Financial Wellness Nursing CE Course

rement accounts, mutual funds, stocks, bonds, jewelry, or anything else of significant value) minus their liabilities (this includes the value of any debt, such as outstanding loans, mortgages, past-due taxes, credit card debt, or medical bills). Real estate and automobiles can be considered assets (if fully paid off) or liabilities (if outstanding loans or mortgages exist). Net worth is a good indicator of financial stability since it consists of more than income alone. Accurate net worth can be determined with simple addition and subtraction, providing the foundation for economic wellness. This metric should be assessed regularly, and most financial experts recommend updating net worth annually. With this initial financial information, nurses can determine where they are heading and what steps to take to further their financial stability (Federal Deposit Insurance Corporation, n.d.; Inman, 2020).

 

Getting Started

Having a better idea of current economic standing is the first step toward enhanced financial health, and evaluating one's debts is a good place to start. Credit card debt is typical for most people in the U.S. The Experian Consumer Credit Review reported that the average credit card balance in the U.S. in 2023 was $6,365, an increase of 11% from 2022 (Horymski, 2023). This type of debt tends to convey a high interest rate each month. Paying off this debt and freeing money for something else is crucial to financial wellness. According to a recent survey of women's retirement outlook by the Transamerica Center for Retirement Studies (TCRS, 2023), paying off debt is an economic priority for 43% of American women. Common strategies to pay off credit card debt include consolidation, the debt snowball method, and the debt avalanche method:

For individuals with multiple high-interest credit cards incurring monthly charges, consolidating those cards into one monthly payment may allow for a lower interest rate overall.

Alternatively, the debt snowball method recommends ranking various debt sources by size, starting with the smallest and increasing to the largest (usually a mortgage or student loan). This technique involves paying as much as possible to eliminate the smallest debt first while paying the minimum monthly payments on everything else. Two things happen simultaneously once this first (smallest) bill is paid in full: Crossing a bill or debt off the list provides a huge psychological boost. At the same time, 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 (Better Money Habits, n.d.; Cruze, 2023; Trusted Health, 2020; Warshaw, 2023).

The only difference between the debt snowball and avalanche methods is the order in which the debts are paid off. In the debt avalanche method, the debts are ranked according to interest rate and the individual starts by paying off the debt with the highest interest rate. This technique involves paying as much as possible to eliminate the costliest debt first (based on the current interest rate being charged) while making the minimum monthly payments on everything else (Barnett, 2023).

Another type of debt common among nurses is student loans. According to the National Center for Education Statistics, the average nurse graduates from an associate degree program with $23,500 in loan debt and a bachelor's degree program with $30,200 in loan debt. Nurses graduating from a graduate-level program have between $40,000 and $54,000 in loan debt. Loans with higher interest rates can often be refinanced to achieve a lower rate (Morris, 2022). Loan payments should be included in the monthly budget and set on autodraft to avoid late fees (Cruze, 2023).

Finally, while debt is generally considered bad, most financial experts believe wise investments in a reasonably priced car or house to be “good debt” (Inman, 2020).

Most economic experts recommend several other healthy habits outside of eliminating debt to establish and maintain economic well-being. Nurses should develop personal financial priorities and stick to them. These priorities may include saving for retirement, education, a large purchase such as a house or 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 payoff) goals. These goals should be collectively established if finances are shared with a partner. Single individuals should consider establishing a financial accountability partner to maintain their focus on such priorities. It is recommended that this partner be positive (to celebrate accomplishments), honest (to speak up when their partner may lag), and trustworthy (Bank of America [BOA], n.d.-a, n.d.-b; Black, 2023; Cruze, 2023; Inman, 2020; Mochizuki, 2020). In the absence of debt, all nurses should start saving for retirement from their first day of employment. This should be done through a tax-advantaged account such as a 401(k), 403(b), or IRA whenever possible. All money coming in and going out should be included in the budget every month or every 2 to 4 weeks (BOA, n.d.-b; Inman, 2020; Mochizuki, 2020).

Various safety precautions can be financially beneficial in certain situations, such as additional flood insurance (beyond one's 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.

Disability insurance covers a nurse against the loss of income due to a qualifying injury or illness and may be short-term or long-term. Life insurance comes in two primary forms: term and permanent (also known as 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 and lasts for a predetermined span of time. Permanent life insurance is more costly and lasts for 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 (MetLife, n.d.).

A recent survey of retired American women indicates that just 32% use a professional financial advisor, and only 20% frequently discuss saving, investing, and financial planning with friends and family (TCRS, 2023). Just as nurses would never expect their patients to manage chronic diseases independently, nurses should explore local financial advisors/planners to obtain specific, tailored advice and assistance, or consider who among their friends and family may be willing to share their insight. Robo-advisors can be accessed through electronic phone applications or webpages. These robo-advisors can also be set up to make automatic investments on behalf of the investor (Monti, 2023).

Before hiring a financial advisor, an individual should learn the difference between the different types of financial professionals. It is essential to research diligently as there are no federal guidelines on who can give financial advice. The nurse should ask directly about the advisor's fiduciary duty. Some financial advisors must work in their client's best interest, known as fiduciary duty (meaning they work for their client first, not themselves). Others are only held to a suitability standard, meaning the products they suggest only have to meet a standard of "suitability," even if they are not in the client's best interest. Financial advisors also make money differently: Some are fee-for-service, while others make a commission. Another sign of quality within the financial advising world is national certification, as indicated by the Certified Financial Planner designation. Due to inconsistencies in financial advisors, it is vital to complete research and use caution when deciding who will help reach financial goals (Schmidt, 2023).

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 compensation package, including 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 (such as specialty certification or advanced cardiac life support certification) or cost of living? Do they offer other educational benefits, such as professional development, 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 through free seminars or access to one-on-one counseling or advice at predetermined times with a local consultant. Other considerations include commute time and how it will affect the amount spent on transportation. Is there onsite parking, and is there a cost for employees to park? Is there onsite childcare available, and is it free? Is there an onsite gym or gym membership package offered with employment? These are all non-salary factors that can impact the overall compensation of a particular job (Walder, n.d.).

Since approximately 90% of nurses are women, it is worth noting that women often live longer than men and should be prepared to support themselves financially for longer. In addition, 41% of women have spent time serving as a caregiver for young children or ailing parents. Of these, 84% had to adjust their working schedules to accommodate this responsibility. Only 19% of American women report feeling "very confident" that they will retire comfortably. More than half of women (55%) do not expect to retire at 65 or do not plan to retire, and 53% plan to return to work after they retire. Approximately half of the survey respondents indicated that saving for retirement was one of their financial priorities (TCRS, 2023). Studies suggest that less confident individuals are less comfortable managing their finances, investing their money, and asking for a higher salary. Applied psychologist Sarah Stanley Fallaw, PhD, studies individuals who are successful at accumulating wealth and recommends increasing education and knowledge regarding the financial world to reduce anxiety and increase economic confidence (Hoffower, 2019).

While most of the recommendations for financial well-being are based on math and economic data, some concepts are also rooted in psychology and sociology. Sociologists and psychologists note that individuals are affected by those around them, and this applies to finances. Mirroring or brain coupling is the human inclination to subconsciously mimic surrounding people, especially if there is a deep, longstanding emotional connection. Brain coupling is feeling on the same wavelength as another person. It is often described as being able to know what a person is thinking or being able to finish each other's sentences. Mirroring is the replication of another individual's actions. This phenomenon can be seen in social interactions when one person crosses their legs and another person does the same thing.

These behaviors demonstrate how people who are closely associated exhibit similar actions. For example, suppose a person's best friend is taking lavish vacations and planning over-the-top birthday parties for their children. The pressure to follow suit is real and palpable, prompting even the most dedicated and disciplined saver to veer off course. For this reason, it is suggested that individuals spend time with similarly minded individuals or practice social indifference, consciously staying away from social trends. By focusing on individual priorities and attaching a "why" to those priorities, people can practice gratitude for what they have instead of focusing externally on the spending habits of others (Cruze, 2023; Mochizuki, 2020; Turner, n.d.).

 

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 an accountability partner.

The first step in writing a budget is identifying 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 spent, the date, and the associated product or service. Alternative methods for establishing spending patterns are using previous credit cards or checking account statements, saving receipts, or using an online model (BOA, n.d.-b; Cruze, 2023; Monti, 2023).

The term fixed expense refers to monthly costs that generally do not fluctuate. This includes mortgage/rent, transportation costs, student loan payments, health insurance, and utilities (although these fluctuate in amount, they are generally predictable). Variable expenses, such as groceries, entertainment, transportation/travel, and clothing, differ over time. All irregular expenses that do not occur monthly, such as tuition, school supplies, birthdays, and holiday gifts, should also be included in this category. To prepare for these variable expenses, having a calendar available when creating a budget is essential. Adding buffers such as a miscellaneous category can help keep a monthly budget somewhat flexible. If charges repeatedly fall into this flexible or miscellaneous category, consider establishing this line item in a permanent category. These expenses can also be included in a budget with a fixed amount set aside each month to be used when these expenses arise (BOA, n.d.-b; CFPB, 2023; Cruze, 2023; Federal Trade Commission [FTC], n.d.).

Various tools or methods can help those new to budgeting prioritize and predict their expense categories:

The 50/30/20 method suggests that 50% of income should be dedicated to needs (housing, clothing, groceries, gas), 30% to wants, and 20% to savings.

An envelope-based (cash stuffing) system is predicated on using 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.

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. It is similar to the envelope system, except that physical envelopes are not necessary, and the budgeter is not restricted to cash-only payment options. The zero-based and envelope systems are often combined, as these systems complement each other well.

A type of reverse budgeting is the pay-yourself-first budget. This system prioritizes savings and debt goals; the remaining money can be used for wants. This method is more straightforward than other methods since expenses are not broken down and where the money goes is not tracked; the focus is on simply not running out of money at the end of the month (Cruze, 2023; Luthi, 2023a; 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, 2023; Mochizuki, 2020). Some advocate for prioritizing needs (gas) over wants (a music subscription). Fixed expenses are typically the most difficult to adjust or trim (BOA, n.d.-b). 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. 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 automatic debit charges and monthly fees for extra features (Cruze, 2023). The FTC (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 (FTC, n.d.). Another method for keeping tabs on monthly spending is establishing separate bank 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). These accounts can be named to indicate the purpose of the funds in the account. Having separate accounts can be especially beneficial for tracking progress toward a savings goal, such as a vacation or down payment for a home (Black, 2023; Waugh, 2023).

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. Lowering these costs may include eliminating a cable or satellite subscription or switching 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 secondhand 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 pickup reduces impulse purchases, and leaving children at home will eliminate begging for treats, 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 items, such as paper and cleaning products and over-the-counter medications, can be less expensive if purchased as generic or store brands. Reusable products (washable paper towels and stainless-steel water bottles) are less costly per use and more environmentally responsible than their disposable counterparts. Recurring subscriptions and memberships should be listed, carefully prioritized, and reviewed for ongoing necessity (and, when allowed, shared with family or friends). Unsubscribing from email marketing lists reduces inbox clutter and the temptation to shop the latest clearance sale. For those who consistently overspend in a certain 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 high-efficiency 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 fixed expenses, 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 on 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 day/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 can pantry and freezer cleanouts 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 new to budgeting to be patient and give themselves grace, as many struggle to get the hang of budgeting for the first 3 or 4 months (Black, 2023; Cruze, 2023; Warshaw, 2023).

 

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 (Internal Revenue Service [IRS], 2023b). The U.S. Bureau of Labor Statistics (BLS, 2023a) estimates that the median annual income of licensed practical nurses and licensed vocational nurses is $54,620 ($26.26/hour), while the mean is $55,860 ($26.86/hour). For registered nurses, the median annual income in the U.S. is $81,220 ($39.05/hour), while the mean is $89,010 ($42.80/hour; BLS, 2023b). According to the IRS (2023d), both groups appear within the third tax bracket. The 2023 IRS tax brackets (filed in 2024) are as follows:

• 10% for a single income under $11,000/year (if married filing jointly, under $22,000)
• 12% for a single income of $11,000 to $44,725/year (if married filing jointly, $22,000 to $89,450)
• 22% for a single income of $44,725 to $95,375/year (if married filing jointly, $89,450 to $190,750)
• 24% for a single income of $95,375 to $182,100/year (if married filing jointly, $190,750 to $364,200)
• 32% for a single income of $182,100 to $231,250/year (if married filing jointly, $364,200 to $462,500)
• 35% for a single income of $231,250 to $578,125/year (if married filing jointly, $462,500 to $693,750)
• 37% for a single income over $578,125/year (if married filing jointly, over $693,750; IRS, 2023d)

A nurse expects to earn $80,000 this year. How much should they expect to pay in income taxes this year, based on that amount, if they have no significant deductions from their taxable income? 10% x 11,000 = 1,100 12% x (44,725 – 11,000) = 4,047 22% x (80,000 - 44,725) = 7,760.50 1,100 + 4,047 + 7,760.50 = $12,907.50 paid in taxes

Saving for the Unknown

A 2023 Federal Reserve survey concluded that almost 57% of Americans don’t have funds saved to pay for an unexpected expense of $400 using cash or the equivalent (U.S. Federal Reserve, 2023). Financial experts suggest building an emergency fund for unforeseen expenses. This fund is crucial, as even a minor unexpected expense can set an individual back financially or create lasting debt if one is forced to rely on credit cards or a loan. The amount an individual should have in their emergency fund is variable. However, a household's fully funded emergency reserve should contain 3 to 6 months of living expenses. This 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 an 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 a $1,000 emergency fund, focusing on debt elimination, and then returning to establish a more significant savings account with 3 to 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 (Black, 2023; BOA, n.d.-a; CFPB, n.d.; Trusted Health, 2020).

Savings can protect individuals and families from the unexpected. All investments and savings should be reviewed regularly (annually or quarterly, in some cases) to ensure they continue to align with established priorities. It is advised to add beneficiaries to accounts and update them periodically as beneficiaries can change with marriage, divorce, the birth of a child, or the death of a spouse (Black, 2023; BOA, n.d.-a). Significant purchases (cars, houses) should be considered carefully and timed intentionally, not made on an impulse. Separate savings accounts (or a spreadsheet indicating the amount of money designated for each purpose within a primary savings account) can help individuals plan and track progress toward saving for necessities (school supplies, home and car repairs, or medical expenses) or wish lists (vacations, holiday gifts, or a car replacement; FTC, n.d.; Mochizuki, 2020; Waugh, 2023).

In a recent national survey, women reported a total household retirement savings of only $44,000. 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, 2023). According to financial experts, a concrete goal is necessary when saving for retirement. The total amount needed for retirement savings is a retirement number. There are conflicting opinions on how this amount should be calculated. Some experts advise calculating this number based on income. Followers of this method suggest that a savings of 75% to 85% of pre-retirement annual income is needed per year of retirement. Other experts believe that retirement savings goals should be based on expenses. Following this technique requires an individual to estimate how much money they would need annually to live comfortably in retirement and then multiply that number by 25. The resulting number is the amount that must be saved before retirement. When calculating these numbers, it is also essential to consider costs such as medical care and family expenses (weddings, vacations, a new home or car). Additional income, such as pension or Social Security benefits, should also be considered. Individuals receive a form from the Social Security Administration (SSA) upon turning 60 that outlines their benefits based on lifetime contributions (Pant, 2022). It is important to consider that the retirement age for Social Security benefits changes based on birth year, with those born after 1960 only eligible for full retirement once reaching 67 (SSA, 2024).

As referenced earlier, psychologists and sociologists have associated specific behavioral characteristics and psychological qualities with wealth. Dr. Fallaw outlines the six behaviors that appear most consistently in her research on the behavioral habits of the most affluent Americans. These behaviors include frugal spending, focus, consistent investment of time, confidence in financial decision-making, personal responsibility, and social indifference. Focus refers to the ability to avoid distraction and consistently work toward individual goals and priorities, and social indifference is the ability to resist the influence of the priorities and spending habits of others. Frugal spending means not spending money unnecessarily or extravagantly, even when income is more than sufficient. Spending time budgeting each month, tracking progress, and educating oneself about finances is an investment in the future (Hoffower, 2019; TCRS, 2023). A 2023 survey by the Federal Reserve indicates that 61% of working individuals with a self-directed retirement savings account report little to no comfort in managing their investments (U.S. Federal Reserve, 2023). Steady practice, education, and curiosity can increase financial decision-making confidence. While it is unwise to be overconfident and reckless, poor confidence tends to impair decision-making, and resulting delays or missteps can ultimately prove costly. Finally, those who successfully accumulate wealth have a sense of self-determination and take responsibility for their decisions and actions. By contrast, those who view their financial health as predetermined and subject to the whims of fate (or the market, economy, etc.) tend not to act due to perceived powerlessness (Hoffower, 2019).

 

Investing With Confidence

After eliminating debt and mastering the art of budgeting, the next step in a person's 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 maintaining a calm demeanor as the financial market fluctuates. Investors who remain consistent, diversify to reduce their risk, and persevere have the most success. Most experts suggest making the most of any tax-advantaged accounts before investing in other brokerage accounts (Ramsey, 2023c). The following section will review various tax-advantaged accounts and their differences.

 

Tax-Advantaged Accounts

The most recent survey completed by the U.S. Federal Reserve (2023) indicates that over 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 (2023) recommends focusing savings into an employer-matched 401(k) account.

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 retirement while working and is promised a predetermined salary based on years of service. Many industries have now 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), the three of which share many features (Ramsey, 2023a). Depending on annual income, some individuals will also be eligible for an IRS tax credit of 50%, 20%, or 10% of contributions to retirement savings, called the Savings Credit (IRS, 2023e).

A 401(k) account is a retirement account offered to employees of private corporations to assist them in saving for retirement. Each employee typically has a small, 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. Some corporations set up vesting schedules, which define specific conditions the employee must meet (usually based on years of service) to receive the maximum employer contributions. Employee contributions are always 100% vested. Users are penalized (10%) for withdrawing funds before age 59.5. The IRS has limited contributions to any 401(k) in 2024 to $23,000 per adult under 50. After 50, the limit increases to $30,500; this is termed a "catchup contribution." Total annual contributions, including from employers, cannot exceed $58,000 (IRS, 2023a; Ramsey, 2023a).

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 taxed when 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, 2023a).

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 $69,000 annually. A savings incentive match plan for employees (SIMPLE) 401(k) is 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 $16,000 for those under 50, while those aged 50 and over can contribute an additional $3,500 as a catchup contribution. Most require employers to make fully vested contributions (IRS, 2023a; Ramsey, 2023a).

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 like 401(k) accounts but may have fewer investment options, lower returns, and higher fees (IRS, 2023c; Ramsey, 2023a). 457(b) accounts are only offered by government or tax-exempt organizations and do not charge the standard 10% penalty for early withdrawal before age 59.5 (IRS, 2023c). Similarly, TSP accounts are often provided to federal employees and military members. TSP funds typically have five fund options for users: G, F, C, S, and I. Dave Ramsey, a personal finance consultant, recommends a mix of 80% invested in C funds and 10% each in S and I funds (Ramsey, 2023a).

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 73. The IRS limits annual IRA contributions to $7,000 for those under 50 and $8,000 for those 50 and over. The IRS also limits the ability to contribute to a Roth IRA for individuals making over $161,000 ($240,00 for married couples filing jointly). A backdoor Roth IRA is a legal solution for those who exceed the limits. Individuals or married couples can contribute up to the annual limit in a traditional IRA and then convert that fund into a Roth IRA. SIMPLE IRAs and simplified employee pension plan (SEP) IRAs are available options for employees of small businesses if offered by their employers. The contribution limits for SIMPLE IRAs 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 $69,000 annually (IRS, 2023a; Ramsey, 2023a).

To optimize the tax benefits of these investment accounts, financial experts 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 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 annual limit. 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 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 $77,000 for an individual or $123,000 for a married couple filing jointly; IRS, 2023a; Ramsey, 2023a).

Taxable Investment (Brokerage) Accounts

Before proceeding, a couple of key terms should be explained:

A stock is an investment in 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 are a type of investment that involves lending money to another and then receiving interest payments or capital gains at set intervals or at the maturation date. Bonds tend to be less volatile and offer a lower rate of return (CFPB, 2023; District of Columbia Retirement Board, n.d.).

Brokerage firms are groups of professional investors who act as intermediaries between buyers and sellers. There are different brokerage specialties, including stockbrokers who buy and sell stocks on behalf of their clients. In many cases, it is difficult for an outsider or layperson to complete transactions in the exchange market, and working with a stock brokerage can facilitate finalizing transactions. Some of the most reputable brokerage firms in the U.S. include Vanguard and Fidelity.

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, which are often passed down to the investors. Index funds typically have a lower expense ratio due to their passive management. As of quarter 4 of 2023, the best index funds had an expense ratio of 0.015% to 0.45% (Fernando, 2023).

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 strategies to build confidence. The most obvious advantages to brokerage accounts include flexibility, as countless options are available for investing and they lack 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, 2023a, 2024). Asset growth needs to exceed inflation, which averages 3% to 4%, to prove financially beneficial. Four essential stock mutual 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 reliance on one fund (Ramsey, 2023b). Investor behavior patterns typically fall into one of the following strategies (Geier, 2023):

• Value investing is based on buying stocks when they are least expensive or undervalued.
• Growth investing is based on purchasing stocks of newer companies with more significant growth potential.
• Income investing focuses on receiving a steady monthly income from investments.
• Active 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.
• The buy-and-hold approach involves purchasing stocks and retaining them for an extended period in anticipation of long-term growth.

Each person should determine their strategy, which is primarily based on one's age, target retirement age, retirement goals, existing capital, and 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 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 best suit long-term investors who may have decades to save before retirement (Geier, 2023; Ramsey, 2023c).

 

Achieving Financial Independence

Those who reach FI 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. This is known as the financial independence retire early, or FIRE, movement (Costa et al., 2021). The recommended capital required to do this varies from individual to individual, but it can be summarized using the 4% rule. Following the 4% rule, an individual can withdraw up to 4% of their portfolio's value in the first year of retirement. In subsequent years, inflation affects the amount that can be withdrawn. For example, if inflation increases by 2%, the amount that can be withdrawn is adjusted. A misconception of the 4% rule is that individuals withdraw 4% yearly without accounting for inflation. When this technique was initially researched by William Bengen, most individuals who followed the 4% withdrawal rate rule had their portfolio last 50 years. The portfolios of those that did not meet the 50-year mark lasted at least 35 years (Berger, 2023).

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