Make a financial plan for the new year

What can you do to make 2023 your best financial year ever? While we can’t control the pace of inflation or the threat of recession, we can offer you some good financial advice — courtesy of two financial planners, who told us what they’re thinking about as they help their clients plan for 2023.

We talked to John Shrewsbury, Retirement Income Certified Professional® (RICP) and co-owner of GenWealth Financial Advisors, and John Morrison, Chartered Financial Analyst (CFA) and Head of Portfolio Management at Secfi.

Here’s some of the advice they’re giving their clients this year. And here’s how you can incorporate their advice into your own financial planning.

Focus on what’s important to you

Shrewsbury advises clients to worry less about how the economy is doing and keep their focus on their own financial goals, whether it’s to save money, build their retirement accounts, or fulfill other financial new year’s resolutions. “Economic headlines may sound frightening, but they often have little to do with your month-to-month well-being.”

Instead of basing your financial plans on what the markets are doing or what the experts are predicting about inflation, ask yourself how well you’re sticking to your budget, saving for the future and managing your financial risks. “Focus on your economy, as opposed to the economy,” says Shrewsbury.

Morrison advises clients to handle economic fluctuations by thinking long-term and letting compound interest do its work. “The best way to deal with inflation and the threat of recession is to set an investment strategy that you can stick with for the long-term and then actually stick with it. Put the power of human creativity and compounding in your corner.”

If you want to learn more about how to set effective financial goals, read our 2023 financial resolutions guide.

Avoid selling investments in a bear market

We’re still in a bear market, which is good news for people who like to buy low — but bad news for people who are ready to sell. If market volatility makes you anxious, remember that you don’t necessarily have to sell any of your stocks, bonds or investments until the market improves.

“Investors need to understand that it is not a bear market that brings permanent damage to their portfolio, it is having to sell assets in a bear market,” Shrewsbury explains. “Selling locks in losses and makes them permanent.”

If you are interested in selling your losing investments, Morrison suggests taking advantage of tax-loss harvesting, which allows you to use your investment losses to lower your tax burden.

“Tax-loss harvesting is top-of-mind,” Morrison told us. “Markets are down, so there are likely opportunities to harvest your losses and reduce your tax bill this year. Additionally, you can also set yourself up for lower taxes in future years.”

Once you’ve sold your investments, you can put that money right back into the market — but be careful not to put it into a substantially identical investment, otherwise it could be considered a wash sale and you might not be able to claim your loss on your tax returns. “When harvesting losses, people should definitely beware of wash sale rules,” Morrison explains.

If you want to know more about how to navigate our current investment market, we’ve got a detailed guide of how to handle a bear market in your 20s, 30s, 40s and 50s.

Avoid high-priced real estate

If you’re planning on becoming a homeowner in 2023, be aware that you’re buying into an extremely high real estate market. While there are still opportunities for first-time home buyers, this might not be the year to consider investing in a bigger home — or buying a second property for rental purposes.

“Regarding the housing market, we would counsel our clients to consider the increased monthly cost of financing a home due to the rapid increase in interest rates,” Shrewsbury explains.
Also, housing has not significantly retreated from the record-high prices of last year, which would give us pause in recommending a home for investment purposes.”

If you are thinking about buying a home in 2023, make sure you take steps to protect your mortgage in a worst-case scenario — and if you are considering an adjustable-rate mortgage, read our guide to the pros and cons of ARMs.

Build a balanced financial portfolio

How can you build a balanced financial portfolio in 2023? First, make sure you’ve set aside an emergency fund in a high-yield savings account. Then, pay off any outstanding credit card debt. That way, you’ll be able to make long-term investment moves without having to worry about running out of cash or racking up high-interest debt.

As you build your portfolio, think about dividing your investments into three categories — low-risk, medium-risk, and high risk. These types of investments generally yield low, medium, and high returns, and are the foundation of a long-term investment strategy.

“We recommend that clients use their investable assets to create a time-based, tiered-risk strategy that allocates funds in three separate buckets,” Shrewsbury explains. “This allows for some money to go to low-risk assets to be used for near-term discretionary expenses. Over time, we would harvest profits from the moderate and growth buckets to re-fill the low-risk investments that have been spent over the short term.”

If you aren’t working directly with a financial advisor on your investment strategy, a roboadvisor can help you set up your buckets and manage your portfolio. You can also manage your portfolio on your own, using target-date funds or index funds to help you keep your risk levels balanced.

Don’t try to time the market, though. “Timing markets and market moving events is a dangerous game to play,” says Morrison. “It usually doesn’t end well.” Instead, start the new year by focusing on your own goals, managing your own risk and making long-term investments in yourself, your career, your savings and your retirement.

If that includes finally getting term life insurance to provide financial protection for your family, or taking other important estate planning steps like making a will, there’s no time like the present. That’s the way to make 2023 your best financial year ever.