You may have been busy between travel and holiday shopping at the end of the year. But now that the holidays are over, it's a great time to start planning for financial success in the new year.
By mapping out your financial goals sooner rather than later, you'll have a plan to start working on them so that your personal finances will be in a better state by the end of 2023. With that in mind, this article will explain what personal finance is and dive into a few ways to improve your financial well-being in the new year.
What is personal finance?
Personal finance consists of everything in managing your and your family's money. Pieces of your personal financial picture include, but are not limited to, the following:
- Debt management
- Saving for retirement
How to improve your personal finances in the new year
Here are four quick tips for improving your personal finances in 2023:
1. Commit to a budget
Budgeting helps you track every dollar you spend and ensure you don't spend more than you make. As a result, your financial stress decreases because you have a firm handle on where your money is going, and you can avoid going into debt.
Additionally, a budget can help you find and cut expenses you don't need. For instance, if you find unused subscriptions you're paying for, you can cancel or downgrade them to save money instantly every month.
Those who need to supplement their budget can consider an online loan. With these loans, you can apply and get approved from the comfort of home. Better yet, you don't need good credit to get approved.
2. Pay off high-interest debts
High-interest debt takes up a lot of room in your financial picture, and you lose money to interest. Paying it off adds more money to your budget that you can use to save, invest, or pay for living expenses.
Here are two helpful methods to pay off your debt:
- Debt snowball: The debt snowball method makes you pay your debts by principal balance from smallest to largest. This builds momentum and scores motivating "quick wins", but you'll pay more in interest than under the debt avalanche method.
- Debt avalanche: The debt avalanche method makes you pay off your debts by interest rate from lowest to highest. This method saves you more on interest but can take longer to eliminate the first few debts.
3. Create an emergency fund
Emergency funds are money you set aside for unexpected expenses like car crashes, layoffs, unexpected medical bills, and other emergencies. The money helps you cover the emergency and any living expenses incurred if you need extra cash or don't have income during the emergency.
In general, your emergency fund should be three to six months of living expenses. Larger families may want to save a little more. Consider saving your emergency fund in a high-yield savings account, which pays tens to hundreds of times more interest than traditional savings accounts. This helps you mitigate the effects of inflation and, in times of low inflation, grow your emergency fund when it sits unused.
4. Start investing
The earlier you start investing, the better. That's because your investments could benefit from compound interest, where the money you earn makes you even more money. For example, if you invest $1,000 and earn a 12% return (just over the S&P 500's annual average historical return) on that this year, you now have $1,120. If you earn that same 12% return next year, you would now have $1,254.4, not $1,240.
As you can see, your earnings from year one helped you earn even more in year two. Over many decades, this will continue to compound and earn even more, assuming each year brings investment growth. That said, consider working with a financial advisor to pick the right investments for your needs and goals.
The bottom line
There's always more work to be done on your personal finances. Now is a great time to start working on your financial well-being so you can get a head start on 2023. Start by creating and committing to a budget. This will help you keep expenses low and reduce financial stress. After that, whittle down your high-interest debt using the debt snowball or debt avalanche method before building an emergency fund.
Once you knock out these goals, invest as much as you can comfortably afford so you can build wealth consistently. Consider working with a financial advisor to pick investments that match your goals and risk tolerance. Follow these steps, and by the end of next year, you'll feel much more secure in your financial well-being.
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