The Best Ways To Start Financially Preparing for 2023
The end of the year is all about festivities. However, before you get caught up in the holiday mood, it is vital to carve out some time and prepare for the coming year. The New Year is an excellent time to start planning for your financial needs for the future. It can offer you a fresh start and perspective. It is also an excellent time to plan your tax liabilities and look for ways to minimize them. Additionally, you may need to check if your retirement contributions are on track or not and accordingly make changes.
The year 2023 can be particularly challenging as the economy heads towards a recession. The global economy has been in flux since the war between Ukraine and Russia. Therefore, you would also need to concentrate on how to prepare financially for a recession. Inflation has also hit record highs this year, posing a great challenge for most income groups. You would have to make sure to be financially prepared amidst all of this chaos and the challenges that are expected to appear in the near future. If you need guidance on how to prepare your finances for 2023 and tackle recession at the same time, consider consulting with a professional financial advisor who can advise you on the same.
Here are some tips that can help you understand how to prepare financially for 2023 so you are able to start the year on a good note.
What are different ways you can prepare financially for 2023?
1. Start preparing for your tax return
Tax is one of the most significant issues that you need to plan for. Tax constitutes a major part of your expenses. However, you can reduce it considerably by planning well. To start with, make sure you understand the various new tax slabs for the coming year.
Here are the latest tax rates and slabs as announced by the Internal Revenue Services (IRS) for 2023:
|Tax brackets for single filers||Tax rate|
|$11,000 or less||10%|
|$11,001 to $44,725||12%|
|$44,726 to $95,375||22%|
|$95,376 to $182,100||24%|
|$182,101 to $231,250||32%|
|$231,251 to $578,125||35%|
|Tax brackets for married filing jointly||Tax rate|
|$22,000 or less||10%|
|$22,001 to $89,450||12%|
|$89,451 to $190,750||22%|
|$190,751 to $364,200||24%|
|$364,201 to $462,500||32%|
|$462,501 to $693,750||35%|
|Tax brackets for married filing separately||Tax rate|
|$11,000 or less||10%|
|$11,001 to $44,725||12%|
|$44,726 to $95,375||22%|
|$95,376 to $182,100||24%|
|$182,101 to $231,250||32%|
|$231,251 to $346,875||35%|
|Tax brackets for heads of households||Tax rate|
|$0 to $15,700||10%|
|$15,700 to $59,850||12%|
|$59,850 to $95,350||22%|
|$95,350 to $182,100||24%|
|$182,100 to $231,250||32%|
|$231,250 to $578,100||35%|
In addition to this, the standard deduction for 2023 has been revised too. Here’s the table for it:
|Filing status||Exemption amount|
|Married taxpayers filing jointly||$27,700|
|Married taxpayers filing separately||$13,850|
|Head of household taxpayers||$20,800|
Make sure to go through these tables and accordingly decide the tax filing status you wish to choose.
You would also have to choose between standard and itemized deductions. The standard deduction is a flat tax cut that you can claim when filing your tax. It is directly deducted from your taxable income, reducing your overall tax. On the other hand, itemized deduction helps you lower your tax cut by deducting certain qualified expenses. These deductible items can include medical costs, home mortgage interest, long-term care insurance premiums, charitable donations, and a few others.
You can choose any one of the deductions depending on your preference. The end of the year can be a good time to decide. If you choose itemized deductions, this would also be the right time to start collecting proofs, such as insurance premiums, medical and dental care bills, etc.
2. Max out your retirement contributions
Retirement accounts like the 401k and Individual Retirement Account (IRA) are great financial tools for long-term security. However, retirement accounts have a number of rules that you must stay up to date with, such as the contribution limits that get updated yearly by the IRS. As of 2022, you can contribute annually up to $20,500 and another $6,500 as a catch-up contribution if you are over the age of 50 in a 401k. For an IRA, the yearly contribution is $6,000 and an additional $1,000 as a catch-up contribution if you are over the age of 50 for the year 2022. For 2023, you can contribute up to $22,500 in a 401k and $6,500 in an IRA. The catch-up contribution for a 401k has been increased to $7,500. However, it remains the same for the IRA, i.e., $1,000. Additionally, the contribution limits for 403(b), 457, and the Thrift Savings Plan are the same as a 401k ($22,500 and $7,500). The contribution limit for SIMPLE (Savings Incentive Match Plan for Employees) retirement accounts is increased to $15,500, while the catch-up contribution limit for those aged 50 and over is increased to $3,500, up from $3,000.
These limits are applicable to both Roth and traditional accounts and play a critical role in financial planning. Your future financial security, as well as peace of mind, largely depends on your retirement accounts. These accounts, along with other investments, will account for a significant chunk of your retirement nest egg. Therefore, ensure you know how to max out a 401k plan to reach your target amount quickly. If you have not yet maxed out your contributions or taken advantage of the catch-up contributions, the end of the year is a good opportunity to make up for the lost time. Maxing out your contributions also helps you get a higher employer match that enables you to save more money. Your employer may choose to match a certain percentage for every dollar you earn. This is as good as free money. So, try to make the most of it for the financial year.
You can continue contributing for a concerning year until the income tax filing deadline. If you file a six-month extension, you can extend the contribution deadline to October 15 in a typical year. However, there may be changes to this depending on several factors, and it is advised to stay up to date by referring to the official IRS website.
It is also important to review your 401k and IRA plans or any other retirement account that you may have. Check the investment options, administrator rules and provisions for loans, etc. You may not have as much flexibility in the case of a company-sponsored 401k account, but you would have plenty of choice in an IRA. So, make sure to pick a traditional or Roth IRA with the best return to maximize your gains.
3. Create an emergency fund
An emergency fund is one of the essential things to focus on right now. Many experts and statistics have revealed that the chance of a recession in the U.S. within the next 12 months has reached 100%. According to Fitch Ratings, the U.S. will see a recession from the second quarter of 2023. With the recession around the corner, the need for cash or liquidity is going to be of utmost importance. Recession can trigger many unfavorable events, such as unemployment and falling stock prices. In fact, significant layoffs have already begun across the market. Meta recently revealed to have laid off 11,000 employees. HP has announced that it will be cutting down on 4,000 to 6,000 jobs over the next three years. These announcements, along with several others, can be concerning. This is why it is essential to create an emergency fund and be prepared for any eventuality that may occur in the next few years.
If you are wondering how much emergency fund you need, the simple answer is at least six to eight months of your monthly income. However, given the extreme circumstances of inflation and recession in the economy, you may aim to save more. Liquidity can be your most vital financial asset in diverse items. It can offer mental peace and lower the chances of taking on debt. Therefore, make sure to have an emergency fund ready that can be easily accessible as and when you need it.
4. Strategize debt management
Debt reduction or elimination can be one of the financial resolutions for the coming year. Debt is a major deterrent to your economic growth. It pushes you back and burdens you. High-interest debt can also come in the way of your savings and force you to cut your investments or retirement contributions. This not only affects you in the present but also jeopardizes your future. Therefore, create a budget for the New Year with a major focus on debt. Prioritize settling any high-interest debt that you may have at this point. You can also focus on your credit card. Make sure to use your credit card prudently, so you get to save money through discounts and air miles. Let it be an asset and not a liability. You can talk to your credit card company and get to know the various deals it offers. Pick a card that is aligned with your income group, profession, lifestyle habits, etc. Most people blindly choose credit cards without research. Avoid this mistake so you can use the deals to your advantage.
Lastly, check your debt-to-income ratio and credit score. This will help you understand your dependence on debt and make suitable changes. If you have a low credit score, you will find it hard to get a loan later. Try to lower your score by settling your debt and reducing your debt-to-income ratio.
5. Review your investment portfolio
Reviewing your portfolio yearly is a great habit to ensure your portfolio is always aligned with your financial needs and goals. Check your investments and see how they have performed this year. This will help you decide if you should continue investing in them or shift your money to a different financial asset. A portfolio review also allows you to rebalance it. If your asset allocation has changed from the original ratio, you can consider rebalancing it to suit your present financial goals and objectives. Make sure your investment portfolio is well-diversified. Try to keep a blend of all asset classes and sectors to ensure low risk. Putting all your eggs in one basket may not be ideal if the market takes a downturn, as you risk losing all your money at once.
When reviewing your portfolio, make sure to take your personal and professional life events of the past year into consideration. For example, having children is a significant life event that also requires you to change your investment plan. You would need to buy insurance, invest or save for the child’s college, etc. You would also need more money to cover the increased household expenditure. Likewise, if you get a promotion and are drawing a higher salary than the previous year, you should increase your savings or investments rate too. You can increase your retirement contributions, buy new stocks, or invest in mutual funds, among several other options. When you review your portfolio, keep these changes in mind and plan for them prudently. If you need professional assistance in this step, you can also consider hiring a financial advisor. Do not see this as an expense. In fact, try to consult a professional and sort out your finances for the coming year. This will offer you a clear plan of action without errors.
6. Educate yourself when it comes to managing your finances
Educating yourself is a constant process. The world of personal finance is complex and dynamic. Rules, laws, and trends are continually changing, and the only way to understand them is by being up to date. When preparing for 2023, make sure that you improve your financial acumen and understanding of the market. Read books, watch the news, follow blogs, or take a short course. Financial advisors can also help you understand different products and investment strategies. You can choose any of these options as you see fit. Just make sure to take out time and make yourself financially sound as soon as possible. Further, avoid making financial decisions backed by peer pressure or hearsay and instead base your decisions on research and data.
Understanding how to prepare financially for 2023 and putting the right plan into action can eliminate mistakes and provide peace of mind. Making a plan for the coming year also improves the chances of actually following through instead of procrastinating. These checkpoints can help you focus on the critical aspects and channel your time and attention to things that can help you succeed in life. Try to incorporate them in your routine. Hiring a financial advisor to start afresh with professional guidance may also be advised.
Use WiserAdvisor’s free advisor match service to find 1-3 highly qualified and vetted financial advisors that are suited to meet your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.