Starting Fresh with Personal Finances in the New Year

New Year equals new personal goals. Closing out 2022 in a challenging economic environment affected by housing market slumps, an erratic stock market, and inflation makes it more important than ever to get personal finances in order this new year – especially after the additional expenses that hit our bank accounts during the holiday season.

“Feeling a sense of control over your finances is key to building wealth, but it’s also critical for mental and physical health, as 65 percent of people report money is a significant source of their stress,” said Cathy Cooper, WaFd Bank executive vice president and chief consumer banker. “That is why it’s so important to have access to simple advice and easy tools to tackle your personal finances head on – and the new year is the perfect time to start new money habits.”

Does the financial plan of a 20-year-old look different than a 50-year-old?

Of course, young people often have less discretionary income with a focus on building long-term savings like a down payment on a house, whereas someone in their 50s needs to be focused on setting aside sufficient money for retirement. The most important thing is to start now. Developing strong budgeting, saving and strategic debt management from a young age will instill habits that are carried throughout life. Some additional differences in the finances of these two age groups will be credit history and the types of loans or debt each person takes on. Everyone’s finances look different, and it is important to stay on track. One step to take at any age is to open either a free or affordable checking account, allowing for a place to track and manage day-to-day finances, set up automatic transfers to ensure bills are paid on time, and so much more.

Is it important to create a financial plan that looks several months or even years out?

Yes. A plan with a longer time horizon allows people to have more visibility into their near- and long-term financial health.  Save early and often to take advantage of “the magic of compounding,” and being organized helps reduce stress about money.

What are some key tips for improving financial wellbeing and recession-proofing bank accounts in 2023?

• Reduce Debt. When looking to reduce debts, always use the “Highest Interest Rate Method”. Why? Because the longer a higher interest rate accrues on a balance, the higher the amount owed. By starting with the highest interest rate debt, less money will be owed in the long term. Specific debts to pay off first would include car loans, credit card debts and student loans. After the debt has been paid off, the second step is to pay bills in full and on time to avoid late penalties and make sure you maintain a solid credit score that will qualify you for the best loan rates in the future.
• Increase Emergency Savings. Just like everything in life, a bank account can be hit by unexpected events and emergencies. That is why emergency savings accounts are set up to cover unexpected expenses. This savings account should cover things like car and home repairs, medical bills, and a loss of income. Although the size of one’s emergency savings account will vary depending on lifestyle and income, one good rule to follow is to save at least three to six months’ worth of expenses. If in a crisis, this will provide financial cushion while finding a more solid solution. A great place to keep emergency savings is a high yield savings or money market account – this type of savings account offers higher interest returns on money in the account, helping the account better keep up with inflation.
• Improve Your Credit Score: A high credit score is important because it opens doors to new financial opportunities. People with a great credit score are more likely to qualify for lower interest rates on loans and credit cards. The best way to improve a credit score is to: understand how credit scores are calculated; keep overall credit utilization low and individual card balances low; review credit reports; pay credit card bills on time; and check transactions to ensure the information is correct. A lower interest credit card that is paid off monthly is a safer way to build a credit score without the risk of growing debt, particularly in an economic environment where the average credit card interest rate is hovering at approximately 20 percent.
• Save for Retirement. Saving for retirement can take on many forms, including contributing to a 401(k) account with an employer’s match, or opening a ROTH retirement account. Like an emergency savings account, there is no “one size fits all” dollar figure for annual contributions. One of the best ways to prepare for retirement is to start early. For example, if a person invested 100 dollars a month for 40 years, earning about 12 percent, they would retire with 1.17 million dollars.  On the other hand, if a person waited 30 years and tried to catch up by investing 1,000 dollars a month for 10 years, they would end up with just 230,000 dollars at retirement. The amount of money needed at the time of retirement depends on one’s lifestyle and income. One way to calculate the amount of money to set aside for retirement is by multiplying current annual spending by 25 – this number is roughly how much money is needed when hitting retirement.
• Make Long-Term Investments. Long-term investments help to ensure consistent financial growth that often outpaces inflation – and they can be easy for beginners looking for a hands-off approach. People just starting their investment journey can begin with their retirement accounts, or they can take the next step by opening a taxable brokerage account. Long-term investments should often take the form of indexed funds – either a mutual fund or an exchange-traded fund (ETF). These funds are a preset collection of stocks or a stock index managed by an investment bank or brokerage. This allows investors to “set it and forget it.” By investing with long-term goals, purchasing power won’t fall behind as inflation takes its bite.

To be set up for financial success, it’s important to develop a plan for how to spend money and how much to save, and all the steps in between.

WaFd (NASDAQ: WAFD) is a regional bank established in 1917 with headquarters in Seattle, and more than 200 branches in eight western states, including Arizona, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. We’re committed to delivering simple, straightforward banking solutions to our clients; helping build healthy, thriving communities; and investing in our employees. WaFd Bank is recognized by Newsweek magazine as one of the Best Banks in America and one of America’s Best Employers by Forbes.