The new year is upon us, and it is the perfect time for personal finance resolutions that can help you manage your money. You might want to start establishing your emergency savings fund this year or invest in the stock market so that you can begin building wealth.
You could also diversify your investments and increase your income streams. Whatever you decide to do, it’s important to develop and maintain healthy financial habits. Creating a budget can ensure that you enjoy prosperity for a long time.
Here are some personal finance resolutions to get you started this 2023:
1. Budget
First of all, you will want to set a budget for yourself and stick to it. Ask yourself how much you spend on groceries every month, or what your gym membership is costing you, for instance.
If you are planning to build up your emergency fund, you might need to cut back on other areas. For example, you could consider eating out once a month instead of once a week. Sometimes, small changes like these make a world of difference.
Regardless of how much you make, you should always be aware of how much you spend. Knowing where every dollar goes will help you to understand how much you need. You will want to include all of your necessary expenses in your budget. This can include rent, monthly subscriptions, vehicle expenses, and perhaps even charitable contributions. Tracking these costs will likely help you have more control over your finances. That way, if you happen to have an extra $20 left over at the end of the month, you can save or invest it.
It is often far too easy to let our expenses get out of control. So a budget will always help you gain control over your spending. This allows you to meet your financial goals, even if that means you have to make sacrifices sometimes, like opting out of buying that new pair of shoes that you’ve been wanting or taking that weekend trip.
2. Give Yourself Some Wiggle Room
It’s important to give yourself a bit of flexibility in your budget. If you are holding yourself to a budget of $1600 per month and your income is $2000, you might also want to allow for $50 of spending money at your favorite restaurant in case you end up meeting with friends or decide to order takeout for a night or two while you’re working.
Keep in mind that life is not as linear as a lot of us would like for it to be. Something will almost always come up. For example, you could fall ill and require medical treatment, or you could get in a car accident and have to pay for repairs. The Federal Reserve’s target has generally aimed for an inflation rate of 2% every year, however, it is almost always essential to practice a great deal of caution. For instance, this year we saw sky-high inflation on quite a few items. Having a bit of flexibility in your budget is arguably essential in case you suddenly have to pay a lot more than you anticipated for eggs!
Whatever the case may be, giving yourself an extra $200-$300 to spend—if necessary—is almost always a good idea. This is also why you should build an emergency fund.
3. Build Up Your Savings and Investments
Finally, it is essential to build up your savings and invest in financial assets if you haven’t already. You might want to consider buying individual stocks, but it is often most beneficial to put your money into index funds and simply hold them regardless of what the market does.
That being said, setting up your emergency fund should always be a priority. You will likely want to have enough socked away to cover three to twelve months of basic living expenses. This is usually anywhere from $6,000 to $30,000.
Setting aside money in an emergency fund is arguably essential since it is generally quite predictable. However, it is nearly impossible to receive a strong return from doing so. Some savings accounts do offer an annual percentage yield or APY, but that is usually about 4% per year at the very most. For reference, the average annualized return for investments in the stock market is about 10%, even though there are many wild swings up and down along the way.
Thinking Ahead This Year
Going into 2023, it will be essential to have a reasonable and detailed budget. It is also important to diversify your investments. Consider putting your money into index funds and simply holding them when it comes to the stock market. Don’t be afraid to look at bonds if you want to play it safe. Investing in dividend stocks can also be a quick way to earn a solid return, and purchasing shares from a real estate company that offers these is often a good idea.
You might want to find sources for relatively predictable passive income. Put money into real estate or other assets, even things like gold and silver. Generally speaking, it’s a good idea to diversify your income streams and your investments as much as possible. This way, you aren’t solely reliant on one source.
Please contact us at Foster Financial CPA for more ideas on creating personal finance resolutions. We are happy to help!