If today’s unpredictable economy has left you feeling unsure about your finances, you’re not alone. While inflation has cooled slightly since its decades-long high in 2022, Americans are still feeling the pinch on their wallets.1 Combine that with rising interest rates, and your hard-earned dollars simply don’t go as far as they used to. Given the volatility of the past year, the time is right to re-evaluate your financial plan for today’s realities.
A financial plan is a living, breathing plan that covers all aspects of your financial life, including your savings, investments, loans, retirement plans, and other goals. It puts you in control of your money, even when external conditions feel unpredictable. In fact, it’s a good idea for everyone to have a financial plan, regardless of how much money you might be making. While creating a financial plan may feel daunting, the process is well worth the effort in the end.
By crafting a thoughtful and customized financial plan, whether on your own or by working with a trusted financial advisor, you can ensure your money is working hard for you and track your progress toward your short-term and long-term financial goals.
Inflation is having a dramatic impact on personal savings and financial goals. The inflation rate peaked at 9.1% in June 2022, the highest rate since the early 1980s.
The current inflation rate has cooled, but is still around 4.7% for all items less food and energy.2 Rents are going up and the costs of food and other consumer goods are high.
“Inflation can silently steal the purchasing power of your hard-earned money,” says Andrew Latham, certified financial planner (CFP) and content director at SuperMoney.com. “It can make your savings less valuable, your debt more burdensome, and put your financial goals at risk.”
To manage this loss, there are a few tactics you can take. For one, you may have to be more prudent with spending. After budgeting for essentials, check in with your short- and long-term savings goals. Aim to build an emergency fund that could cover three to six months’ worth of your expenses to give yourself some cushioning.
Volatile Stock Market
Investing your money is usually the best way to combat inflation and build wealth over the long term. However, it’s easy to feel spooked by the stock market in today’s volatile climate. To weather the ups and down, Mahesh Odhrani, CFP and president of Strategic Wealth Design, says diversification is key.
“Diversification and a solid investment strategy are crucial in navigating the volatile stock market,” he says. “Consider working with a financial advisor and start saving for retirement early.”
Dr. Ohan Kayikchyan, CFP and money coach at The Money Doctor, also recommends using dollar-cost averaging, rather than trying to time the market.
“Invest fixed dollar amounts in a regular schedule, regardless of the share price,” says Kayikchyan. “By spreading out investment dollars over time, you are mitigating the risk of buying shares at a high price point.”
When it comes to saving for retirement, start as early as you can. Even if the markets are nerve-wracking today, a long-term, diversified strategy could help you come out ahead in the long run.
“It is not about ‘timing the market’ but rather about ‘time in the market,’” says Odhrani. “If you are investing for the long term, have an investment strategy and stick with it.”
Increased Costs of Borrowing
Borrowing costs are higher than they were this time last year. The Federal Reserve has been increasing rates in an attempt to curb inflation.
While the Federal Reserve may be achieving its goals, the impact is not so fun for consumers. It costs a lot more to borrow money whether you’re looking to take out a mortgage, a personal loan, or carry a balance on your credit card.
Since higher rates will cost you more out of pocket, it’s always a good idea to shop around with multiple lenders before committing to a loan. Consider opting for fixed rates rather than variable ones to protect yourself from rate hikes.
If you owe money on your credit cards, consider transferring the balance to a card with a lower rate or a 0% APR for a period of time. Just be mindful of balance transfer fees. You could also explore consolidating high-interest debt with a personal loan.
Aim to pay off your balance in full rather than carrying it over from month to month.
“If you habitually carry a balance on your credit card, it could be high time to break that habit,” says Kirill Semenov, CFP and wealth advisor at Intellicapital.
Finally, check in with your budget before borrowing money, whether with a loan or credit card. Make sure that the monthly payments and long-term interest costs won’t be too much of a burden on your wallet before you sign on the dotted line.
Fluctuating Real Estate Market
The rise in interest rates has had a dramatic impact on new residential mortgages. When mortgage rates fell below 3% in 2020 and 2021, it set off a house-buying frenzy. Now that rates have more than doubled to 6% and nearly 7%, consumer demand has decreased.3
However, home prices haven’t cooled all that much, so you’ll have to think carefully about how much home you can afford before making an offer.
“Values haven’t dropped as much as we all had hoped for, so focus more on your cash flow and if you can truly afford that house today,” says Mahesh Odhrani, CFP and president of Strategic Wealth Design. “It is okay to rent, save up a ton of cash, and perhaps buy in another year with a larger down payment.”
As with other types of loans, opting for a fixed-rate mortgage, rather than an adjustable-rate one, may be a safer bet in order to keep your payment amounts predictable. Whether you’re looking to buy a home or refinance your mortgage, Latham says patience is key.
“Be patient, flexible, and realistic about your expectations and budget,” says Latham. “A home is likely to be the most significant purchase you’ll ever make, and it’s a long-term investment that requires careful consideration.”
Up-and-Down Job Market
While workers were quick to quit during the Great Resignation, many are thinking twice about switching jobs as tech layoffs dominate headlines and the job market has started to cool.
Unemployment is still at one of the lowest rates in half a century, but there aren’t quite as many openings in 2023 as there were last year.
“Job openings have declined and people are taking longer to make a decision about whether to move or not,” says Cathy Lanzalaco, career coach and CEO of Inspire Careers.
If you’re thinking of changing jobs this year, Lanzalaco offers this advice:
“Update your resume to align with the specific job you want, optimize your LinkedIn profile to help recruiters find you, and fill in any skills gap you may have,” she says.
Creating Your Financial Plan
The upheavals of the past year are certainly keeping people on their toes. To ensure that you’re on track toward your short-and long-term goals, it’s smart to have a financial plan that takes into account your entire financial picture and could help your money work harder for you.
Your financial plan isn’t a one-and-done deal, though—check in with it periodically and make adjustments as circumstances change. For a plan that takes a comprehensive approach to your financial strategy, consider working with a professional financial advisor. Financial advisors are able to identify opportunities to help improve your financial situation, as well as pinpoint potential risks that could derail your carefully laid plans.
Meet with a Santander Investment Services Financial Advisor to start building a financial plan that helps support your short- and long-term goals, and helps prepare your finances to weather even the most unpredictable economic conditions.
Having children and raising a family can be a joyful part of life, but as any parent soon discovers, it’s expensive. Beginning in infancy and moving all the way through to college, the costs are substantial and constant. But at the same time, it’s important for parents to save for retirement. Unless you have a guaranteed pension, the responsibility for having enough money to live on after you stop working falls on you. So, while the impulse may be to always put your children’s financial needs first, doing so at the expense of your retirement savings isn’t good for you—or ultimately them.
For many parents, the goal of funding a college education begins as soon as a child is born. And it’s not a small undertaking. The average cost for a private college in the current academic year is $38,185. For a public, four-year school the price tag is $22,698 a year, according to U.S. News & World Report. Given that the average annual increase for tuition and fees at a public, four-year university has been 9% over the past 20 years, that cost will be far greater when today’s little ones are entering college.
With such a massive financial obligation ahead, it’s only natural that parents want to pour every extra dollar into a college savings plan. But financial experts say that can be a costly mistake. That’s because, unlike your child’s college education, there are no “retirement loans” to help fund your lifestyle after you stop working. And with fewer employers offering a defined benefits plan, the money you’ll need in retirement is up to you. As a result, it’s important to pay yourself first before saving money for college expenses.
A balancing act
Still, it’s possible to save for retirement and set aside money for your child’s college education. Financial experts maintain the key is balance, and a clear understanding of your financial picture. Here are some things to consider as you put together a plan:
- Maximize your retirement savings. This is your first step and should take precedence over any college savings. If your employer offers a 401(k) or 403(b), be sure to put the maximum amount into the plan, especially if your employer offers a matching contribution. This is essentially free money and can result in a substantial amount of extra income that will continue to compound over the years. The money is tax-deferred and, since it is coming out of every paycheck automatically, you won’t be tempted to spend the money beforehand.
- Start a college saving plan. Among the most popular are 529 plans because they allow contributions to grow tax-deferred and distributions are not subject to federal tax when used for qualified education expenses. You can earmark a certain amount each month or pay period to automatically go into a 529 after you’ve made your retirement plan contribution. Keep in mind, too, that grandparents and other relatives can open up a 529 account for your child so there can be multiple sources of savings to fund a college education.
- Open a brokerage account. If you don’t want to tie up college savings in an account with limitations and restrictions, consider investing with a brokerage account. You won’t get any tax breaks with these accounts, but they will give you more control over your investments. With a brokerage account, there are no contribution limits or penalties based on how you use the money. You’re not restricted to using funds only for education-related expenses, so if your child decides not to go to college, the money can go towards expenses like a down payment on a home or starting a business. You can open a brokerage account with any broker, but take your time comparing them to find the best fit for your investment goals.
- Be college-smart from the beginning. As you begin to save for your child’s education, remember that it’s important to consider all the options to keep costs in check. Perhaps it’s starting at a community college and then transferring to a four-year institution to finish a degree. It might also mean having your child take on paid internships, part-time jobs, or a reasonable amount of student loan debt while in school. Doing so will not only help reduce the overall amount of money you need to contribute, but this sense of responsibility will help to build character and financial discipline in your child. The point is to factor in from the start that you likely will not have to save every dollar to cover the cost of your child’s college education.
- It’s not all or nothing. Once your retirement savings goals have been established and are being fully funded, it’s possible to tweak your college savings plan over the years. You might be able to designate a certain percentage of future pay increases or bonuses as additional contributions to a 529. Or perhaps you can use monetary gifts from grandparents or other relatives to make further contributions to a college savings plan. The bottom line is that you have many more options to save and pay for college than you do for retirement, so be sure to use them all.
And finally, keep in mind that as parents, we all want to do what’s best for our children. Reach out to one of our experienced bankers for more information on how you can make that happen. By prioritizing your retirement over college savings, you’re lessening the chances of becoming a financial burden to your children down the road. What can be more thoughtful than that?
1 CNBC.com. Here’s the inflation breakdown for December 2022 – in one chart. 12 Jan 2023. https://www.cnbc.com/2023/01/12/heres-the-inflation-breakdown-for-december-2022-in-one-chart.html
2 Bureau of Labor Statistics. Consumer Price Index. Retrieved August 2023. https://www.bls.gov/cpi
3 Freddie Mac. Mortgage Rates. Retrieved 10 July 2023. https://www.freddiemac.com/pmms
4 Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Retrieved 10 July 2023. https://www.bls.gov/cps/
5 Statista. Monthly job openings in the United States from May 2021 to May 2023. Retrieved 10 July 2023. https://www.statista.com/statistics/217943/monthly-job-openings-in-the-united-states/
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