5 Steps for Financial Success in 2023
Don't let another year slip away; get on the path to financial freedom with these five easy steps.
It’s a New Year, and if you have not taken the steps necessary to begin your journey to financial freedom, why not start now? Here are five steps you can immediately implement to improve your financial situation.
Step #1: Establish an emergency fund.
A general rule of thumb is that you should have 3 to 6 months of your living expenses available in case of emergency. The amount of cash one should hold can vary depending on your immediate and long-term needs. Having an adequate emergency fund will help you avoid the cycle of debt.
Often, when we have an insufficient rainy-day fund and an unexpected emergency happens (major home repair, medical bill, car breakdown, job loss, etc.), our lack of financial resources severely limits viable solutions and we are forced to borrow money at high-interest rates to cover the expense. Additionally, not having the financial means to cover the need adds to an already stressful event. Planning ahead and bolstering your cash holdings will enable you to calmly evaluate the situation and decide how best to proceed without the additional emotional stress of lacking the financial resources to address the problem.
For more guidance on how much cash you may want on the sidelines consider our previous Substack: How much cash should you have?
Where should you stash your cash?
We have updated this month’s list of competitive Money Market, Savings Account, and CD rates available nationwide. If you have excess cash in a bank account, consider moving some into a more competitive cash equivalent.
Available here, this list is updated as of December 31, 2022.
Step #2: Create a debt repayment plan.
First, create a list of all your outstanding debt (mortgage, car loan, credit cards, personal loans, etc.), paying particular attention to high-interest debt.
Focus first on paying off what I call “useless" debt—debt that does not move you forward financially. Credit cards, personal loans, and other high-interest borrowing is often acquired because of emergency needs and/or lack of budgeting and failing to live within your means. Some other types of debt (such as a mortgage or student loans) is money borrowed with the intention of improving your financial situation in the near-to long-term. Generally, debt acquired for long-term financial improvements I consider “useful” debt (and is usually at lower interest rates).
As a rule of thumb, anything with an interest rate over 5% should be paid down as quickly as possible. Anything under 5% can wait until the higher-interest loans are dealt with.
Once your debt is paid off, plan to reallocate those debt payments to savings or other financial goals that you were unable to work towards because your debt was weighing you down.
Step #3: Increase your retirement savings.
I recommend saving 15% of your gross household income towards retirement. This amount can seem daunting if you are just starting or have been saving a lot less. Start with small steps, and increase your retirement savings by at least 1% this month and for the remainder of the year. If you are contributing to a work retirement plan, inching it up by 1% will likely go unnoticed in your monthly cashflow. (Consider saving the additional 1% into a Roth segment of your plan if available.) See, All Things Roth.
Step #4: Review your investment allocations.
Confirm that your investments reflect your short-, mid-, and long-term financial goals. The purpose of a specific account will dictate how it is allocated. For example, if you are young and saving in a retirement account, your money should be invested more aggressively than your emergency fund (which should be in cash or cash equivalents).
Other two key things to confirm when reviewing your portfolio:
Make sure you are not holding cash in accounts that should be invested. This is probably one of the largest mistakes I see clients make—they contribute money to an investment but do not realize they are still in cash holdings. Check all your accounts and be sure to put any excess cash sitting on the sidelines into investments.
Confirm your overall allocation reflects your risk tolerance. If you are a conservative investor, make sure your portfolio is not going to be too volatile in down markets. Conversely, if you are an aggressive investor, your portfolio should hold an adequate amount of equities.
Step #5: Update your financial goals.
Goals are going to change from year to year. Because life changes, your priorities change. Almost as important, markets change, so it is vital to revisit your short-, mid-, and long-term financial goals and make adjustments as needed. Without firm financial goals—the result of deliberate thought and planning—you will waste resources and time spinning your wheels.
Make this year count!
Wherever you are in your journey to financial freedom, consider how you can further your success in 2023. Financial success is not achieved overnight, but is the result of decades of steady, moderate financial choices. Don’t waste another minute or year—make some adjustments this month and your future self will thank you!
Live webinar available.
This year, we will be providing regular webinars on topics and trends we think are fundamental or timely to financial success. Subscribe to our channel to be notified when we go live in the coming weeks.