Going Back to Basics: Time to Review Some Important Financial Fundamentals




“May you live in interesting times,” is an expression where someone ironically wishes an “interesting” time to whomever they are speaking with. Although it may seem innocuous it’s really an insult. By saying this, you wish the person to live during times of uncertainty and disorder as opposed to peace and tranquility. Investors are currently living in interesting times. In 2022, we have seen portfolios fall in value. Also, buying power has been substantially eroded by rising inflation. As a result, the Federal Reserve is intentionally trying to slow the economy to curb inflation.


While doom and gloom have recently dominated the financial headlines, not all of 2022’s impact is bad. For example, if you own a home, it has likely appreciated substantially. If you are one of the 70 million people who are receiving Social Security retirement income, you will get an 8.7% raise starting in 2023. A side benefit of inflation is an increase in the standard deduction. Married taxpayers were entitled to a standard deduction of $25,900 in 2022 — that number is expected to jump to $27,700 in 2023. Single and married individuals filing separately will see the standard deduction rise to $13,850 from $12,950 in 2022. Because of inflation, tax bracket qualifying incomes are also going up. For couples filing jointly, in 2022 the 12% bracket ended at $83,550 and jumped to 22% after that. For 2023, the 12% tax bracket will extend to $89,450.


In 2023, taxpayers at all levels will be paying less income taxes on the same income as in 2022, but hopefully your income will increase. As a side note, the Social Security wage base is also going up from $147,000 in 2022 to $160,200 in 2023, which will increase Social Security taxes for employees who make more than $147,000. Challenging times bring with them both good and bad. This is an opportune time to remember how to be smart about some of your money decisions. Money management, unfortunately, is not a skill set that is taught in school. It is also an expertise that is never too late to learn. Even the most disciplined person can forget or become complacent about some of the foundational tools that help keep a sound financial situation. Let’s review some financial basics.


Keep A Budget


It is always a good time to create or review your budget. Budgeting and balancing your bank account is the best way of making sure what’s going out of your account each month isn’t exceeding what’s coming in. Winging it and hoping it all works out at the end of each month can lead to unnecessary bank fees and credit card debt. It can also prevent you from achieving your savings goals.


An easy activity to try is to review your statements for three to five months and then make a list of your average monthly income (after taxes), as well as your average monthly spending. It can be helpful if you categorize your spending into basic needs (e.g., rent, utilities, groceries) and discretionary spending (e.g., shopping, travel, eating out). To get a more detailed understanding of where your money is going, you may want to track your spending for a month or so, either with a diary or an app on your phone.


Once you see the typical inflow and outflow of money each month, you can determine if you’re overextending, staying even, or ideally, getting ahead by putting money into savings each month.


If you find you are unable to save each month, the ideal first step is to go through your budget and look for ways to cut back discretionary spending. Can you eat at home more instead of going out? Buy less clothing? Avoid impulse item purchases?


There are many budgeting apps that can help you with this process. Please note, there’s not necessarily one right way to budget. Instead, it’s about finding the strategy that works best for you.


Review and Understand Your Debt


Having debt can be a major stressor and be a cause of anxiety and an unhealthy strain on a person’s mental and emotional health, relationships, job performance, and daily life. Therefore, it is wise to have financial literacy and a good understanding of how debt can affect your situation.


There are several different types of debt. Two of the largest types of debt are secure debt, like mortgages, and unsecured debt, such as credit cards. Within those types, there are also subtypes, such as revolving debt, which is most commonly from credit cards, and installment debt, which is many types of loans, like, auto, home equity, and student loans.


“Debt” is often synonymous with “bad” but there are also ways of having “good” debt. Having a mortgage in good standing can increase your credit score and provide you with a home that has long-term investment benefits. The debt that we more often think of as “bad” is unnecessary credit card debt with a high annual rate.


The most common debt for American’s is in the form of a mortgage. Secondly, it is debt from credit cards. Assess your own debt and what kind you have. A quick rule of thumb is to always have a debt-to-income ratio (DTI) that is well below 36%. To calculate your DTI, take your total monthly debt payments and divide this by your gross monthly income.


Do you have too much debt for your comfort zone? Do you have any unnecessary debt? If so, then start reducing your debt by first removing the unnecessary debt that has the highest interest rates and hidden fees. Try to cut back on avoidable spending that you discovered when reviewing or creating your budget.


Having a firm grasp on your debt situation can help create a life with reduced stress and anxiety. With rising interest rates and an increased cost of living, now is a great time to review your debt, your comfort levels, and find ways to reduce any “bad” debt.


Have an Adequate Emergency Fund


As the last few years have clearly reminded us, anything is possible and no one can predict what the future holds. The coronavirus pandemic left the world is a state of confusion and many Americans found themselves either without jobs, closing their once thriving businesses, or just wondering how they were going to make ends meet. Coupled with the fastest rising rate of inflation in over 40 years and rapidly rising interest rates, many households are feeling the pinch and finding it challenging to stay ahead, let alone save for the future or unexpected emergencies.


Having an adequate emergency fund can prove to be a wise plan. A good rule of thumb is to have a minimum of 3- to 6- months’ worth of living expenses saved in an emergency fund. This emergency fund can be a helpful resource to use (and replenish) when, for example, you have unexpected car repairs or a medical emergency. With interest rates rising these emergency funds can also work for you when stored in a savings account with a decent yield.


How do you build your emergency fund? Determine your monthly expenses and multiply that by the number of months you want to have funds for. Then, calculate how much you can commit each month to put into your savings fund after you’ve paid all your bills. Many people get ahead of their timeline goal by setting aside a portion of their tax refund (if they get one) into their emergency fund. The most crucial step is the hardest for most – sticking with the plan. It’s easy to convince yourself that “nothing is going to happen” that will cause you to need those funds and sadly many people spend their extra cash on the latest impulse item or BOGO deal that arrived in their inbox. Once again, recent history reminded us that anything can happen.


Understand That Investments are Long-term Commitments


With the recent volatility in the market and the steady decline in equities in 2022, we need to continue to be reminded that those having a long-term mindset when it comes to investing have historically been rewarded.


As one of the most successful investors of all time, Warren Buffet, said, “The most important quality for an investor is temperament, not intellect.” This mindset requires a disciplined approach to investing. Rash decisions and panic moves have no place in a long-term investor’s plan. This mindset helps reduce anxiety over short-term fluctuations in the markets and instead focuses on long-term success. Equity markets are cyclical and while dips and rises are part of the investment experience, many still find themselves pulling out of the market during a downturn and missing out when the trajectory returns upward.


As your financial professional, our goal is to find the right long-term plan and investments for your portfolio, while considering your time horizon and risk tolerance. We always recommend that prior to making any changes to your plan, that you contact us first, as many moves can have consequences that you are unaware of, such as potential tax ramifications for you or your beneficiary(ies). If you are concerned because of the media’s headlines or just need to have an assessment of your investment portfolio and overall financial picture, we can discuss this at your next review meeting, or you can call us to schedule an appointment. Remember, investing in equities should be viewed as a long-term commitment!


Conduct a Year-end Assessment


The end of the year can be a very busy time, filled with festive parties, family gatherings, and travel. However, it is good practice to take some time to conduct a year-end financial assessment. This can be a quick look at how you managed your finances in the current year and then setting yourself up for success in the new year. To help make this easier, we have created a short yearend checklist for you. As your wealth manager, we enjoy providing you holistic assistance in all aspects of your financial life.


As always, if you have any questions or concerns, please call us.



Disclosure:

Advisory Services offered through Materetsky Financial Group Inc., a Registered Investment Advisor. Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. Private Client Services and Materetsky Financial Group Inc. are unaffiliated entities. All insurance products are offered through unaffiliated insurance companies. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Materetsky Financial Group, Inc. [“Materetsky]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Materetsky. Materetsky is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Materetsky’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.materetsky.com. Please Remember: If you are a Materetsky client, please contact Materetsky, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian. Note: The views stated in this letter are not necessarily the opinion of broker/dealer, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is general considered representative of the U.S. Stock market. The modern design of the S&P 500 stock index was first launched in 1957. Performance prior to 1957 incorporates the performance of the predecessor index, the S&P 90. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. Past performance is no guarantee of future results. CDs are FDIC Insured and offer a fixed rate of return if held to maturity. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There is no guarantee that a diversified portfolio will enhance overall returns out outperform a non-diversified portfolio. Diversification does not protect against market risk. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There is no guarantee that a diversified portfolio will enhance overall returns out outperform a non-diversified portfolio. Diversification does not protect against market risk.

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