Taking Control of Your Financial Life: A Step-by-Step Guide

Do you feel like you should get your finances in order, but don’t know where to start? Do you find yourself spooked by headlines advising strategic investment moves that make you wonder if you are missing out? In this article, you will get strategies that reduce overwhelm and help you take control of your financial life. For a step-by-step guide on how to make that happen, read on.

Effective financial management requires making decisions in the right sequence. Once you take care of bigger picture choices and no-brainer opt-ins, how to manage the rest will become clearer and easier.

Step 1: Build a Strong Financial Foundation

De-risking key elements of your financial foundation reduces stress by decreasing vulnerability. You can achieve this by maintaining a three-to-six-month emergency fund, eliminating high-cost debt, and being properly insured.

Setting aside money to cover surprise expenses or an unexpected decrease in income can help diminish financial stress should your car break down or if you experience a job layoff. This can also keep you from having to borrow money or sell investments at an inopportune time.

Carrying high-cost debt is never a good idea, especially with some credit cards currently charging rates north of 30%. Taming the debt beast by first paying off cards charging the highest interest rates is a smart money move. And if you view debt in a different category than your investments - beware. This form of mental accounting is a trap. Paying high rates on some money, while investing “other” money that, chances are, will earn a return lower than the interest you’re paying, is not the kind of arbitrage you want.

Dial in the right insurance. For example, review your auto insurance coverages and deductibles. Ask yourself, "If I were in an accident, could I afford the deductible?" If not, selecting a lower deductible may be your better option, even if your premium rises a bit. Maybe you actually could afford it and then some. In this case, consider whether the premium savings you gain from raising the deductible make sense for you.

Look at your coverage and decide if it is appropriate given the value of your car. Paying for comprehensive and collision insurance on an old car may not be worth it. Consumer Reports suggests dropping those coverages when the premiums exceed 10% of the car’s value. Caution: before dropping any coverage, make sure that if your car were damaged, you could cover the cost of its repair or replacement.

Step 2: Accept Free Money

If you work for an employer that provides a 401(k) retirement plan, you may have access to a matching program. When you contribute a percentage of your salary, many employers will match your contribution up to a certain limit. A popular formula is an employer match of 50% on the first 6% of pay[1]. This makes for a guaranteed 50% return on every percentage you contribute up to that 6% threshold. Some employers even offer a one-to-one match up to a maximum percentage. In this case, you get a 100% return on those contributions. This is free money. Check out the terms, noting what percentage contribution the employer will match and whether it is attached to a vesting schedule.

While many plans immediately vest, meaning that even if you leave the company, you get to keep all of your employer’s contribution, some employers use a vesting schedule. In 2025, about a quarter of the companies surveyed by The Vanguard Group attached a 5 to 6-year vesting schedule to contributions made to employees’ accounts. These formulas permit employees to keep an increasing percentage of the employer match each year, entitling them to the full amount only in years five or six.

Step 3: Assess Both your Risk Tolerance and Your Risk Capacity

Even if you love the thrill of adrenaline-spiking activities, smart financial management demands making investment decisions that reflect not only how well you can stomach the market’s ups and downs but also whether you can afford the volatility. If you rely on your investments to cover life’s expenses, you run the risk of a shortfall. If a market downturn means you won’t be able to make rent, you don’t have the risk capacity to be fully invested. Dialing in the right amount of risk that you can both tolerate and afford is a critical first step before deciding what will likely have the biggest impact on how well your investment portfolio does, your asset allocation.

Step 4: Formulate your Asset Allocation Strategy

When devising your asset allocation strategy, start high level. This means considering the distribution of your investments across asset classes, such as stocks, bonds, and cash. Until you have that figured out, don’t worry about which specific products to choose. Your asset allocation should reflect both your risk tolerance and risk capacity. An emphasis on stocks suggests you are both willing and able to take on a higher level of risk, while the less volatile bond and cash investments reflect a more conservative orientation. Your risk profile will be influenced by your personal timeline, both in terms of when you will retire and expectations around upcoming income and expense items.

Once you have determined your overarching asset allocation strategy, you can move on to product selection within each category. While certain characteristics of any particular product will be determined by how it is packaged – i.e., as a mutual fund, exchange-traded fund (ETF), separately managed account, etc. – factors to consider include fees, degree of diversification, historical volatility, tax efficiency, and manager experience.

Step 5: Make it Tax Efficient

Tax-Efficient Accounts

There are many ways to invest in a tax-efficient manner, from 401(k) s to traditional IRAs, Roth IRAs, and so on. Here are some of the trade-offs to consider as you evaluate each option.

When you invest in a traditional 401(k), the money deducted from your paycheck isn’t taxed at the time of contribution. This lowers your taxable income today. The funds won’t be taxed until you make withdrawals in retirement. Similarly, contributions[2] to traditional IRAs are often tax deductible.

Some employers also offer Roth 401(k)s. In this case, you pay tax now, and unless you withdraw the funds early, you won’t pay any additional tax in the future. Similar rules apply to Roth IRAs. Just keep in mind, there are income thresholds that impact the ability to directly invest in a Roth IRA or to take a tax deduction on a traditional IRA when you or your spouse is covered by a workplace retirement plan.

Bucketing

A good way to think about structuring a tax-aware portfolio is to look at the Roth versus traditional IRA decision as both a timing and a tax-bracket strategy. If your tax bracket today is currently lower than what you project it to be in the future, contributing to a Roth is a good option. Conversely, if you expect to drop down to a lower tax bracket in the future, you are better off taking the tax deduction today.

If your tax bracket at the time of the initial investment is the same as when you make the withdrawal, all else being equal, your ultimate net-of-tax outcome will be the same whether you invest in a traditional or Roth account. Even so, diversification by tax bucket can help you manage your lifetime tax liabilities so that you can keep more of what you earn. Here’s why: in retirement, you can apply a bucketing strategy when making withdrawals. There are three key tax types: 1) tax-free, which are your Roth and Health Savings Account (HSAs); 2) tax-deferred, your traditional IRA and 401(k)s; and 3) taxable, your standard brokerage account.

Traditional IRAs and 401(k)s have required minimum distributions (RMDs) that are taxable income. Since 2023, generally, the age at which you must begin to withdraw funds from these accounts is 73. This income not only affects your taxes, but also whether you are subject to higher Medicare premiums[3]. Qualified[4] Roth distributions aren’t taxable income and don’t have RMDs.

Timing and Tax Brackets

Having a combination of Roth and traditional retirement accounts can give you some control over which tax bracket your income falls into when you are living off your accounts in retirement. Strategically sourcing needed income from different accounts can help you achieve tax efficiency and smooth out the amount of taxes paid each year.

The strategy involves being mindful of your marginal tax rate[5], capital gain thresholds, and the risk of crossing into higher tax brackets. This means you may want to withdraw funds from your traditional IRA in a given year to “fill up” a relatively lower tax bracket, thereby reducing future required minimum distributions. Absent doing that, in future years you may pay a higher percentage tax on those same dollars simply because you are pushed into that higher tax threshold. This can be particularly consequential when the next bracket is significantly higher, e.g., 22% versus 12%.

With taxable accounts, managing the amount of taxable gains generated in a given year can result in tax savings. This involves being mindful of the 0%, 15%, and 20% long-term taxable gains rates relative to your marginal tax rate on ordinary income. For example, you could pair a withdrawal from a taxable account with a distribution from a traditional retirement account, ideally filling up a lower tax bracket while lowering the future tax liabilities.

Devising the right strategy for your unique situation can be tricky. Working with a tax advisor to devise a customized retirement withdrawal plan may allow you to achieve substantial lifetime tax savings and possibly extend how long your money will last in retirement.

Tax Loss Harvesting

Another strategy to manage your tax liability is tax loss harvesting. Selling a losing position in your taxable account provides realized losses that may be used to offset realized gains, thereby reducing your taxes due. Just keep wash sale rules in mind when implementing the strategy; for 30 days before or after selling a security, be sure to avoid buying a “substantially similar” security

Over time, assembling a portfolio of accounts diversified by tax treatment may serve you well, as you will have more dials to turn when you are required to start withdrawing from your retirement accounts.

Step 6: Document and Automate

Once you have worked through the steps above, memorializing your plans in a one-page document can help keep you on track. Include your dollar-amount target for an emergency fund, triggers for a car insurance review (e.g., when your car logs a certain number of miles, or when you buy a new car), your risk capacity (i.e., what can you not afford to lose), your target asset allocation, tax loss harvesting plan, and retirement account strategy. Then, consider how to make implementation and ongoing management easy. Automate what you can. This goes beyond having your employer move a percentage of your earnings into your 401(k) each pay period.

Several methods can eliminate the need for ongoing tinkering. One is: invest in a balanced mutual fund with an asset allocation profile that matches your risk tolerance and risk capacity. A dynamic version of this is a target date fund, where the target date is when you expect to retire. The asset allocation of this type of fund is adjusted over time, so that your portfolio becomes more conservatively positioned as you get closer to retirement.

There are also robo-funds where you direct your preferred asset allocation, which will be rebalanced automatically for you. A fee-only advisor can also be a good way to offload the management of your assets.

The benefit of any of these options is that your account will be objectively rebalanced. This eliminates the temptation to let your winners run, to overbuy in an up market, or to sell underperforming asset classes, behaviors that can lead to undesirable buy-high, sell-low actions. Human nature can make it hard to stay disciplined and stick to a pre-determined strategy during volatile markets or amid distracting headlines, whether they express euphoria or fear. Managing the process on your own can work, as long as you stick to your strategy unless circumstances truly warrant a re-evaluation; for example, you come into a windfall, change your target retirement date, or lose your job.

Just keep in mind, frequent rebalancing isn’t advised. A study by the investment company, Vanguard, suggests that annual rebalancing is optimal. Mark your calendar and review your portfolio to see if your mix of asset classes still matches your targets. If not, trim back the positions that have gotten too big and reinvest in those that have shrunk below your minimum percentage of portfolio.

Tax loss harvesting is best done more frequently than rebalancing, with once a month or quarterly being a good cadence. Losses can be used to offset gains and up to $3,000 a year of income.

The Rewards

A methodical approach to structuring a personalized, holistic financial management strategy can help reduce stress and facilitate well-reasoned decision making to support your goals. Automation and a set plan can make ongoing management simple and efficient, allowing you to get on with living your life without being unduly distracted by disorganized finances.

Disclosures:

Kelly Hicks does not provide accounting, tax, or legal advice. The information herein is educational and general in nature. Kelly Hicks makes no guarantees regarding the use of this information. You should carefully consider your specific needs and goals before making any decisions. Tax laws are subject to change. To determine how to apply this information, you should consult with a financial advisor, tax professional, or attorney.

[1] “How America Saves 2025”, The Vanguard Group, 2025

[2] If your income disqualifies you from making a tax-deductible contribution to a traditional IRA, submit IRS Form 8606 with your tax return in years when you make an after-tax contribution or take a distribution. This documents the portion of your IRA that has already been taxed (your “basis”), which can help you avoid double taxation on those dollars.

[3] Income related adjustment amount (IRMAA) is an additional income-driven premium for Medicare Parts B and D.

[4] With few exceptions, to be considered qualified, a distribution must occur at least 5 years after the initial contribution, and you must be age 59½ or older.

[5] A marginal tax rate is the percentage tax applied to your last dollar of taxable income. You pay a different tax rate on your income dollars as you move up the tax brackets. In the U.S., the progressive tax system means not all of your income is taxed at the higher rate.