than waste time trying to optimize every single detail. Choose a low-cost index fund like Vanguard’s Total Stock Market Index Fund, arrange for automatic contributions, and check in often to watch your money grow in real time.

Here are some of our favorite Brokerage Account Sign-Up Bonuses right now.

3. Organize Tax Deductions for Your Side Hustle

Even if you’re not running your own business full-time, that doesn’t mean you can’t deduct certain expenses from your side hustle from your taxable income. If you’re earning money from a source other than your employer, you can probably find things to write off. Maybe, a lot of things.

Common write-offs include things like gas or transportation, certain overhead costs (if you’re working out of your home), and meals (if there is more than one person present and you’re discussing business).

Gather any receipts you have and talk to your accountant prior to filing your tax return to see what’s possible. At the very least, find out what you can write off for next year, and be sure to start tracking those expenses from now on. If you earn more than $1k a month with your side hustle it’s likely worth setting up a separate LLC, bank account, and even credit card for it to keep your personal and business expenses separate.

Here are some of our favorite Business Bank Accounts for an LLC.

4. Open an FSA or HSA if your employer offers it or if you’re self-employed

Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) allow you to set aside money tax free in order to help pay for future medical and healthcare-related expenses.

FSAs are offered by employers, and, for 2023, the IRS increased the contribution limit to $3,050. If your employer offers this option, figure out how much you anticipate spending on qualifying expenses, and set up your FSA to deduct a portion of that amount from each paycheck.

Keep in mind that you forfeit any money you don’t spend by the end of the year, so this is one tax-advantaged account you don’t want to max out unless you think you’ll be able to spend the max amount in the time allotted.

Still, FSAs are a great way to reduce your taxable income while setting aside money for necessary expenses. You can also access 100% of the funds you budget for at any time, even if you haven’t yet paid the full amount into the plan.

For example, if you decide to set aside $100 a month ($1,200 for the year), but receive a $500 doctor’s bill in February, you can pay the full amount from your FSA even though you will have only paid in $200 so far. In this way, an FSA is essentially an interest-free tax-advantaged loan you give to yourself.

If you are self-employed and have a high-deductible health insurance plan, you likely qualify for an HSA. HSAs are the same as FSAs but with several additional advantages. For one, they have higher contribution limits for both individuals ($3,850 in 2023) and families ($7,750).

More importantly, any money you don’t use rolls over into the next year and, as long as you use any withdrawals toward medical expenses, the money remains tax exempt in perpetuity. You can also change your contribution rate at any time. If you haven’t already, see if you can max out your contributions for 2023.

If you’re self employed here are some of our favorite HSA accounts.

5. Calculate Your Net Worth

Your net worth is a snapshot of how much money you are worth at any moment in time and is the most important number to measure and track consistently if you’re pursuing financial independence.

If you haven’t done so in more than a few months, take a few minutes to calculate your net worth by subtracting your liabilities from your assets.

If you’ve never calculated your net worth, check out Chapter 4 of Financial Freedom for a deep dive on how to calculate this number for the first time. You can also use my free calculator here.

It should take you no more than an hour or two to complete all of the five tasks listed above, but the resulting ROI of that time is invaluable.

It’s easy to become obsessed with the big wins, but we often overlook the opportunities that are right in front of us. As you know there are an infinite number of decisions you can make in your financial life, but some are much more powerful than others in helping you create more freedom.

I hope this encourages you to take some time to check in on the basics of your financial life and make sure nothing is slipping through the cracks. It all makes a difference and compounds over time.