Money Management

These moves might really help improve your financial picture. 

Rampant inflation has been with us for well over a year. And it’s caused a lot of people’s finances to take a turn for the worse.

A recent SecureSave survey found that for almost three in four Americans, financial stress is hurting their productivity at work. So if you’re struggling financially and are worried about your prospects, you’re not alone.

But if you want your financial circumstances to improve, you can’t just cross your fingers and hope your luck will change. Rather, you have to make some positive changes happen. Here are a few steps you can take to better your financial picture in 2023.

1. Boost your emergency fund

The aforementioned survey found that a whopping 67% of Americans don’t have enough money in savings to cover an unplanned $400 expense. If you’re in a similar boat, it’s imperative that you do what you can to boost your emergency savings. Having extra money in the bank could help you sleep better at night, whereas if you’re low on cash reserves, you might worry about racking up scores of credit card debt the next time an unplanned bill comes your way.

In fact, ideally, you should aim for a large enough emergency fund to cover a full three months of essential bills. That way, if the emergency you’re faced with is the loss of your job, you’ll have a means of covering your bills.

Now, if you’re really low on savings right now, it’s going to take a while to amass enough cash reserves to cover three months of bills. The key, however, is to do your best and add to your savings month after month, even if it’s just small amounts at a time.

2. Get on a budget

Following a budget could help you get a better handle on your money. That might lead to more savings and less stress.

There are different ways you can go about budgeting, but you should know that it doesn’t have to be fancy or complicated. You could simply open a spreadsheet or even bust out a piece of paper and write down your different expenses, along with their respective costs. Then you’d simply compare those expenses to your paycheck and make sure the numbers work. If you’re spending all of your paycheck, or beyond, based on your bills, then you’ll know it’s time to make cuts.

3. Grow your job skills

Being great at what you do won’t automatically prevent you from getting laid off if your employer is forced to make cuts. But you’re less likely to wind up losing your job if you’re an outstanding employee with skills your peers lack. So in the coming weeks and months, try your best to grow your job skills, whether by doing independent research when you’re not on the clock or observing successful people around you.

Getting to a secure place financially isn’t just a matter of luck. Often, it’s a matter of hard work. But if you make the effort, you may find that come this time next year, you’re a lot happier with your financial picture on a whole.

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You don’t need to be a tax expert to benefit from it. 

Paying taxes is an expense every working American needs to account for. And whether you have your taxes deducted from your paycheck every few weeks or you’re self-employed and make estimated quarterly payments, they’re something you have to think about year-round.

But most people don’t tend to focus on taxes until the time comes to work on their actual tax returns. And what’s the concept of tax savings really tends to come into play.

The good news is that the U.S. tax code is loaded with benefits that can help taxpayers save money. Tax credits, for example, reduce your tax liability on a dollar-for-dollar basis. So if you owe the IRS $1,000 but are able to claim a $1,000 tax credit, that liability is wiped out completely.

Tax deductions, meanwhile, exempt a portion of your income from taxes. So if you claim a $1,000 tax deduction and your effective tax rate is 22%, you save $220.

Of course, just because the tax code is filled with different credits and deductions you can take doesn’t mean all of them are available to you. You’re allowed to deduct the interest you pay on your mortgage loan, for example. But if you don’t own a home, you won’t have mortgage interest to write off.

Furthermore, many tax breaks have income limits associated with them. And often, that means higher earners can’t benefit from them. But there’s one tax break that is available to anyone filing a tax return.

The standard deduction benefits everyone

No matter how much you earn, you’re entitled to claim the standard deduction on your tax return every year. For 2023, here’s what that deduction looks like based on your filing status:

Single or married filing separately: $13,850Married filing jointly: $27,700Head of household: $20,800

Keep in mind that these numbers represent the standard deduction for the current year, so you’ll claim it on a tax return you file the year after, in 2024. But it’s good to have a sense of what this year’s standard deduction looks like.

RELATED: Best Tax Software

If you’re in the midst of filing your 2022 tax return right now, these are the standard deduction numbers for last year:

Single or married filing separately: $12,950Married filing jointly: $25,900Head of household: $19,400

Should you claim the standard deduction or itemize?

Figuring out whether to take the standard deduction versus itemize is really easy, as it’s a matter of simple math. Let’s say you’re filing your 2022 taxes right now and are single. That gives you a standard deduction of $12,950. If your itemized deductions only add up to $10,400, then the standard deduction is what you should claim, since that’s the higher number.

In many cases, itemizing deductions will make more sense for people who own homes and pay a lot of mortgage interest and property taxes. But this isn’t always the case. Ultimately, it pays to run the numbers to figure out which route to take.

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You might be surprised at how little financial shock the average American could handle. 

The average American’s emergency fund is nowhere close to where it needs to be. Half of Americans have less than $500 in emergency savings, according to data from Prudential. If an unexpected expense came up that was greater than $500, half of Americans would need to borrow the money or sell something to pay for it.

$500 — or even $1,000 — isn’t nearly enough to be truly prepared for tough financial times. Here’s why an emergency fund is so important, how much you should have set aside, and what to do if you aren’t well-prepared for unexpected expenses.

Why an emergency fund is so important

Let’s face it — life happens. Your car can get a flat tire, your child might need an unexpected visit to urgent care, or you might need emergency dental work, just to name a few possibilities. And far too few people plan for the unexpected.

An emergency fund is critically important because it allows you to deal with the unexpected without derailing the progress you’ve made elsewhere in your financial life, or worse, without digging a financial hole by borrowing money. You’ve probably read that long-term investing is the best way to build wealth, but it’s hard to do that if you have to dip into your brokerage account every time an unplanned expense arises. And if you need to charge every unplanned expense to a credit card, you’re setting yourself up for a cycle of debt that can be tough to overcome.

How much do you need?

The general rule of thumb among financial planners is that Americans should aim to have six months’ worth of expenses set aside in a readily available place, such as a savings account. So, to figure out your emergency fund target, add up all of your expenses for a month, including fixed expenses (housing, car payment, etc.) as well as realistic estimates of variable costs like utilities, gas, and groceries. Aim to have at least six times that amount so you have six months’ worth of savings. The idea is that your emergency fund should not just be enough to handle an unplanned expense, but should provide you with sufficient cushion if you lose your job or are otherwise unable to earn money. Bri from The School of Betty recommends figuring out what an emergency looks like to you to help with the savings process. “Defining this will not only help you from spending these funds on non-emergency things, but will also give you permission to use these savings when you actually need to.”

Now, six months’ worth of expenses can be a big number and might seem like an intimidating goal. But you don’t have to get there right away. Even a $1,000 emergency fund will put you in better shape than the majority of Americans and should be enough to handle most unexpected expenses. So, if a six-month emergency fund seems like a lot to aim for, set a goal you can realistically achieve in the next few months and go from there. Once you reach it, set another target, and so on. For full disclosure, it took me well into my 30s before I had a six-month cushion set aside.

Take steps to prepare yourself

If you need to build up your emergency fund, there are two steps that can make it much easier. First, open a separate bank account just for your emergency fund if you haven’t already. Keeping your emergency fund separate reduces the temptation to use it as everyday spending money.

Second, make it automatic. Figure out an amount you could comfortably afford to put into an emergency fund every time you get paid and set up a recurring transfer into your emergency account.

The bottom line is that most Americans are very underprepared for financial hard times, but with some solid planning, you don’t have to be. By taking steps to build your emergency fund, you’ll be on your way to a higher level of financial comfort faster than you might think.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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It’s good to be addicted to positive habits. 

Workers today are deep in the throes of a personal savings crisis. And it has financial expert Suze Orman very worried.

A recent survey by SecureSave (a company Orman co-founded) found that 67% of Americans don’t have enough money to cover a $400 emergency expense. And so it’s easy to see why Orman thinks consumers need to focus on boosting their savings.

Now, getting over that initial hurdle and actually starting to save money may be challenging. But once you get into the flow of saving money consistently, you may find that habit is a hard one to break. And that’s actually a really good thing.

It pays to get addicted to saving money

There are certain things in life that may seem daunting until you actually go out and do them. Take driving, for example.

Some people are terrified at the thought of having to operate a vehicle on a busy road. Then they start taking lessons, get a little practice, and realize how convenient it is to be able to travel by car.

The same holds true when it comes to saving money. You might think the idea of freeing up cash for your savings is overwhelming. But once you save your first $100, you may be even more motivated to save your next $100, and another $100 after that. Before you know it, you could be well on your way to building up a solid emergency fund. That, in turn, could make it less likely you’ll need to rack up credit card debt the next time an unplanned bill lands in your lap.

As Orman herself puts it, “People get addicted to watching their money grow.” So really, if you want to build savings and wealth, the key is to just plain start.

You don’t even have to start with a lot of money. If you can only afford to save $15 this month, do it. And then, if it’s possible, push yourself to save $20 the next month, and $25 the month after that. Any amount of savings you have is better than nothing, and once you get into the habit of socking money away, you’re likely to uphold it.

Automation could be the key to success

If you tell yourself that you’ll do your best to save some money by the end of the month, what might inevitably happen is that you run out of funds and fall short of that goal. So if you’re serious about starting to build savings, make the process automatic.

Arrange for a small amount of money to leave your checking account and land in your savings at the start of each month so it disappears before you get a chance to spend it. If you’re able to increase that sum over time, even better.

Automating your savings could make it easier to actually stick to your goals. And once you start seeing results, like a growing bank account balance, you may be even more motivated to keep setting money aside for your own financial protection.

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It’s a risk you can’t afford to take. 

At this point, many people are deep in the throes of finalizing their tax returns. And if you’re working your way through yours, you’re in great shape, seeing as how there’s still some time between now and the April 18 filing deadline.

A lot of people outsource their taxes to a professional because they worry that if they don’t, their risk of getting audited by the IRS might increase. The reality is that filing taxes on your own won’t necessarily increase your audit risk, and using a tax preparer won’t necessarily get you out of an audit. But there is a risk of filing taxes solo you should know about that has nothing to do with audits whatsoever.

Can you afford to give up money you’re entitled to?

The U.S. tax code is loaded with credits and deductions that can help taxpayers save a lot of money. But some of those tax benefits may not be obvious to the average person who files a tax return on their own. And there lies the danger of not using a tax professional: losing money.

In a recent interview, Mark Steber, Chief Tax Information Officer at Jackson Hewitt, explained that the reason he tends to advise taxpayers to use a professional is that these people know the tax code inside and out, whereas you probably do not. And that’s okay. If you’re not a tax preparer or accountant, why should all of those rules take up space in your brain?

But when you file your own tax return, you risk missing out on tax breaks that could result in a higher refund, or in less money you have to send to the IRS. And at a time when money is so tight for so many people due to surging inflation, that’s not a risk you should be willing to take.

“I see a lot of self-inflicted oversight,” said Steber with regard to people filing their own taxes. And that situation is easily avoidable.

Is a tax professional worth paying for?

You might reap some tax savings by using a professional to complete your return, but in exchange, you’ll pay a fee. So will you really come out ahead in the end? In many cases, the answer is yes.

Let’s say a tax preparer charges you $300 to complete your return but only manages to find you a $250 tax break. You might think you’ve lost money in that transaction because your tax savings this year didn’t cover their fee.

But remember, now that you know you’re entitled to a given tax break, you can look into claiming it year after year. So even if you don’t come out ahead financially right away, in time, you stand to gain.

Now, this isn’t to say that you can’t research tax credits and deductions yourself. You absolutely can. But given that you’re probably not a tax code expert, it may be worth it to turn to someone who is. Chances are, extra money in your bank account would no doubt come in handy right now, and using a professional could be your ticket to scoring some.

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It’s important not to be fooled by too much positive news. 

If you were to do a quick search along the lines of “Is the U.S. economy in good shape?” you’d probably pull up some data pointing to a reassuring “yes.” The national unemployment rate recently hit a 54-year low, and that alone might lead you to believe that there’s no need to worry about losing your job.

But financial guru Suze Orman isn’t convinced that the job market is totally stable and the economy is in a good place. And she cautions workers to do what they can to boost their savings in case layoffs increasingly start coming down the pike.

Don’t get too comfortable with today’s job market

More than 500,000 jobs were added to the U.S. economy in January. When you see a number like that coupled with record-low unemployment, it might lead you to believe that things are perfectly rosy.

But Orman warns that the job situation very much has the potential to take a turn for the worse, as does the broad economy. First, as Orman likes to remind people, “All indicators are backward-looking indicators.”

It may be that jobs increased in January and unemployment reached a decades-long low. But that’s not necessarily indicative of what’s to come.

We’ve already seen a number of large employers lay off staff during the early part of 2023 in an effort to cut costs. If that trend continues or picks up, the national jobless rate could easily rise.

What’s more, we’re definitely not out of the woods as far as a recession goes. If the Federal Reserve keeps raising interest rates to fight inflation, which it’s likely to do this year, it could drive up the cost of consumer borrowing, from credit card rates to personal loan rates. That could lead to a serious pullback in consumer spending — and a broad economic downturn.

Once that happens, layoffs could become even more rampant. And workers who aren’t financially prepared for one might really struggle.

Shore up your savings now

All told, many workers today have, as Orman calls it, a “false sense of security.” A lot of people think they’ll be able to just go out and get a job if their current one goes away. But Orman cautions that a lot can change in that regard, and soon. So rather than take comfort in today’s seemingly strong labor market, take action.

Pump more money into your savings account so you’ll be able to cover several months of bills should your job be taken away. Not every employer that lays off staff offers severance or compensation. And your state unemployment benefits might replace just a fraction of your missing paycheck. So at a minimum, try to save enough to cover three full months of essential bills so that if you need to go without pay for a while, you won’t automatically be driven into debt.

At the same time, it’s a good idea to work on boosting your job skills and networking. You never know when you might fall victim to a layoff, and having a solid skill set and connections could be your ticket to finding a new job in short order when you need one.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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