The past year was notable for its challenges, with the highest inflation in decades, rising interest rates, and the lowest US personal savings rate since 2005. Many fear a recession in 2023.
According to Fidelity Investments’ latest study, more than a third of respondents say they’re in a worse financial situation than the previous year. Only 65% believe they’ll be better off in the coming year compared to 72% in the last study.
Be Optimistic For The Future
As we move into the new year, it’s an excellent time for a fresh start, making financial resolutions to strengthen your finances to help you save more, pay off costly debt, and build wealth.
10 Valuable Financial Resolutions For 2023
1. Set Financial Goals
The top of our list is to revisit your financial goals at the beginning of the year. You have a better chance of realizing your goals when you set reasonable and specific ones that pertain to your needs. At the same time, consider economic realities like high-interest rates that may require postponing large purchases like a home or car if you need a loan.
Update your net worth and determine your liquidity position essential for emergencies. There isn’t a crystal ball to prepare for such events, but you should realize that preparation is helpful. Learn from past experiences that may highlight your mistakes, like not saving more money.
2. Create A Budget Or Track Spending
To be financially disciplined, you need to understand how your monthly budget works so you can make improvements where needed. Your budget combines your actual income sources, less total expenses (fixed and variable expenses), and equals the bottom line. Fixed expenses include rent, mortgage, utilities, and food, while variable costs are often discretionary.
Many people have significant financial challenges if they lose a job or have emergency medical costs. When your income exceeds your expenses, you have money to save and add to your emergency fund, pay down debt, or invest in the future.
On the other hand, if your costs exceed your income, you will need to earn more, borrow to pay expenses, reduce spending, or a combination of these. Bring down whatever costs you can. You want to avoid borrowing on your credit cards at higher interest rates, which will put you in a terrible financial bind with an insurmountable debt balance. The average credit card interest rate is 22.37%, which is destructive.
There are various ways to budget so you can monitor your finances monthly. The 50/20/30 budget rule divides your income into three categories: spending 50% on basic needs, 20% on savings and debt repayment, and 30% on wants. Alternatively, if you want to save more, consider paying yourself first by automating your income to go to savings and retirement accounts in a predetermined amount before you pay your bills.
Some people use spreadsheets which may be constraining, while others use budget apps to help you track your spending. Whatever way works for you will help you better manage your finances.
3. Prioritize Savings
By spending less than you earn, you should have more savings to replenish your emergency funds, pay down debt, contribute to your retirement savings, and invest more.
US households saved more money during the pandemic as they stayed home, dined out less frequently, had fewer vacations, and received stimulus money. In 2022, the US personal savings rate dropped to 2.3% in October, the lowest rate in decades, and well below the 8.3% registered at the end of 2019.
There are several ways you can save more money:
Automate savings and pay yourself first from your paycheck to retirement and other accounts.
Be more mindful of spending by living more stingy, especially if your credit card debt is severe.
Cancel premium subscriptions you no longer need, and accept ad tiers.
If you realize your overspending is harming your finances, you may need some motivation to reduce spending. When your overspending and debt accumulation are severe, consider therapy or meeting with a financial counselor to help you make significant changes.
4. Create or Replenish An Emergency Fund
Having savings on hand for emergencies should be a top financial goal. Create an ample emergency fund to cover your necessary and urgent living expenses for up to a year. In regular times, 3-6 months may seem plentiful, but saving for an extended period in a challenging economy is necessary. This money is a cushion for you to feel more financially secure should you lose a job, have a medical emergency for you or your pets, or have a catastrophic flood in your basement.
Invest these funds in liquid investments with quick access. With the highest interest rates in years, you may realize more income from better yields on FDIC-insured bank savings accounts, CDs, or money market accounts.
Think of this fund as a savings cushion that can help pay your monthly bills, including food, rent or mortgage, utility, health care, car, property taxes, and pet care. Significant savings will allow you to sleep better at night. You can read more about the emergency fund and how to invest it here.
5. Save For Retirement – Max Out Your 2023 Contribution Limits
Saving early for retirement is essential for your financial future. Making sure to understand the changes in retirement benefits through the SECURE 2.0 Act, signed by President Biden at the end of 2022.
Enrolling in your firm’s 401K employer-sponsored plan would be best as soon as you start working. Automate a specific amount or percentage of the money you receive from your paycheck into your retirement, investment, or savings account. It’s an easy way to save consistently for your retirement to build this account through compounding.
A Company Match Is Valuable
You’ll want to earn your company match contribution. For example, your company offers a 50% match of your contributions up to 6% of your salary. Suppose you contribute 6% of your $55,000 annual salary, or $3,300. Your employer will match 50% of their contribution of $1,650. The employer’s contribution is like getting free money.
Updated 2023 Contribution Limits
You’ll want to max out your contribution limits as you earn more.
The 401K contribution limits in 2023 increase to$22,500, up from $20,500 in 2022. The catch-up contribution for plan participants age 50 or older will rise to $7,500, up from $6,500.
For highly paid employees, there may be restrictions once their compensation reaches $330,000 in 2023.
The IRA limits increase to $6,500 in 2023, with the catch-up provision remaining at $1,000 for individuals age 50 and older, equaling $7,500. The IRS did increase income ranges for the traditional IRA and Roth IRA contributions which vary depending on your filing status ranging from single, head of household, or married, so check with the IRS.
6. Manage Debt Wisely, Especially Credit Cards
Too much debt will make it difficult for you to achieve financial security and wealth. Manage your debt wisely, and postpone making large purchases like homes as interest rates climb. Make trade-offs that minimize debt accumulation, especially credit cards. As interest rates rise on most loans, paying off your credit card balances becomes overwhelming.
Carrying significant credit card balances is a substantial financial albatross and is a challenging habit to break. It may mean postponing purchases you don’t need. At a minimum, pay your monthly bills on time, but aim to pay your monthly card balances entirely.
A zero-balance transfer credit card gives you a fresh start to pay off credit card debt over an extended period. If you have a lot of high-interest credit card debt and a good credit score, consider a 0% balance transfer card so that you have a typical period of 12 or 24 months to pay off your card balance. Reduce your credit card balances to zero, so you never have to pay the issuer any interest owed.
Additionally, use more cash, which often limits your spending, or buy less until you have more control over this debt.
Find Savings To Pay Down Debt From:
- Annual tax refunds.
- Passive Income.
- Your annual bonus or a raise.
- Extra savings.
7. Review Your Credit Report Periodically
As part of this new year’s financial resolutions, review your credit report periodically. You can rotate among the three credit bureaus to examine your report every few months. You can do so for free through AnnualCreditReport.com.
Lenders rely on our creditworthiness to see our borrowing rates. The higher the score in the 300-850 range, the lower the annual percentage rate (APR) we’ll pay on loans for cars, mortgages, or private student loans. Check for errors you can fix quickly on your report and follow up with vendors when you spot those issues. These errors can hurt your credit.
8. Raise Your Credit Score
Improving your credit score can help you improve access to credit while reducing your borrowing rates and providing financial security. Many parties, including lenders, landlords, partners, and employers, are interested in our credit scores. You can better understand how your credit scores are determined and how to raise them here.
A Better Score Means Lower Interest Payments
For example, a 30-year fixed mortgage rate differs based on your credit score, impacting your loan rate, monthly interest payments, and total interest paid over the life of the loan.
Comparing the best and worst credit scores for a 30-year fixed mortgage loan of $300,000 using the myFICO calendar:
The best credit scores range from 760 to 850, providing an estimated loan rate of 5.736% with a monthly payment of $1,748 and total interest paid of $329,298.
Compared with the lowest credit scores ranging from 620-639, the best scores result in an estimated loan rate of 7.325%, a monthly payment of $2,062, and total interest paid of $442,252, or almost $113,000 more added to the price of the home.
9. Rebalance Your Investment Portfolio
The rebalancing of your investment portfolio is essential as there are usually shifts that take place in your holdings. Some sectors, like energy, were more attractive than technology stocks, so you may want to change exposure within your portfolio.
It was an unusual year for investors, with high market volatility driven by high inflation and the Fed’s persistence in raising interest rates to levels we haven’t seen since before the Great Recession. Instead of a low-interest environment and the Fed’s previous accommodative monetary policy with zero interest rates, yields on Treasury bonds and money markets became attractive for investors in 2022 and are likely to remain that way for 2023.
Consider adding exposure to bonds and money market securities in 2023, given the rise in interest rates, making stocks less attractive than they have been in recent years.
10. Update Your Designated Beneficiaries And Estate Plan Periodically
If you are working, you have some assets. You likely received forms to complete at work, at the bank, or online to designate beneficiaries. Beneficiary designations identify who your intended heirs are for most of your assets. These assets represent the non-probate property. These assets can be efficiently and effectively transferred outside your last will, overriding your estate planning documents.
The mistake many people make when designating their loved ones is that their designations may need to be updated or revised. Review these forms regularly. You should review your documents after significant life events such as loved ones’ passing, marriage, divorce, and births. Updating your records can be done online. We explain more about designated beneficiaries here.
Probate assets are digital assets, real estate, cars, and personal possessions such as jewelry, art, antiques, and other collections. The distribution of most assets by the average person is through designating beneficiaries. However, distributed probate assets must be through a will or a trust, which is part of an estate plan.
Create your estate plan, and review it periodically during your lifetime to have control over your asset distribution to your loved ones. Your plan should be as litigation-free as possible, so your loved ones can avoid the often painful and lengthy probate court procedures.
Having a grateful attitude is always healthy. Let’s be thankful for our loved ones, friends, colleagues, and those who would appreciate our recognition. You made it to another year, and you can make a fresh start in 2023 with sensible financial resolutions and an optimistic mindset.
Take proactive steps early in the year to reshape your future financially. Revisit your financial goals, and go through financial resolutions to improve your budget, save more money, contribute to your retirement accounts, pay off debt, and rebalance your investment portfolio. Make modifications to reflect your needs and economic realities better. Happy and healthy New Year’s to you and your family!
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.