Money Management

Are we in for another year of solid growth? 

It’s fair to say that 2022 was an interesting year, economically speaking. On the one hand, the stock market tanked, leaving investors with on-screen losses in their retirement plans and brokerage accounts. Inflation also wreaked havoc on consumers, forcing them to do everything from raid their savings to rack up credit card balances just to stay afloat.

But while the stock market was volatile and living costs were high, unemployment was really low in 2022. In fact, we closed out the year with a national jobless rate of 3.5% — the lowest number over the past 20 years.

Even more notable is the fact that the U.S. economy added roughly 4.5 million jobs in the course of 2022. That’s the second-highest number of new jobs in a single year on record. The highest number was 2021’s astounding 6.7 million jobs.

Of course, it’s clearly worth noting that a big reason job growth has been huge over the past two years is that 2020 was a record year for job loss. That year, the economy shed 9.3 million jobs in response to the pandemic.

But while job growth was solid in 2022, there’s some question as to whether that trend will continue into 2023. And unfortunately, we could see job growth slow down quite a bit in the coming 12 months. We may, in fact, even wind up with a bit of an unemployment problem on our hands.

What does 2023 have in store for the U.S. economy?

Without a crystal ball, we can’t predict how the next 12 months will shake out, economically speaking. But there’s reason to believe economic conditions could worsen.

The Federal Reserve remains concerned about inflation despite the fact that it’s cooled modestly since peaking in mid-2022. As such, the central bank plans to continue implementing interest rate hikes in 2023, which are apt to drive the cost of borrowing upward.

That could, in turn, lead to a major decline in consumer spending — a substantial enough drop to fuel a recession. If that were to happen, it could easily lead to an increase in unemployment levels.

In fact, a number of big-name companies have already announced plans to lay off staff to conserve costs. And while those decisions have largely come from the tech industry, which took a beating in 2022, we can’t discount the possibility of more layoffs in the coming 12 months.

Even if we don’t see an uptick in layoffs, there’s a good chance job growth will slow down in 202. That’s partly because companies are likely to be more conservative in their hiring practices in light of recession warnings, and because a lot of the jobs employers have needed to fill over the past couple of years have already been staffed. So while 2022 may have brought about 4.5 million new jobs, 2023 may not bring about nearly as many, and we could see a net loss in jobs by the time the year concludes.

Workers shouldn’t panic about the state of the labor market

While it’s certainly possible that job growth will slow in 2023 and that unemployment levels will increase, workers should recognize that we’re starting off the year in a very strong place. And also, we’re unlikely to go from record-low unemployment on a national scale to crisis-level job-loss numbers in a span of a few weeks.

If the economy starts to decline, there will almost certainly be warning signs. And from there, workers will know to start boosting their savings account balances to gear up for a potential recession and unemployment. (Granted, workers should be bolstering their savings already, given the warnings that have already been issued.)

Let’s also remember that if a recession hits in 2023, it may be short-lived rather than drawn out given that we’re starting off the year in a pretty solid place. That’s another thing that should help alleviate workers’ concerns.

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Don’t get too excited if you have a tax refund coming to you. 

For many Americans, receiving an annual tax refund is something to look forward to.

In fact, it’s common for people to have plans to spend this money soon after it comes.

Receiving a big sum of money in your bank account from the IRS all at once can feel like a windfall or like something to get excited about. But, Dave Ramsey pointed out recently that getting a refund is actually not a good thing — and he’s absolutely correct.

Here’s why Ramsey believes a tax refund isn’t something you should aspire to receive.

There’s a very good reason not to want a tax refund

Ramsey offered a simple explanation for why you don’t want a tax refund, even though it might be “fun in the moment,” when the payment comes.

“Wouldn’t it be nice to have that increase in income each month instead?” Ramsey asked. “Yes! Then you’re in charge of what that money’s doing instead of the government.”

See, as Ramsey correctly points out here, the refund coming back to you is from extra money you sent the government throughout the year. The money was taken from you out of your paycheck, kept by the IRS for months, and finally returned to you after you filed your taxes.

While the government was holding your money, though, you didn’t have control over any of it. You weren’t able to put it into a high-yield savings account where you could have earned interest or accessed it when you needed it. And you weren’t able to use it to pay down debt faster, avoiding unnecessary interest charges you paid to creditors while the government held your cash interest-free.

Instead of allowing the IRS to just keep your money for you for months because you pay too much, it’s much better as Ramsey suggests to pay less in taxes throughout the year, have that money as your own each month to spend, and then get a smaller refund or even owe a little bit to the IRS at the end of the year.

How to avoid a tax refund

If you want to follow this solid advice from Ramsey and avoid your tax refund, you can do so via a simple approach. Adjust the details on your income tax withholding at work. The IRS has a withholding estimator if you aren’t sure how much is being withheld. Make use of it to determine the minimum you need to withhold to avoid tax penalties, and then tell your employer you want to update the withholding details you provided when you were hired.

Once your withholding is adjusted, your employer will send less money to the IRS on your behalf over the course of the year so you will get more cash in your paychecks. Be sure to use this wisely.

Sometimes, people like a tax refund because then they can make sure they take the lump sum and use it for things like debt repayment or savings. But you can set up automated payments to your debt or transfers to your savings account on payday for the extra amount in your check. That way, you’re benefiting from the money all year long.

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Buying a home is a big deal, so make sure you don’t make the wrong call. 

Buying a home is no easy feat these days. That’s because home prices are way up, and so are mortgage rates. And so unless you have a really healthy budget, you may have to make certain compromises in order to snag a place of your own.

But there are certain factors you shouldn’t compromise on when it comes to buying a home. And if these signs apply to you, you may be on the verge of making an offer on a place that’s really not a good fit at all.

1. It’s over your budget

As a general rule, your monthly housing costs, including your mortgage payment, property taxes, and homeowners insurance premiums, should not exceed 30% of your take-home pay. If you’re buying a home that will put you over that threshold, that alone is a sign that you may want to reconsider. If you take on housing expenses that are too high, you might fall behind on them or on other bills, leading to a world of financial struggle.

2. It’s not convenient to your job

Many people are back to full-time in-person work these days. If you’re one of them, and the home you’re looking at will leave you with a miserable commute, you may want to seriously rethink your offer.

Your commute is something you’re going to have to deal with on a daily basis. And the stress of a lengthy commute can impact your overall wellbeing in a very negative way.

3. It’s nowhere close to friends and family

It’s important to have access to your friends, family, and support network. If the home you’re looking at buying puts you nowhere near anyone you can count on in a pinch, you may want to rethink your plans.

Granted, some people do decide to move to an area where they don’t know anyone to pursue job opportunities or enjoy a more affordable lifestyle. But if the idea of being separated from the most important people in your life is troublesome, then you may want to rethink your home purchase.

4. It’s way too small — and there’s no way to expand it

Sometimes, a smaller home can become a larger one by renovating it, such as finishing a basement to add living space or putting on an addition. But if you’re looking at a home that’s clearly too small for your family, and there’s really no way to make it larger, you might end up regretting your decision.

It’s one thing to give up a separate dining room and settle for an eat-in kitchen instead. But it’s another thing to buy a two-bedroom, one bathroom home when you’re a family of five.

Because home prices are up these days, buying the wrong place can be particularly problematic. If your purchase doesn’t work out and you’re forced to sell in a couple of years, you might end up getting much less for your home than what you paid. And that’s a risk you probably don’t want to bear. So instead, really take the time to make sure the property you’re about to buy is the right one. And if you have your doubts, look out for these key warning signs.

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There are pros and cons to going that route. 

If you’ve been hearing more and more about “buy now, pay later” plans, or BNPL plans, there’s a reason for it. These plans have become an increasingly popular choice among consumers over the past couple of years because they offer certain benefits that credit cards don’t.

For one thing, with a BNPL plan, you can avoid interest on your purchases entirely simply by sticking to a payment agreement and making your installment payments on time. You can also qualify for a BNPL plan on the spot, as opposed to having to apply for a new credit card and wait to get approved.

But should BNPL plans take the place of credit cards? Not necessarily.

Not a perfect solution

BNPL plans work sort of like a mortgage. You make a down payment on the item you’re buying, and then you pay the rest of your purchase off over time.

Only there’s a major difference between BNPL plans and mortgages and other installment loans. With a BNPL plan, you’re usually required to pay off your purchase within a short period of time — often, 12 weeks or less. And that doesn’t give you all that much wiggle room.

Let’s say your washing machine breaks and you need a new one, only you can’t afford to plunk down $900 on the spot. If you charge that washing machine on a credit card but don’t pay off your balance by the time your bill comes due, you’ll start to accrue interest on that balance. If you use a BNPL plan for that washing machine purchase and pay it off in three months (or however long your BNPL plan calls for), you won’t accumulate interest at all.

But if you can’t swing the cost of a $900 washing machine today, chances are, you’re not going to magically come into the money over the next number of weeks. So what could end up happening is that you fall behind on your BNPL agreement and then start to rack up interest and fees.

Plus, when you don’t keep up with a BNPL plan, it gets reported as negative activity on your credit report, the same way you’d get dinged for being late with a credit card payment. On the other hand, if you make your minimum credit card payments, you’ll be considered to have paid on time.

You’ll miss out on different perks

Not only can BNPL plans be risky, but these agreements don’t allow you to accrue rewards or cash back on purchases like credit cards do. So if you’re buying an essential item like a washing machine, you might as well get something out of it.

All told, BNPL plans can be a good solution in limited situations, but they’re not ideal. And they shouldn’t necessarily take the place of swiping a credit card.

If you’re buying something you’re truly convinced you can pay off in two or three months and you want to avoid credit card interest, then a BNPL plan may be a better way to go. But if you’re signing up for one of these agreements, make sure to first comb through the details carefully so you know what you’re getting into and there are no surprises.

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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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