As 2022 comes to an end, you’ll want to put yourselves in a position for financial success to make the most of 2023. This past year was incredibly challenging for many people throughout the country. Inflation has taken a toll on already tight family budgets. Retirement funds have shrunk, and savings disappeared. Extensive layoffs, the crash of cryptocurrency, and the unaffordable housing market have led analysts to believe a recession is imminent.
Despite the hardships, there have been positives. Many workers experienced pay raises after a period of stagnation, specifically those who switched jobs. Although it’s not exactly clear what 2023 will bring, here are nine steps that you can take to prepare your finances for the future.
Update your budget.
As inflation and interest rates continue to rise, it’s important to ensure your budget is up-to-date. At the start of the new year, take the time to create new financial goals and track your expenses. This is also an ideal time to audit your subscriptions and cancel any services you no longer use. With this new budget in place, you’ll be better equipped to handle any financial surprises. If you are looking for help crafting a budget that works best for you and your family, numerous resources are available. Reddit’s personal finance hub is one option, as well as various apps such as Capitol, You Need a Budget, Tiller, or Personal Capital.
Create a strategy for managing your student loans.
Due to the ongoing litigation, the federal student loan payment moratorium has been extended. This means that you won’t have a bill due in January. However, it’s possible that your payments will resume in the near future. If you have some money on hand, the extension is an excellent opportunity to review your finances and determine where the extra cash can be used. If your daily expenses are covered, a high-yield savings account is a good place to put it. Rising interest rates will allow you to earn a little bit more on your balance, and you can access it when the payment pause ends.
Open a high-yield savings account.
High-yield savings accounts are a good option if you’re looking to earn a steady income. Some banks, such as Capital One, currently offer yields as high as 3% on these accounts. Setting up automatic transfers is also a great way to build up a high-yield savings account. This eliminates the need to move the money every month. Start by setting aside a small amount of money each month to help you reach your financial goals. If you find that larger goals can be intimidating, try setting multiple smaller goals instead.
Prioritize paying down high-interest debt.
Rising interest rates can make credit card bills more expensive. The average interest rate on a credit card has reached 19.34%, the highest ever. This can be disastrous to those who are already struggling with high inflation. To minimize the impact of rising interest rates, conduct a debt analysis to determine if you’re getting the right deal that aligns with your goals.
Put away a bit more for your retirement fund.
In 2022, you have the option to invest up to $20,500 in your workplace 401(k) if you are under the age of 50 or up to $27,000 if you are 50 or older. This money is taken from your taxable income, allowing you to pay lower taxes. You can also transfer your year-end bonus directly into your 401(k) account. The deadline to make contributions to your retirement account is April 18, 2023, but you can get ahead of the deadline by making them earlier. If you cannot contribute the maximum amount to your accounts, consider raising your contributions by just 1%. Although this may appear to be a trivial amount, it can accumulate significantly with time.
Spend down your FSA.
For most health insurance policies, the end of the year is the deadline to spend any funds in your flexible spending account. If you’re looking for items that are eligible for your FSA funds, FSAstore.com and Amazon’s FSA store are great places to start. You may be surprised to learn about the items eligible for purchase.
Check your credit report.
Now is the perfect opportunity to review your credit report. Doing so can help protect you from potential fraud and give you an insight into what potential lenders may see when they pull your credit. This can be especially useful if you consider a major financial decision, such as purchasing a property.
Evaluate tax loss harvesting opportunities.
Considering the choppy market conditions this year, you might want to talk to a financial planner about using tax loss harvesting with your taxable investments. This is a tactic that minimizes capital gains taxes. It involves selling assets that have dropped in value and replacing them with similar yet different securities so that you can use the losses to offset any taxable gains.
Consider a Roth conversion.
When the market is down, it’s time to think about changing from a classic to a Roth IRA. This shift would mean a lower tax bill when converting and tax-exempt protection when a market rebound occurs. When you contribute to a Roth IRA, you will be paying taxes on the money now, so you don’t have to worry about it later. This can be a great benefit since all qualified withdrawals from your Roth account will be free from income taxes. Moreover, you won’t have to meet any required distribution mandates, so your money can keep accumulating until you need it for retirement.