The past few years have taught us some financial lessons that we can use in 2023 to make sure we’re not stuck in a bigger financial mess.
We must be prepared for a short-term crisis, think long-term and educate ourselves about investments.
First, the pandemic and lockdowns left many people unable to earn a living, while few had savings to fall back on.
Then, just after all the lockdown measures were lifted and everyone was hoping for a better financial future, the war in Ukraine started and runaway inflation sent interest rates soaring.
“The last few years were tough for so many people, but now we need to use the lessons we learned to make sure we don’t get caught again,” says Brett Mackay, consultant at 10X Investment.
READ ALSO: Leave the budget in 2022 and start 2023 with a spending plan
Lesson 1: Prepare for a short-term crisis
Mackay says a key personal finance rule reinforced now is how important it is to have some sort of emergency fund or short-term savings account that you can tap into in times of crisis.
“Remember that while investing will grow your wealth, saving will secure it, so it’s probably not an investment, but a savings plan.”
If your income is suddenly interrupted or reduced, or if you are faced with an urgent and unexpected crisis, having an emergency fund or short-term savings account with enough funds to replace income can be a lifesaver .
Mackay advises consumers to use a money market fund to ensure their savings are easily accessible to avoid going into debt to cover emergency expenses.
“When times are tough, having extra debt has the opposite effect of having emergency cash. Not only will you have to pay back money for goods (or good times) bought in the past, you’ll likely have to pay interest and costs as well” .
He adds that having funds in a short-term savings account also provides the flexibility to load assets when there are market downturns.
“There has been a lot of volatility in the stock market over the past few years, which creates good opportunities to invest additional funds when unit prices are low.”
READ ALSO: How to teach your children to save and invest
Lesson 2: Think long term.
However, it is also important to think about the long term. Unfortunately, Mackay says, investors are more likely to do the opposite of buying in a dip: they sell, but by selling your investments after prices fall, you’ll simply lock in your losses.
“In other words, it will prevent you from making up lost ground when the market turns up again, which it inevitably does.”
As a general rule, especially with long-term investments, it’s best to keep your eye on the horizon.
“You can expect short-term volatility, which is part of long-term investing. There will be dips followed by peaks, followed by dips and peaks, but the long-term trend is up.”
Therefore, it is better to ignore short-term volatility and keep your eyes on the horizon because approaching long-term goals such as retirement as long-term projects gives you the best chance of success and makes it much easier.
Mackay says it can be hard to ignore the noise of investing as it is in life, which is why so many of us live day to day, focusing on our immediate needs.
“Especially in a time of inflation and rising interest rates, as we are now, it can be difficult to see beyond the ever-increasing costs of basic goods, from groceries and gas to school fees and payments rent or bonds”.
The urgency of our short-term needs often diverts our attention from something equally important: our long-term needs, and we must not let that happen.
READ ALSO: By 2022 it left the middle class in mountains of debt
Lesson 3: Educate yourself
You are the one who cares most about your money, so you need to make sure that you know enough to take care of your money properly. You can educate yourself by asking questions like:
- How much am I paying in commissions?
- What difference will this make to my overall long-term savings?
- Am I using available tax incentives to lower my tax bill and increase my savings?
Mackay says the more informed and critical your approach, the more confident you’ll be in your ability to make good decisions and advocate for your own interests.
“It’s never too early or too late to start. The best time to start is when you start making a living, the second best time is now.”