2023: Preparing for the Year Ahead

Dec 30, 2022

2023 coins stacked, the police credit union

A dizzying mix of economic forces have had us constantly pivoting and readjusting expectations in 2022, from record-high inflation and rising interest rates to stock market losses and the fallout from a major geopolitical crises. After three years of a global pandemic, markets are reeling from a major imbalance between supply and demand that ratcheted up prices on goods and services at rates not experienced in 40+ years. In the effort to rein in prices and stabilize the economy, the central bank’s series of interest rate hikes in 2022 represented a dramatic shift from the near zero rates set at the beginning of the COVID-19 pandemic.

But if you expected all of the volatility of 2022 to give way to a smooth and predictable ride in 2023, you might need to reassess, because uncertainty itself seems to be a constant variable economists are forecasting for the year ahead.  Still, experts have offered up some important predictions to keep top of mind when making financial decisions in the new year. To stay grounded and strengthen your financial well-being in the year ahead, it can help to be aware of these projections for 2023, along with a few suggestions on how to manage them:

Geopolitical conflicts and global tensions will likely have a major impact on the economy.

Russia’s invasion of Ukraine had reverberations well beyond the destruction, loss of life and suffering experienced in Eastern Europe. In “Five Economic Trends to Watch in 2022” Todd Hirsch drives this point home, emphasizing that the invasion of a democratic and sovereign country by another highly industrialized nation has highly consequential ramifications for the global economy and for international relations more broadly. As Hirsch explains, the conflict in Ukraine creates changing dynamics around countries such as China, Saudi Arabia, North Korea and Iran. Moreover, it can depress consumer confidence and business investment. In addition, the war can continue to disrupt supply chains due to potentially blocked ports as well as sanctions, and it creates the need for more government spending on defense. Essentially, more U.S. dollars earmarked toward military spending can mean less spending in areas such as education, research and infrastructure.

Expect that inflation will only gradually subside over the course of 2023 — and we may not reach target levels by year-end.

If you’re wincing as you pore over your holiday bills, know that you’re far from alone. Market intelligence reveals a 7.6% year-over-year rise in holiday spending in 2022, with much of it attributed to inflation, even as consumers adapted to higher prices by diversifying their spending and prioritizing dining out and other experiences. While economists largely view these strong sales as a sign of a resilient economy, the fact is that reduced purchasing power does not exactly instill optimism among individual households. What’s more, price instability can make it more difficult to create and maintain a budget. The good news is that experts have suggested that inflation likely peaked in June 2022, and in all probability, it will begin to fall, albeit slowly, in 2023. At the same time, this doesn’t mean you should necessarily expect pre-pandemic levels by the close of the year. It’s been suggested that there is at least a reasonable chance of higher inflation continuing into 2024.

Interest rates are likely to stay higher through most of 2023, although the Federal Reserve may begin to slow down the rate hikes in the near term.

After years of historically low rates, The Federal Reserve began instituting a policy of aggressive interest rate increases in 2022 to counter soaring prices on everything from food and housing, to apparel and transportation, and more. The Fed’s intent in implementing a monetary policy of higher rates is to tamp down demand for goods and services by making it more expensive to borrow money. This helps to balance out supply and demand so that prices don’t continue to rise unabated.

With the rate of inflation gradually but consistently falling over the last several months of 2022, the Federal Reserve has signaled that it may decelerate interest rate hikes in the months ahead. If inflation continues to trend downward, interest rates could peak in 2023 and possibly begin to drop by the end of the year. The challenge for the central bank in the near term will be to combat inflation and preserve the value of the U.S. dollar while not stifling other aspects of the economy.

How to navigate the current climate of high inflation and rising interest rates

The Federal Open Market Committee (FOMC) ascertains that inflation of 2 percent over the long run is optimal for achieving maximum employment and price stability in the economy. When inflation is low and steady, it is easier for households and businesses to plan and make informed decisions regarding saving, borrowing and investing. Accordingly, this promotes a strong and stable economy.

As the Fed works to curb inflation while trying to prevent a major slowdown in the economy, there’s a high probability that as consumers we’ll continue to grapple with higher interest rates as well as high  inflation in 2023. While the central bank has indicated that it will slow down interest rate hikes in the near term if inflation comes into line with their targets, equilibrium between supply and demand is apt to take a while to achieve.

Because we’re spending more money than usual on living costs and on interest for loans and credit cards, it can difficult to predict expenses each month and avoid racking up debt. That’s why it’s so important to take a hard look at your spending habits now, so that you can make adjustments as needed, and work to reduce credit card debt if you carry a balance on your cards from month to month. Free and secure money management tools such as MoneyTrac from The Police Credit Union can simplify this process, making it easy to build a budget, and track and monitor spending. What’s more, MoneyTrac is incredibly helpful for managing debt, monitoring investments and setting financial goals.

When it comes to eliminating credit card debt, a highly effective strategy is to prioritize payments based on interest rates with what’s commonly referred to as the “debt avalanche” approach. With this method, you take your credit card bill with the highest APR, and apply any extra money toward it each month, while being sure to make the minimum payments on your other cards. Once this account is paid in full, move on to your credit card with the second-highest rate, and then continue the process. Many experts like the avalanche approach because it allows you to pay less money in interest overall. But if you have several cards with similar rates or would prefer a method with a quicker psychological payoff, you might want to opt for the “debt snowball” process, in which you pay off your credit cards with the smallest debts first.

Ahead of a potential recession, it can be a good idea to increase your emergency savings.

While common wisdom holds that households aim to establish an emergency fund that contains three to six months’ worth of living expenses, financial advisors have suggested that some consider increasing the amount of their cash reserves ahead of a possible economic downturn. Especially if you work in a field or industry where layoffs are more likely, you might gain greater peace of mind by saving up to six or nine months of expenses in an account that is accessible, but separate from the one you use for everyday expenses and paying bills. And according to what one CFP told Heather Taylor at Yahoo, retirees should actually have anywhere from one to three years of expenses in financial vehicles that allow immediate access to cash.

For those who carry a balance on high-interest credit cards and have yet to create an emergency fund, a good strategy can be to save $500 to $1,000 as an initial goal, and then focus on paying down any non-mortgage debt. Once you’ve eliminated this debt, you can start putting more money into your emergency account. For a simple and painless way to create your financial cushion, consider setting up automatic transfers from your checking account to your emergency fund. If you have direct deposit, you could also opt to carve out a portion of it to go into a savings instrument.

Don’t let short-term losses in the stock market stop you from working on your retirement planning goals.

When you consider that just five trading days in 2022 accounted for roughly 95 percent of the S&P 500’s year-to-date decline of 21% in 2022, it’s easy to get caught up in anxiety surrounding the volatility of the stock market. A contentious political climate and general economic uncertainty for the year ahead may also contribute to unpredictable performance among stocks in 2023, as explained by experts who spoke with SUCCESS magazine. However, financial executives and economists are also optimistic that stocks will rebound in 2023, one chief investment officer even noting that the U.S. stock market has only declined once since 1935 in the year following midterm elections. What’s more, stock market volatility can offer the benefit of giving investors the ability to buy stocks at low prices before they bounce back. Although to be clear, actually trying to time the market is generally not a good strategy for most people, who almost always net bigger gains by buying and holding stocks in their portfolio.

What’s critical to understand is that one of the most effective ways to build wealth is to invest regularly in the stock market over a long-time horizon. Whether stocks are moving up or down, it’s important for most long-term investors to stay in the market so that their money will keep growing through compound earnings. While a diversified portfolio can help protect against losses in a downturn, market unpredictability can potentially cause investment allocations in your portfolio to become unbalanced. Given the large fluctuations we’ve experienced recently, the beginning of the new year can be a good time to talk to your financial advisor about whether adjustments should be made based on your tolerance for risk and your timeframe for investing.

When preparing for the year ahead, a bit of perspective can be helpful to keep in mind. In reality, we can’t know for sure what will happen with the global economy in 2023. Ultimately, the best we can do is  take the steps to improve our overall financial well-being and security in ways that will serve us well, whatever the new year brings. In any financial climate, working with a certified professional can help you to avoid pitfalls, and set you on a course to greater prosperity and wealth based on your goals, personal situation and tax-planning needs. Through our partnership with LPL Financial (LPL), The Police Credit Union offers comprehensive Wealth Management services. Our financial advisors can create an investment strategy customized for you, and provide an ongoing review of your portfolio to ensure that it remains aligned with your aspirations. Find details here.

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