Preparing Your Finances for 2023: Financial Resolutions for the New Year
Philip H. Weiss, CFA, CPA, RLP®
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Do you like to make Financial Resolutions for the New Year? If you do, how long do you keep them? The track record of those who make any type of New Year’s Resolutions is not great. Check out these statistics:
If you think those figures look bad, the same article says that among those with similar goals who do not set a resolution, only 4% find success six months later.
Why do we so often fail?
I’ll add one more to the above list. We set resolutions without including actionable, measurable steps. For example, don’t just say you want to exercise more in the year ahead. Resolve to exercise five minutes a day or 30 minutes a week. Then build from there. Track your progress, too. That makes it harder to forget you made the resolution in the first place.
Holiday Thoughts
I wanted to take a moment to wish everyone Happy Chanukah, Merry Christmas, and Happy New Year! May you all have a wonderful holiday season. I wish you much happiness, joy, and success in 2023.
I also have a quick story. When our kids were much younger, I started what has now become a family tradition. On the labels for each of their Chanukah gifts, I would write who it was from. But I didn’t write it was from either my wife or me. I used the name of someone associated with the gift in some way.
For example, if we gave them something connected to the Yankee as a gift, the label would say it was from their favorite player. Our kids are older now, and I thought they had outgrown this tradition. I WAS WRONG!
Diana wrapped most of the kids’ gifts on Saturday while I was out food shopping. We agreed to start Chanukah a night early as we’re going to be out of town for part of the holiday. But I hadn’t labeled any gifts. Our kids were not happy. They didn’t want to open gifts without labels. All their gifts now have a proper label. Some “gifters” are easier to identify than others, but they all have some type of connection.
This experience also reminds me of the importance of creating simple family traditions. Sometimes we don’t even realize we’re doing it. Hopefully, our kids will continue this one with their future families.
Heading into 2023
As the start of a new year approaches, we often reflect on the past and consider what we would like to accomplish. Revisiting our personal and financial goals can help set us up for success in 2023 and beyond.
In 2022, investors have had to deal with inflation’s effects as well as the fear of a possible recession. This makes it more important to review our personal and financial goals. A difficult economic environment can be challenging. Sometimes we can take preventative steps that improve our ability to face these challenges. Adopting some or all of these financial resolutions for 2023 could help.
2023 Financial Resolution — #1: Save More/Spend Less
When it comes to saving more, I’m a big fan of the following three words: Pay Yourself First! Automate the contributions to your different savings accounts. Never let the money hit your checking account. It’s hard to spend money you don’t have. All things equal, saving more without increasing your debt levels will cause you to spend less, too.
In addition, set measurable targets. For example, if you contributed 8% of your salary to your 401(k) this year, set a goal of increasing it to 9%. If you contributed $3,000 ($250/month) this year to your child’s 529 to help fund their college education, try to increase it to $3,600 ($300/month) this year.
It can be easy for our spending to get away from us during the holiday season. Consider what you can afford based on what you’ve spent in the past. If times are tight, focus on the people that matter most to you. Set an amount ahead of time that you don’t want to surpass. Be disciplined and plan.
If you don’t think you have the discipline to follow through, find a friend or family member you trust to hold you accountable. If you don’t work with a financial advisor or have a financial plan, you could also consider working with one. Your financial advisor can hold you accountable as well. If you’d like to discuss your situation, please schedule a free call.2023
2023 Financial Resolution — #2: Revisit (or Create) Your Household Budget
Review your monthly income as well as your fixed and variable expenses. Fixed expenses include costs such as rent or your monthly mortgage payment. These figures generally don’t change from month to month. Variable expenses include amounts spent on entertainment and travel. Determine your financial priorities for 2023 and use these to help develop your ideal budget.
When setting a budget, consider the 50/30/20 rule. This budgeting method’s basic rule of thumb allocates your monthly after-tax income to three spending categories:
For example, if your monthly after-tax income is $6,000, $3,000 should be allocated to your needs. Needs may include your mortgage or rent, your utility bills, minimum loan repayments, and basic groceries.
Following through with this example, you would have $1,800 per month to pay for wants. Wants may include travel, shopping, entertainment, dining out, and non-essential groceries.
That leaves you with $1,200 per month for your savings goals or additional debt repayment. If you have credit card debt, you can choose between two repayment methods. One involves paying off the smallest balances first. The other begins with paying the balance with the highest interest rate first and working your way down from there. When faced with this situation after graduating college, I chose the latter method. It costs less in the long run. But you can choose whichever method would give you the most momentum psychologically and help you repay any outstanding balances aggressively.
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2023 Financial Resolution — #3: Prepare for the Unexpected
Life includes risks, especially when it comes to investments and finance. The market’s returns this year provide a stark reminder that all investment roads don’t lead to the sky. We will have down years as well as up years. Beyond the markets, our financial lives can be upended by many other surprises. These include job loss, disability, death, natural disasters, or lawsuits.
There are two ways to prepare for the unexpected. The first involves building — or maintaining — an emergency fund. Make sure you have adequate funds set aside for a rainy day. An emergency fund can help you avoid liquidating portfolio assets during periods of market volatility. It can also help keep you financially afloat when unforeseen life circumstances arise. For example, if the US economy goes into a recession and unemployment rises, are you prepared if you or a loved one experiences a change in their job situation?
The general rule of thumb suggests holding three-to-six months’ worth of living expenses in a safe, liquid account. In today’s higher interest-rate environment, you have more attractive options for your emergency savings account. I discussed some options in this blog.
You also want to make sure you have adequate insurance coverage. Among the types of insurance to consider include the following:
Your situation may not warrant carrying all the above types of insurance. Your needs can be evaluated in conjunction with your financial plan.
2023 Financial Resolutions — #4: Make Sure Your Financial Plan is on Track
Are your retirement savings on track? Do you think you can maintain your quality of life and live your desired lifestyle in retirement? Have the current bear market or other factors temporarily thrown you off course? If you work with a financial advisor, now would be a good time to check in and discuss what you can do to get back on the right path.
On the other hand, if you remain on track to achieve your goals, you can talk to your financial advisor about any new goals you may want to work toward.
I often tell clients that a financial plan is a “living document.” In other words, nothing is set in stone. Your goals or objectives may change. Markets and life don’t go exactly as we expect them to either. Your plan should be reviewed and updated regularly.
If you don’t have a financial plan or haven’t set any related goals, please schedule a call. We’d be happy to share some suggestions to help you get started.
2023 Financial Resolutions — #5: Protect Your Estate
Many think that only the wealthy need an estate plan. But there are simple steps everyone should take. Make sure you have properly designated your beneficiaries. You should have a will. If you have minor children, make sure that attorneys and the courts don’t decide their fate.
Properly designating beneficiaries for your financial accounts allows your assets to transfer quickly and easily to your beneficiary(ies). Be sure to update your beneficiaries after major life events such as marriage, divorce, the birth of a child, or death. Remember that if you divorce and do not change your beneficiaries, your ex can still inherit your financial assets.
A will is about more than transferring assets. It aids in the support and care of your dependents. It can help your loved ones avoid the costs that come if you die without a will. Your will can also spell out plans to repay any debts including credit cards or mortgages.
You should also have advanced healthcare directives and a healthcare proxy so that others know what type of medical care you want. This way others won’t have to worry about making the wrong choice when it comes to your care.
2023 Financial Resolutions — #6: Plan Your 2023 Contributions
For 2023, you can contribute up to $22,500 to your 401(k), up from $20,500 in 2022. Those over 50 can contribute an additional $7,500. Usually, contributions are set as a percentage of your salary. For example, assume you have a current salary of $112,500 and are less than 50 years old. In that case, you would contribute 20% of your salary to your 401(k). ($22,500/$112,500 = 20%).
If you’re eligible, plan to fund your traditional IRA or Roth IRA. If you’re not, and your account configuration allows it, fund a Backdoor Roth IRA contribution instead. You can save up to $6,500 a year in one of these accounts in 2023. Individuals who are age 50 or over can save an additional $1,000.
If you have a high deductible healthcare plan, you can save as much as $3,850 for an individual or $7,750 for a family in 2023. Individuals aged 55 or older can contribute an additional $1,000. If you have an HSA, invest the funds if possible. Don’t treat the account as use-it or lose-it. ( See here for more on the benefits of HSAs.)
2023 Financial Resolutions — Closing Thoughts
As stated earlier, when making financial resolutions, focus on setting small, measurable goals. Reaching a goal or milestone can increase your chances of sustained success. Start small and adjust from there. For example, if you want to lose weight, you are more likely to be successful if you resolve to lose two pounds a month than you will be if you say you want to lose 25 pounds this year. The same applies to starting an exercise program or saving more money.
Plus, if you achieve one of your goals, you can always increase your target. I have benefited from that approach both personally and professionally.
Creating a mental picture ( or vision) of what success looks like can also help. Picture your success in your mind. It might sound like a trick, but it can help.
I hope you find the above discussion helpful. If you have questions or would like some help determining what might be best for you, please schedule a free call. I’ll gladly answer any questions and assist in whatever way I can.
I’ll be back next week with “Apprise’s Five Favorite Reads of the Week.”
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