Strategic Flexibility

Because money decisions aren’t binary

This week, I wanted to cover something a bit less technical. We will be talking about the power of optionality.

I’ve seen and heard it many times, I’m sure you have as well. Someone saying, “Always max out this account” or “never do that with your money.”

The world of never and always creates a very tough mold to break out of. In some cases, people are over-optimizing and too much optimization can become a barrier to flexibility.

My absolute favorite part of personal finance is the idea of flexibility. It almost never has to be all or nothing.

So many aspects of personal finance are not binary and ensuring that you have reviewed all the options is so important.

Here’s a few examples of what I mean:

Split funding goals:

I love split funding. It feels like we’re accomplishing two things at once. One of the most common split funding scenarios we see is putting a cash reserve in place and increasing retirement contributions.

Depending on the household, they may want to hold 9-months’ expenses as cash. But when they hit 3-months’ worth, they may also want to be saving for retirement.

In this scenario, once the 3-month reserve is met, it may make sense to begin adding some retirement savings to the stack.

Some Roth, some pre-tax:

Tons of people get tied up with how to contribute to their 401(k) plan. Generally speaking, in the higher tax brackets, individuals tend to favor the pre-tax and when in lower brackets, they tend to favor Roth.

For those who are in the middle-ground in the tax bracket hierarchy, a split decision may take the cake. It allows for a diversified pool of retirement funds, which is usually not a bad thing!

And for those who are doing Roth contributions, it is very likely that any employer match is ending up on the pre-tax side! Great diversification right off the bat!

Funding multiple accounts:

Some get really caught up in this. There is no rule that says a Roth IRA needs to be maxed out before a brokerage account is opened. There is no rule that says a 401(k) must be maxed out before a Roth IRA is opened up.

In a perfect world, I think more often than not, young professionals gain so much from having the full stack.

Of course, it may be tougher in the beginning to hit the maximum to a 401(k) and Roth IRA while still having funds to invest in a brokerage account.

But getting diversified tax-location can be so huge. Young professionals have some major purchases coming up! That brokerage account can add significant flexibility to their asset base with absolutely no age restrictions on withdrawals.

Selling a portion of a position

It happens! People can get very attached to their holdings. This is so prevalent when equity compensation is in the picture.

But here’s the thing… it is never all or nothing with this. There is always the ability to take some off the table. Could be 10% of the position, could be 90% of the position.

We have options and these options can allow us to feel more confident in the choices we make.

I know many would hate to sell a position only to watch it gain some serious momentum and at the same time, this one position may be making up a significant portion of their net worth. Concentration like that can become a real risk.

Finding a happy medium can help to mitigate that FOMO feeling as well as the potential concentration risk.

Alright, there are 4 very common scenarios in which I believe we need to be wary of absolutes. It seems silly to write out, but remembering that optionality exists is key. Work through different scenarios: Does it really have to be all or nothing? Am I diversified across tax locations?

Most people have more than one goal in life. Personal finance works the same way.

This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.