It's financial planning 2023 time. But, as you prepare to make your personal finance New Year's resolutions, be extra cautious. Beware of high inflation and the risk of a recession.
The ongoing war in Ukraine and the threat of war over Taiwan are fueling that latter risk. Plus, the economy is still vulnerable to shutdowns inflicted by Covid-19 variants.
And all of that is on top of the usual uncertainties about next year's stock market.
So it's important to safeguard your personal finances. Experts recommend 10 new resolutions to achieve precisely that.
Financial Planning 2023: Time To Act
Your job: Fine tune your resolutions to fit your individual needs. "You always (want to) look for what works for you in your own circumstances," said Meredith Stoddard, vice president of Life Events Planning, Fidelity Investments.
Resolution #1: If you don't have an investment plan, make one. "If you're trying to lose weight, it won't happen if you wing it," said financial planner Judith Ward, a Thought Leadership Director for T. Rowe Price. "It's the same with investments."
Decide how you want to reach your goals. Especially with the diversified, fund-focused portion of your portfolio, pick your asset allocation and stick with it. "Focus on each step. This quarter, you'll do such-and-such. Next quarter, you'll do what else. That improves your odds of success."
Rebalance After Market Gyrations
Resolution #2: Rebalance even the diversified portion of your portfolio. Market gyrations over the past year may have distorted your asset allocations away from whatever you settled on in your investment plan. "If allocations are 3% to 5% different from your target amounts, rebalance," Ward said. "But remember, rebalancing taxable accounts can create taxable capital gains."
Resolution #3: "Build up your emergency savings fund," said Paul Schatz, president of Heritage Capital. As a general rule of thumb, people should aim to save enough to cover three to six months of expenses in case they lose their job.
You want enough of a financial cushion so you don't feel pressured to tap into your retirement savings. Let your IRAs and 401(k) keep growing tax-protected for as long as possible.
Pay Down Debt, Lower Expenses
Resolution #4: "Pay down debt," said Ward. In financially tough times, one of your key goals should be to reduce your spending. It's hard to cut fixed costs like a home mortgage, especially at a time when interest rates are rising. Credit card debt is a better target.
Aim to pay off your credit cards so you don't owe interest on outstanding balances. And replace high-interest-rate cards with lower-rate ones. Shop around. The average card rate is 19.77%, as of Dec. 21 says CreditCards.com. Low-rate cards average 16.8%. Likewise, try to pay down student loans from private lenders.
Resolution #5: Cut spending. You can identify your household's discretionary spending by writing out your family's net worth statement or annual budget. If they're sufficiently detailed, those documents pinpoint what's coming in and how money goes out.
Look to end subscriptions to publications and services you don't use much. "Are you paying for Ancestry.com but haven't used it?" Ward said. "Or some video service you don't watch? Cut them."
Keep Saving For Retirement
Resolution #6: Make sure your 401(k) contributions, including any company match, total at least 15% of your pay. Put as much as you can afford into a Roth account if your plan offers that option.
Remember, Roth contributions are made with money that's already been taxed, so weigh the impact on your overall tax bill. (Regular 401(k) contributions are with money that has not been taxed.) Years later, withdrawals from your Roth 401(k) are tax-free. "And unlike Roth IRAs, there is no income-eligibility phaseout for contributions," Ward said.
For example, married joint tax filers with 2023 modified adjusted gross income (MAGI) of $228,000 or more are not allowed to contribute to a Roth IRA. But owners of a Roth 401(k) account face no such barrier.
Financial Planning 2023: Name A Financial Proxy
Resolution #7: Update your estate plan. In an uncertain, financially fraught period when people are looking for ways to save money, out-of-date estate planning documents can cost you big bucks.
So, it's time to create or update your financial power of attorney. That document authorizes your appointee to make financial decisions on your behalf if you're not able to. That could be while you're medically incapacitated.
In addition, check beneficiary designations for financial accounts, including checking, savings, IRAs, 401(k)s and insurance. Especially if you've gone through a major life event like divorce, make sure the beneficiaries are still the people you intend.
Review your medical power of attorney as well, or create one if you don't have it. It enables someone to make medical decisions on your behalf if you can't. Likewise, update or create a living will to spell out medical care you do or don't want in the event that you're unable to communicate those preferences. And it's always good to review your regular will once a year, too.
Check SSA Record And Credit Report
Resolution #8: Check your Social Security record. At SSA.gov, create an account if you don't already have one. Then look at your annual earnings history. Monthly Social Security benefits are based on your 35 highest earning years. "Make sure your earnings history is correct," Ward said. If it isn't, contact the Social Security Administration about fixing it.
You can also use the site to get forecasts of the size of your benefit. Your starting benefits grow the longer you wait to begin taking Social Security. "Seeing how much more your benefit might be if you delay their start can help you and your spouse," Ward said.
Resolution #9: Check your credit report. Your credit report is the basis for your credit score. "That number tells you whether you'll pay less or more or even be able to get credit," Ward said. Scores range from 300 to 850. The higher your score, generally the less interest you'll be charged. A score of 670 and higher is considered good, Ward says. A score of 740 or above is considered very good.
You can get a free copy of your credit report every year from each of the three major credit bureaus, Equifax, Experian and TransUnion, or through AnnualCreditReport.com.
If any of the information in your report is wrong, you can ask to have it fixed. As for your credit score itself, usually providers charge a fee to show that to you. But some card companies, like Capital One, offer users free looks at their scores.
Resolution #10: Create your financial planning 2023 "owner's manual." That is, let key loved ones know how to access your accounts. List where your accounts are and include account numbers and passwords. Also list any important contact people with contact information. Be sure to store this information securely.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and the best mutual funds.
