Inflation has been hitting everyone hard and going into 2023, there are several things you can be doing in order to protect the state of your finances.
Ask for more at the bank.
Because interest rates have risen sharply over the past year, suddenly it is possible to get a return on savings accounts, money markets, certificates of deposit, and other cash equivalent instruments. Look at your statement and if your interest rate is still paltry, consider changing banks or talking with your financial advisor to find better alternatives.
Ask for more at work.
Because of the rate of inflation, companies who generally give a “cost of living” raise will likely have to increase the percentage of raises just to keep up. If your HR department offered you the normal 3%, you’ll actually be taking a pay cut.
Talk to your company about at least approaching the 8.7% cost of living adjustment set by Social Security in order to counterbalance the increase in goods and services we’re seeing in most industries.
Use it wisely.
If you’re fortunate enough to receive a meaningful raise, you want to use that extra money wisely. Especially in the current conditions, you don’t want to fall victim to lifestyle creep–or an increase of your normal spending when you have access to more money.
Try to continue living on the amount you were previously making and use the additional funds to pay down debt, invest for your future, or build an emergency fund. If you have some debt at a variable rate–like a line of credit on your home or personal credit cards-pay those down as soon as you can because they are getting more expensive each time interest rates rise.
Increase your contributions.
The IRS has increased the contribution limits for most retirement savings vehicles. The 2023 limits will be:
401(k): $22,500/year with a $7,500 catch-up provision at age 50+
IRA: $6,500/year with a $1,000 catch-up provision at age 50+
HSA: $3,850/year for individual or $7,750/year for families with a $1,000 catch-up provision at age 55+
SIMPLE IRA: $15,500/year with a $3,500 catch-up provision at age 50+
Defined Benefit Plan: $265,000/year
Defined Contribution Plan: $66,000/year
If you’re already used to maxing out your retirement accounts in 2022, consider increasing your contributions to reach the newer, higher limits in 2023.
We’re seeing unprecedented changes in the cost of living, and there can be several new planning conversations to have with your advisors. Talk to your CPA or financial advisor about possible tax-planning opportunities related to continued employment, relocating to a different state in the U.S., and exploring Roth IRA conversions or other income tax timing strategies.
Inflation is scary and is hurting a lot of families, but there are ways to minimize the effects. Making strategic decisions with the help of a trusted and professional advisor can have a great impact on your financial future.
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