The Dress for Success community shared their top financial concerns as we head into 2023. Our Savvy Ladies Helpline Volunteers teamed up to help guide and answer their financial questions in a special Ask the Expert session.
- How to budget for the new year?
- How to stop holiday spending from wreaking havoc on your finances?
- How to prioritize saving, investing and debt repayment, especially in a volatile economic environment?
The tangible effects of inflation and the fear of a looming recession make it more important than ever to get the knowledge you need to make informed and empowered personal finance decisions.
Read our experts’ answers below and contact our free financial helpline for pro-bono, one-on-one mentoring with a volunteer financial advisor.
How to Keep Spending in Check
Any tips on not overspending during the holidays? And also not going overboard spending in 2023 on the “fun” things I skipped in 2022 to build savings?
Ravi Patel: This one is always tricky because it is easy for this to get away from you. I think you always want to start off with, what can you afford based on how you’ve spent in previous years. If you are in a tough financial spot, I would just isolate the handful of people or less you feel it is essential to shop for. But in either scenario, write down the number ahead of time you don’t want to go beyond. And shop early, so you can identify meaningful gestures you can make within budget. But always remember, the least expensive gifts with thought are often the most meaningful for the person receiving it. But this like anything else is about telling your money where you want it to go. That is why you want to write the number down with wiggle room embedded in it, so you are very intentional in terms of how you want to spend. The number written down could be $500 when you really only want to spend $400. Gives you that extra 20% buffer if something comes up with an extra person or an item that is a little more than you originally accounted for.
Ross Krause CFP®, MBA, MSA: Be disciplined and plan. Make sure you have a budget going into this time of the year about what you can afford to spend and be realistic about it. I know this is hard and requires a fundamental change to your habits but that’s the only way you will be successful. I tell my clients all the time that this is hard work that requires discipline, patience, and planning. If you don’t think you have the skill set or desire, which is completely normal, then find a friend or family member that you trust to hold you accountable. Many of my clients hire me for this exact same thing, they want someone who holds them accountable just like a personal trainer does when you work out.
Budgeting for 2023
How do you budget for the end of the year to set yourself up for financial success in the new year? Saving has been challenging for me and I want to start saving. What are the best strategies to use?
Ravi Patel: The first thing you want to make sure of is having your numbers correct. Base your next 12 months of income on what your take-home was in the prior 12 months. If you are fortunate enough to get a bonus or a raise, then treat that as gravy on top. So start on the income line and do an honest estimate on essential expenses based on how you spent over the past 12 months. Utility, cable bills, etc have a 12 month lookback. so you can always retrieve old statements and add up the totals. The rest is gas, transportation, groceries, housing, etc. If you have a good read on your non-rent/mortgage essential expenses over the past 12 months, add 8-10% to that in our current inflationary world and come up with a conservative estimate. Now with the money left over, I would absolutely contribute 10-15% of your income to retirement assuming all consumer debt is paid off. If consumer debt is not paid off then I would tackle that first with any money left over after essentials.
People have different strategies they use. Some pay off the smallest first, some start with the highest interest debt and work their way down. Whatever you think would give you the best momentum psychologically to aggressively pay those off. There is a free budgeting app a lot of people use called “Every Dollar”. You can use that if you want to go beyond pen and paper or excel spreadsheets. But to start off, know your take-home, what your essential expenses are, what your debts are, a good number to allocate to retirement, and then with left over money, prioritize the spending based on what your goals are.
Ross Krause CFP®, MBA, MSA: If you find yourself struggling with this, then it’s time to get professional help. There is absolutely nothing wrong with admitting that finances are a weakness and outsource this to a professional. Any decent advisor will be able to work with you on all of those issues and help you set up and maintain a plan that is suitable for your needs.
Planning Your 2023 Contributions
What is the best way to prepare for the new year? I want to max out my contributions, but what if I don’t have enough take home?
Ravi Patel: It’s best to work off percentages. I think the match always has us run to the 19.5K 401K max. When you have your debts paid off, then it is a great idea, but you also want to make sure you are satisfying your short term obligations, and if your current income doesn’t give you enough room to deduct the full 19.5K that is absolutely okay. I would focus on any consumer debt you have first. And if those are taken care of, I would endeavor to at the minimum contribute to any company match, and beyond that try to get to 10-15% of your gross income being allocated to retirement in total. Roth IRAs are the best if you are below the income thresholds. Roth 401Ks at work are great as well. It is after tax income, but the amount you will have in retirement and the tax free growth benefit over a long period of time almost always makes the most financial sense.
Ross Krause CFP®, MBA, MSA: It’s all about budgeting and cash flow. If you want to max out your 401k or IRA contributions you have until the calendar year for 401k’s and April 15th for IRA’s. If you can’t afford to do so but want to there are only a few realistic options. Cut something out of your spending so you have more disposable income, get a second job to increase your income, or dip into your savings. Unfortunately, there is no magic answer to this question as the answer requires more cash.
I was laid off this year. How would you recommend that I begin saving for retirement once I’m offered a new position? Should I enroll in the company’s retirement plan or should I concentrate on paying down the credit card debt that I incurred?
Ravi Patel: In terms of saving for retirement, if you want you could allocate enough to your retirement up to your company match if they have any. Beyond that, I would absolutely attack your credit card debt first. Paying off 15-20% debt amounts are going to be better than any investment you can make. Paying that debt off is like making a guaranteed 15-20% on your money, so that is a no brainer. I would also endeavor to pay off any interest-bearing loan greater than 4-5% if you have it before contributing even more to your 401K. And once you have allocated an amount into your 401K that you are comfortable with I would consider paying off all the remaining non mortgage debt you have no matter the interest rate. Being debt free with a beefed up emergency fund gives you a tremendous amount of peace to tackle uncertain job and economic environments and meet your other financial and life goals.
Ross Krause CFP®, MBA, MSA: When it comes to prioritizing your income, you should always pay off high interest debt before anything else including retirement. Credit card interest is usually double or triple what you can earn in the market, so your money is better spent chipping away at that. Also, paying down those debts will increase your credit score and most importantly it is a huge mental relief once it is paid off. Next you make sure your emergency savings account is healthy, which would always be about 6 months of monthly expenses in cash. Once those are taken care of you can then focus on retirement planning. However, if your company does have a 401k and offers a match, you should always contribute the bare minimum required for you to receive the full match, otherwise you’re literally missing out on free money.
Investing in the New Year
I want to start investing, but I’m afraid of starting to invest right before a recession, since lots of people are saying a recession will happen in 2023. Do you have any tips on getting past the “mental barrier” of being afraid to invest?
Ravi Patel: Being afraid to invest is absolutely natural. It is a barrier we all have because the market can sometimes be painted as this complex entity that we have no control over. The reality is the market is just a reflection of commerce and how customers engage with the marketplace. And as long as we continue to believe Americans will continue to engage in spending and participate in the marketplace, the market through fluctuations will always grow over the long term. At least that is my personal belief. However, when investing you want to make sure you do it after you have paid off consumer debt, built up an emergency fund of six months of expenses, and have a house or mortgage payment that is a small percentage of your take home pay, and you are already contributing 10-15% of your income up to your retirement. After that, you are free to invest. But you want to make sure you are investing over the long haul. Therefore, if you need the money over the next 2-3 years, definitely keep it in money markets. Otherwise when picking mutual funds, look for a long track record, and returns over a 5-10 year period which meet or beat the index. And as long as you spread this out over 4/5 funds, you will generally be okay. You will certainly have market exposure, but it will be generally limited to that and not situations where you will have significant tail risk or loss of 50-60% other than those twice a century scenarios where the broader market cuts in half before it recovers as it always has. But when you have a long term horizon, you are able to ride out those roller coasters as well.
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