It’s no secret that the state of the markets and the geopolitical environment aren’t exactly encouraging for investors right now and are truly out of our control. But it’s important to remember, especially during times like these, that silver linings always exist. In fact, now may be a good time to revisit your strategy, or develop one with help from your financial advisor, and ensure things are in order.
No matter what’s going on in the economy or the markets, opportunities to improve your finances are always available. Wondering how to move forward right now? Consider these eight financial tips that will help you focus on the things you can control during challenging times like these.
1. Map out a solid, long-term financial plan
Lack of clarity around your money can cause unnecessary worry and make financial decision-making harder than it needs to be. A financial plan that considers where you are now, what events are on the horizon, and what you want for your future can bring tremendous peace of mind. It’s crucial to spend time documenting and planning for your short- and long-term financial goals. And if your plan is properly stress-tested, you shouldn’t need to modify your goals during periods of downside market volatility.
Keep in mind that creating a financial plan is not a “set it and forget it” exercise and should be revisited annually. From building an emergency cash reserve, paying off debt, refinancing a mortgage, planning for college savings, developing a charitable plan, or saving for your own retirement, there’s a wide range of events to consider and multiple ways to reach certain goals. It’s vital to run a financial projection to ensure you’re on the path to achieving your goals and you understand the impact these different decisions have on your long-term plan.
2. Create — and stick to — a budget
In times of high inflation, it’s helpful to be able to see where you can cut back if needed to cover the essentials like gas and groceries. Nobody loves the idea of having to live on a budget because it’s human nature to prioritize short-term gratification. But, it’s a great way to regain a sense of control over your finances.
A budget allows you to plan for your expenses and can prevent you from going into debt or consistently spending more than you make. To create a budget, try an app like Mint or YNAB (You Need A Budget), or just an Excel spreadsheet, and list out your monthly income and expenses. Simply being able to see where money is coming from and where it’s going can help you start to take the reins back. Your budget can bring peace of mind and help you understand the impact your spending choices today will have on your ability to meet your longer-term goals like paying off debt, buying a vacation home, or retiring early.
3. Harvest tax losses
Losses in a portfolio are never enjoyable to experience, but when meaningful losses do occur, tax-loss harvesting can help ease the pain. Tax-loss harvesting is a technique used in nonretirement accounts where you sell an investment at a loss and then purchase a similar security the same day, so you aren’t out of the market. You can then use that loss to offset capital gains and up to $3,000 of ordinary income in that tax year. In addition, if you don’t use all the losses in the current year, they carryover to future years.
It’s important to understand the wash-sale rule, which prevents investors from buying a substantially identical stock within 30 days before or after a sale. If this occurs, the loss is disregarded for tax purposes. Don’t wait until the end of the year to harvest tax losses because if the market recovers, the opportunity could dry up.
4. Build emergency funds and capitalize on higher cash yields
We’ve all been reminded over the last couple of years that having an emergency reserve is crucial. A nest egg that’s safe and secure helps ensure that a temporary job loss or unexpected expense won’t result in debt or cause you to cash out of your portfolio when it’s down double digits.
How much cash to have on hand is a very personal decision, but the good news is rising interest rates have resulted in better yields on the cash you do hold. If your bank account is still paying very little interest, it may be time to shop around with the funds that you’re holding for emergency reserves or are saving for a future expense. Some options include high-yield savings accounts, CDs, purchased money market funds, or even U.S. Treasury Bonds.
5. Try an age-based 529 plan
Saving for education? Make sure you’re getting the most out of your savings. 529 plans are popular vehicles for funding college education, and for good reason. Money invested in the plan grows tax-free and, if funds are distributed for qualified education expenses, no income tax or penalties will be assessed on the distributions.
When investing in a 529 plan, there’s a menu of investment options to choose from. Many account owners select the most aggressive investment option hoping to achieve a higher return and maximize college savings. Unfortunately, that’s likely not the best option when you’re saving for a shorter-term time horizon. Most plans offer age-based or enrollment year options that are more aggressive when the child is younger and gradually de-risk as the child gets closer to the age in which the funds will be needed.
6. Teach the next generation
It can often feel like an impossible feat to teach the next generation about money, but research shows the most impactful way to teach the next generation is by showing them. How you handle your finances as the caregiver will likely have the biggest influence on the next generation.
Many families are having more conversations about finances given the constant media attention on the markets. Check out this article we wrote, which provides great tips for bringing the next generation into financial conversations and education early and often.
7. Lean on an independent and objective financial professional
While this year hasn’t been characterized by strong market returns, it’s given many individuals the opportunity to test their risk tolerance and deepen their relationship with their financial advisor. Now is a great time to lean on the professionals in your life — it’s always helpful to have a sounding board as well as someone who can give you great advice. If you’re in the market for a financial advisor, you may want to reference articles our team published on independence and objectivity and “What’s a fiduciary, and why is it important to your financial plan?”
8. Optimize charitable giving
Charitable giving can come in many shapes and sizes — be it a long-term family philanthropy plan, establishing a foundation, or giving cash here and there to those in need, it’s important to understand how to optimize your charitable goals.
First, identify your charitable goals and interests. You may have an annual gifting budget in mind, but it’s wise to work with a professional to see how this fits in with other financial goals. Then, work with your financial and tax advisor to determine how to give. Do you give a consistent amount each year? Should you give cash or highly appreciated marketable securities? Does it make sense to bunch a few years’ worth of donations into a donor-advised fund to take advantage of a greater tax benefit? There are many nuances to charitable giving, so it’s important to think through your goals with your family and team of advisors.
Positive thinking, practical planning
Even in difficult years financially, there’s always something to be grateful for. This is the perfect time of year to focus on the positives rather than the negatives and reflect on the opportunities that lie ahead.
