- The new year can be a great time for investors to review and make changes to their financial goals.
- Advisors recommend building a robust emergency savings and considering your portfolio on a timeline.
- It also suggests creating a debt repayment plan, considering the tax implications, and considering predictable medium-term expenses.
As the new year begins, Investopedia spoke to three financial advisors to find out what investors should be thinking about in 2024.
1. Emergency savings is the first step
One opinion all three financial advisors agreed on was that having emergency savings is essential and should be prioritized above other investment and savings goals.
In 2023, inflation affected not only people’s spending but also their savings.
“Make sure you have enough savings for emergencies. A good rule of thumb is to have about three to six months’ worth of living expenses in an emergency savings account in case of a major expense or job loss. ” said Ashley Christine Ritterhouse. The certified financial planner (CFP) and founder of Curious Crow Financial Planning told Investopedia.
“When the unexpected happens, having a strong emergency fund means you’re less likely to have to withdraw money from your investments or accumulate debt to cover them,” says Ritters. Mr. House added, emphasizing the sometimes overlooked value of emergency funds for investors considering investments such as: Make your portfolio more resilient as you grow your assets.
2. Align your portfolio to your timeline
Create a savings and investment plan that works for you and your goals. Consider what future life events will require available cash and predict when they will occur.
Key elements in creating this plan include checking “when you will need the money and whether your portfolio is appropriately invested based on the amount of risk you can tolerate,” Rittershaus says. “It’s the equivalent of a down payment on a house in two years,” he said. , saving for college in 7 years, and the retirement account he needs in 30 years are all likely to be very different investments, and should be reflected in your asset allocation.
While there is no one-size-fits-all approach as every investor is different, common solutions for building savings include automating contributions to an employer-sponsored retirement plan or automatically transferring funds to a savings account. settings etc.
3. Tackle your debt
As inflation affected consumer finances in 2023, some investors may have had trouble repaying existing debt or potentially taking on new debt.
While the average debt of U.S. adults has steadily declined in recent years, it’s important for investors to have a debt repayment plan in place, especially as interest rates remain high.
“Debt in and of itself isn’t necessarily a bad thing,” Crystal McKeon, chief compliance officer at TSA Wealth Management, told Investopedia. It’s sexual,” he said. It could be a house or a car,” but borrowing must be done for appropriate expenses. For example, “accumulating something like credit card debt is not the same as taking out a mortgage to buy a house,” McKeon said.
McKeon added that the right way to pay off debt is the one that works for you, and while paying off the highest interest rate first might work for some people, this method can be overwhelming and can be overwhelming at first. He explained that some people may choose to pay off their minimum debt. These two approaches to paying off debt are known as the debt avalanche strategy and the debt snowball strategy.
Both McKeon and CFP Rittershaus noted that they generally advise clients to use free funds to pay off debt, rather than investing free funds and trying to make a profit. .
4. Tax planning
While past tax returns typically serve as a guide to what to expect in the coming year, there may be major changes to U.S. tax law in the future.
“Right now, the tax brackets that exist in 2023 will also exist in 2024 and 2025,” Sean Michael Pearson, CFP at Ameriprise Financial Services, told Investopedia, adding, is scheduled to be abolished.” [in 2026]This means that tax rates and brackets will revert to what they were before the latest tax cuts in 2018. ”
The Tax Cuts and Jobs Act (TCJA), which went into effect in 2018 and lasts through 2025, made several important changes to both business and personal taxes.
“We don’t know what will happen [tax brackets] Some investors may hedge their bets between 2024 and 2025 tax rates, Pearson said, as tax rates could rise in the future, according to the CFP. Taking actions like contributing to an after-tax Roth account rather than a traditional pre-tax Individual Retirement Account (IRA) can reap benefits for years.
Considering upcoming taxes can help investors better understand their finances and avoid situations where they have to dip into savings or investments to pay higher taxes than expected.
5. Consider predictable medium-term costs
People often consider the short term for emergency savings and the very long term for retirement savings, but can overlook saving for expenses in between.
“Saving for retirement is important, but there are also many responsibilities that you have to fund before age 59.5,” Pearson told Investopedia. “Purchasing a new home or vacation home, investing in a business, helping with expenses for an adult child, or funding a child’s senior trip may be years away,” the financial advisor said, but these are still years away. He said this is a type of expense that he categorizes. Not “unexpected” but “unexpected”.
“If you have a two- or three-year-old child, [years old]”I don’t worry about orthodontics that much,” but when the orthodontic bill comes, “it’s not unexpected.”
These are the types of intermediate expectations that Pearson recommends clients consider, highlighting the importance of saving for expenses that “can’t always be quantified until you need them.” Emphasized.