There's no better time than at the start of a new year to clean up your finances and boost your net worth.
When it comes to managing money, nobody's perfect. Many succumb to lifestyle creep and spend more than they can afford. Others derail their portfolios with self-inflicted moves like trying to time the market without following proper rules. Some wing it without a financial plan or monthly budget.
But that doesn't mean there aren't moves you can make in January to improve your financial wellness in 2024.
It's reset time.
"The beginning of the year is when we should be getting our lives in order, whether it's our finances or our health," says Rob Williams, managing director of financial planning at Charles Schwab.
Here are steps you can take right now to improve your personal finances:
Review Your 2023 Money Moves For More Net Worth
Step one is figuring out what the heck you did with your money last year. Good money habits, like saving 10% to 15% of your pay and sticking to a budget to avoid debt, boost your odds of financial success. Poor financial habits, such as not having a budget or not saving for retirement, cause stress.
"Look back and say, 'What worked for me financially last year? What didn't? What do I want to change?' " Williams said. "Getting your head around that is an important first step."
Let the numbers do the talking, though.
Scrutinize those credit card statements, savings accounts and 401(k) balances and asset allocations like a forensic accountant. Data doesn't lie. It exposes financial truths.
Are you carrying high-interest credit card debt? Why? Is your cash still earning 0% instead of 4% or 5%? What gives? Is your retirement account stuffed with too much cash? What's keeping you on the sidelines?
Is your model mix of stocks relative to bonds and cash way out of whack due to the stock market's big rally in 2023? Why haven't you rebalanced your portfolio so it's in sync with your risk tolerance and time horizon?
Net Worth Helper: Track Your Spending With An App
Where's all your money going? Is lifestyle creep making your retirement less secure? It's time to find out.
Use an expense-tracking app to gain color around how you are spending your disposable income, says Rob Leiphart, vice president of financial planning at RB Capital Management.
"Sometimes just seeing what one is spending on things like 'meals out' is eye-opening," said Leiphart.
Create A Budget To Boost Your Net Worth
If you don't have a budget, make one. "That's our No. 1 New Year's resolution," said Williams. Cash-flow planning is key, he adds.
Do a line-by-line analysis of how much income is coming in each month and how much is going out with everyday expenses, nonessential purchases and savings.
Look for spending categories that you can cut back on, such as dining out or sipping high-priced signature cocktails. You want to free up cash for savings. "Always pay yourself first," said Dan Casey, investment advisor and founder of Bridgeriver Advisors.
As a rule of thumb, a reasonable budget consists of 50% going toward essential spending like rent and food, 30% on discretionary spending such as vacations and entertainment and 20% toward savings.
One technique to save on nonessential expenditures is to pick one activity per month that you're not going to spend on. Maybe you don't go out to eat in February or swear off clothes shopping in March.
And if you have a big expense coming up this year, start setting money aside.
Plan, Plan, Plan For A Higher Net Worth
Not having a financial plan or failing to stick to the one you have means you lack a financial road map. And that likely means you don't have any guardrails in place to avoid financial mishaps.
"Make sure you have a plan," Williams said.
Ideally, you want to ensure that you address short-term issues, such as credit card debt, cash flow problems or an underfunded emergency fund.
So, set your safety net up now.
The benefit of dealing with short-term financial problems is it frees up capital to meet longer-term goals like saving for retirement or your college.
"You can keep those long-term items on autopilot," said Williams.
Pay Off High-Interest Debt
Carrying a balance on a credit card from month to month is an expensive proposition. The annual percentage rate (APR) charged on credit card purchases, on average, is now 20.74%, according to Bankrate.
To find out how big paying interest is hurting your bottom line, review your December or year-end credit card statement and look for the total dollar amount of interest paid in 2023.
If you don't like the number you see, it's time to do something about it.
"With interest rates so high, anybody who has high-interest credit-card debt ought to look to pay that off completely, if possible," said James Sahagian, a certified financial advisor at Ramapo Wealth Advisors, part of Steward Partners Global Advisory.
Easier said than done, of course. Especially if there's not enough cash left over each month.
That's why Sahagian recommends shifting your debt burden to lower-rate borrowing options, such as a home equity line of credit, or HELOC (which now, on average, charges roughly 10.16%), to pay off your cards. If you have savings outside your rainy-day fund earning very little interest, you might also consider using that available cash to pay off your plastic, says Sahagian.
Lock In High Savings Rates To Turbocharge Net Worth
While Wall Street is debating when the Federal Reserve will start cutting interest rates, you should be taking steps to lock in the plump yields now available for longer.
"In all likelihood, rates have peaked and are going to come down," Sahagian said.
So, if you're still only earning the 0.47% yield that Bankrate says the average money market account is paying, now's the time to shift that money into a higher-yielding account at another financial institution, if necessary. It's still possible to earn 4.75% on a money market account, according to Bankrate.
Another way to lock in yield is to invest in fixed-income investments with longer durations. Setting up a CD ladder that includes one-, two-, three-, four- and five-year certificates of deposit, for example, will enable you to lock in today's higher rates for up to 60 months.
Now may also be a good time to consider putting more money to work in longer-term bonds, such as the 10-year U.S. Treasury note, which now yields around 4%, says Sahagian.
Contribute To Roth Retirement Accounts
The tax cuts put in place by former President Donald Trump are set to expire in 2025. That means taxes on income will rise next year unless Congress acts to extend the cuts.
And if tax rates go up, that makes Roth IRAs and Roth 401(k)s more attractive. Roth accounts are funded with after-tax contributions, but your money grows tax-free, and you won't pay taxes on qualified withdrawals. Roth investments are prudent if you think taxes will be higher in the future than they are now.
"If it's appropriate for your personal situation, take advantage of Roth options and pay tax today (that likely will be lower than next year's levies) to create tax-free funds for your future," said Leiphart.
You might also consider converting a traditional IRA to a Roth IRA before 2025, adds Rob Burnette, investment advisor representative at Outlook Financial Center.
Save More For Your Future
If you're not yet contributing the maximum amount allowed to your 401(k), move the needle on your savings a little at a time.
"Increase your contribution to your workplace retirement plan by 1% (or more) and do this annually," said Leiphart. "The goal is to make small, incremental changes, increase contributions, and create better outcomes in retirement."
Socking a little more of your paycheck away this year will help you get closer to the savings target of 10% to 15% of your income that Wall Street recommends.
You don't want to miss out on any help from your employer, either. So, make sure you contribute enough to your 401(k) to at least get your employer's full matching contribution.
"If they match 4% of your salary and you are only contributing 2%, you are leaving 2% of your salary on the table and passing up free money," said Leiphart.
And when it comes to your investments, now's the time to make sure your asset allocation is still the right fit for your goals. And rebalance if necessary. If last year's rally has upped your stock exposure to 70% of your portfolio (and your plan calls for just 60%), sell some stocks to get back to your preferred asset allocation.
Sahagian also recommends easing up on last year's big winners, such as the Magnificent Seven megacap tech stocks, and adding exposure to areas of the market that didn't fare as well in 2023, such as small caps and value stocks.
"You know, put some money into the other 493 stocks in the S&P 500," said Sahagian.
