Financial Tips For 2023
A new year often brings investors to review their investment portfolios, to assess the previous year’s returns, and to recalibrate their portfolios in light of current economic headwinds.
However, this year perhaps more than ever in living memory, more and more expats are also taking stock of their personal financial budgets, to see how they can reduce their outgoings and expenses in light of soaring inflation, cost of living expenses and increasing interest rates.
In 2023, no matter the size of their investment portfolio, every investor must take a more holistic view of their income and expenses and seek to optimise their own personal ‘P&L’ account over the next twelve months, in addition to ensuring their investment portfolio is ready to weather any unforeseen economic storms which may arrive during 2023.
Here are some key financial tips to help you improve your financial bottom line in 2023.
Build a rainy-day fund
With a lot of uncertainty in the financial markets and wider global economy, there has never been a better time to start saving for a rainy day. Traditionally, good financial advice has been to advise clients to keep a minimum of 3 months of outgoings in a cash account in case of emergencies. However, in recent years, which have been characterised by low interest rates and high returns in other asset classes, long term cash savings accounts, which earned a poor rate of interest, fell out of favour. As a result, many investors kept very little in a savings account.
We would advise our clients to keep a minimum of 3 months, but preferably 4 to 6 months of their outgoings and expenses in a high yielding interest rate account to weather any future financial storms which could arrive during the course of 2023.
Historically, this seemed ‘old fashioned’, out of style advice - with cheap credit, low interest rates, and global stock markets rising exponentially, very few investors would consider keeping 6 months outgoings in ‘dead money’. However, today’s savvy investor needs to be ready for all eventualities.
Review credit card debt
As central banks increase interest rates to reduce inflation, this is having a knock-on effect on interest rates on consumer credit, with credit card interest rates being the hardest hit. Credit card companies pass on increased cost of funding to consumers, and interest rates are soaring.
Therefore, an easy way to save money is to sit down and review your credit card expenses. If possible, ensure that all payments are made in full at the end of every month, to avoid high interest charges. Whilst it may seem an obvious tip, it is often one which is often overlooked, especially for the average expat investor, whose average income is generally higher than most.
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Reduce monthly outgoings
This next financial tip follows on from the above tip to reduce credit card debt. In the era of ‘buy now, pay later’, and ‘interest free for 12 months’, most consumers have become accustomed to buying what they wanted, when they wanted, safe in the knowledge that if their current income or savings could not cover the purchase, then cheap finance would enable them to make the purchase.
In today’s economic environment, with higher inflation, cost of goods, and increased cost of financing, this economic model is no longer viable. Whether it´s upgrading your car, or booking a luxury holiday, consider the effect such a purchase will have on your annual budget, and whether the money can be put to better use, such as increasing your pension contributions, or paying off a credit card.
How to invest wisely in 2023
2022 was one of the worst years on record in the financial markets. For example, the share price of Tesla and Meta, previously the darlings of the Nasdaq, each collapsed by more than 65%. Other previously hyped asset classes such as cryptocurrencies had a similarly disastrous year. Bitcoin, seen as one of the more stable cryptocurrencies, dropped more than 65%, and other coins suffered even worse.
In 2023, the focus becomes much less on picking winning sectors or individual stocks, but on creating a ‘bullet proof’ portfolio able to withstand any further shocks to the global economy. The priority for 2023 is for your investment portfolio to beat the rate of inflation. It is a basic economic truth that inflation erodes the value of money. Therefore, the focus of investors in 2023 needs to be on preserving the real value of capital.
Investing in real estate is always a good option if you are looking to invest for the long term. As inflation increases, so do rental prices, which can increase rental yields. Whether you choose to invest in real estate through buying a new build apartment in the UK or invest in a REIT (‘Real Estate Investment Trust’), an investment in real estate will help hedge against the effects of inflation and is a proven addition to any investment portfolio.
Inflation linked bonds are also a good option for reducing the overall volatility in your investment portfolio. These types of bonds can hedge against inflation risk, as investors can access increased yields during periods of high inflation.
Conclusion
Whilst the days of double-digit investment returns and cheap finance may be over for the foreseeable future, with sensible investment planning and financial budgeting, the prudent investor can still preserve their capital and create positive investment returns in a challenging economic environment.
In terms of personal finances, the focus must shift to reducing unnecessary expenses, eliminating expensive credit card debt, and building a rainy-day fund to weather any unexpected diversions from your long-term financial plans.