Money Management

It’s a move that could work out — or backfire. 

Many people struggle to build savings. In fact, as of 2021, a good 32% of people couldn’t rely on their savings to cover a $400 emergency, reports the Federal Reserve.

But what if you’re in the opposite situation? What if you have a really robust savings account balance, to the point where you think you might even have a little too much money sitting in cash? You may be tempted to take money out of your savings in 2023. But is that a smart move?

The quick answer? It depends.

The upside of moving money out of savings

These days, savings accounts are actually paying a pretty generous amount of interest. That wasn’t the case for many years, so now is a good time to have a little extra money in the bank.

But while you might snag, say, a 3% interest rate on the money you have in a savings account, you might score three times that return by investing money in a brokerage account. In fact, now’s a good time to pump more money into the stock market because it’s had a tough year.

At this point, stock values are still down compared to where they sat a year ago. It’s in your best interest to buy stocks when they’re down, and raiding your savings could be your ticket to doing that.

The downside of moving money out of savings

While the U.S. economy is strong right now, many financial experts are convinced we’re headed for a recession. And if that happens, you might need extra money in savings to get yourself through a period of unemployment.

Because of that, it’s easy to argue that it’s not the best idea to move money out of savings in 2023. If a recession strikes and you’re hurt financially, you’ll risk landing in debt if you don’t have enough cash reserves to cover your bills.

What’s the right call?

It may be a good idea to move some money from a savings account into a brokerage account in 2023. But before you do, make sure you’re leaving yourself with a decent-sized emergency fund.

At a minimum, you should always aim to have enough savings to cover three full months of essential living expenses. But given all of the recession warnings we’ve been hearing, a better bet right now is to leave yourself with enough money to cover at least half a year’s worth of bills.

In fact, some experts even say that in the wake of the COVID-19 pandemic, it’s a good idea to have enough cash in savings to cover up to a year of bills. Others might say that’s pretty extreme, but saving enough to pay for six months of expenses is definitely a smart idea at a time like this.

If you can do that while freeing up money for investing purposes, go for it, as long as you understand the risks involved. Otherwise, you may want to err on the side of having extra savings until economists start to adopt a more positive outlook.

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It’s a nice option to fall back on. 

Saving for emergencies is important, because you never know when life might throw you a curveball. You could wake up in the middle of the night in winter to a freezing house, or come home from work one summertime afternoon to find that your home is scorching. And let’s not forget that your car could decide to stop running at any time, especially if it’s an older one.

That’s why it’s crucial to have money in a savings account for unplanned bills. But unfortunately, many people don’t have cash reserves like that. And over the past year, inflation has made it more difficult to put money into savings.

Meanwhile, it’s also an important thing to save for retirement. If you don’t, you might end up short on cash once your senior years roll around.

Now, there are a number of different tax-advantaged retirement plans you can use to save for the future. You could put money into a traditional IRA and get a tax break on your contributions. But a traditional IRA will have you paying taxes on the withdrawals you take during retirement.

Another option to look at is a Roth IRA. Though you won’t get an upfront tax break with a Roth IRA, you’ll get tax-free withdrawals as a retiree.

Financial guru Suze Orman happens to be a big fan of the Roth IRA. But it’s not just because these accounts allow for tax-free retirement withdrawals. She also likes the fact that a Roth IRA can serve as your backup emergency fund.

More flexibility

In a recent blog post, Orman wasn’t shy about touting Roth IRAs as an excellent savings tool. But a big reason she’s a fan has to do with what she refers to as “emergency flexibility.”

As Orman explains, “You can always withdraw the money you contributed to a Roth IRA without owing any tax or penalty. The only time you would be hit with tax and potentially a 10% early withdrawal penalty is if you withdraw any earnings from the account. If you make an early withdrawal from a Traditional IRA you will owe income tax, and potentially a 10% penalty.”

She’s right about that. The downside of saving in a tax-advantaged retirement plan is facing restrictions on when you can touch your money. Removing funds early from a traditional IRA will generally result in a 10% penalty unless you qualify for an exception (you can take a limited withdrawal, for example, to purchase a first-time home).

But Roth IRAs are far more flexible. Since you don’t get a tax break on the money that goes into it, you can remove that money in a pinch without being penalized.

Should your Roth IRA be your emergency fund?

Absolutely not. While your Roth IRA could bail you out of a jam if you run out of money in your savings account, your goal should be to maintain a separate emergency fund so you don’t have to tap your retirement savings prematurely. Doing so could mean facing a major shortfall later in life, which is clearly not ideal.

Not only that, but the benefit of keeping money in a Roth IRA is getting to invest it and let it grow tax-free. If you keep taking emergency withdrawals, you’ll lose out on that benefit. So while Orman is right in that a Roth IRA does give you emergency flexibility, you should make every effort to avoid raiding yours before you reach retirement age.

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It’s certainly something lawmakers are fighting for. 

When the American Rescue Plan was signed into law in March of 2021, it did more than just send stimulus checks into millions of bank accounts. It also gave the Child Tax Credit a notable boost.

Prior to 2021, the Child Tax Credit had a maximum value of $2,000 per child, and it was only partially refundable. That meant a family with no tax liability could not receive the full $2,000 value of the credit per child.

In 2021, the Child Tax Credit’s maximum value increased. For children under age 6, the credit was worth up to $3,600. For children aged 6 to 17, it was worth up to $3,000.

The credit also changed to be fully refundable in 2021. And half of it was made available in monthly installment payments that went out during the second half of the year. That was crucial in helping families with children keep up with their living costs at a time when inflation levels were starting to creep upward.

In fact, the boosted Child Tax Credit did a lot of good in 2021. It helped pull millions of children out of poverty that year, and it also helped a lot of households shore up their finances.

But while lawmakers were initially hoping to keep the boosted Child Tax Credit in place for 2022, that didn’t happen. The question is, what does 2023 have in store for the Child Tax Credit?

It’s still on lawmakers’ radar

Lawmakers haven’t forgotten about the Child Tax Credit. And many on both sides of the political spectrum agree that a boosted credit is necessary. The problem, though, is that lawmakers don’t necessarily agree on the rules surrounding the credit.

Some lawmakers want to impose a minimum earnings requirement for Child Tax Credit eligibility. But those opposed say that rule will make it so that the lowest income households are unable to receive the credit, or collect it in full.

It’s easy to see both sides of the argument. Some lawmakers feel strongly that the Child Tax Credit should not be meant to discourage work, nor should it take the place of parents going out to find work. On the other hand, some parents face challenges that make holding down a job very difficult. And childcare is one of them.

For lower earners, the cost of childcare can effectively wipe out a paycheck. In some cases, it can even exceed their earnings. So it’s easy to see why parents with young children who don’t stand to earn a very large wage don’t get jobs — it doesn’t pay off financially.

Will a boost come back in 2023?

We can’t predict whether the Child Tax Credit will get a boost in 2023 or not. We also can’t predict whether the Child Tax Credit will once again be made available in monthly installments, or whether the families entitled to it will have to sit tight and wait to collect their money in tax refund form.

But given the number of lawmakers who have been fighting for the boosted credit this year, there’s a reasonable chance the Child Tax Credit will get some sort of enhancement in 2023. What that could look like, however, is still really up in the air.

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Don’t move forward with a home purchase without thinking about these issues. 

Buying a house is a huge financial and personal decision that’s going to shape what the rest of your life looks like for years to come. You don’t want to jump into it without thinking through the details.

If you’re contemplating getting a mortgage and purchasing a property in the new year, here are four key questions to ask yourself to decide if that is really the right choice for you.

Are you financially ready to buy?

Before even considering any other issues, you need to make sure you are in a good financial position to move forward with a home purchase. This means you need to take care of the following tasks:

Check your credit report and score and make sure you have a reasonably good credit score (ideally, your score will be above 700 to get the best rates, but if it is below 640 then you should think seriously about waiting to improve your credit before buying).Confirm you have some money to put down. Ideally, you’d make a 20% down payment, but if that’s not possible, you’ll typically want to have at least 5% down.Make sure mortgage payments will be affordable for you. You should try to keep total housing costs to no more than 25% of your income in order to avoid being house poor.

You’ll want to be sure you’re in a good financial position to both qualify for a mortgage and be able to pay for your home loan once you get it.

What will your mortgage rate be?

Mortgage rates are higher now than they have been in years. Some experts project that rates will slightly fall next year because demand for home loans will decline and banks will have to drop their rates to get borrowers. Others predict rates will increase because of continued efforts to fight inflation.

Although it can be hard to predict where rates will go in 2023, you’ll want to think about whether you’re comfortable borrowing at the level they are at when it comes time to get your loan.

What does the real estate market look like in your area?

Property values skyrocketed when mortgage rates were low and the supply of homes was low during the heart of the COVID-19 pandemic. But property values have begun to fall as demand for houses drops due to today’s higher rates. Many experts believe they are likely to continue to fall further, although not everyone agrees.

If prices remain high in your area, think about whether there are economic indicators — like properties staying longer on the market before selling — that could suggest prices could decline further.

How soon will you need to move?

Finally, think about whether you will need to relocate shortly after buying.

If you have to move soon, it can be harder to make back your money due to the high transaction costs associated with buying and selling a home. A temporary decline in property values, if it occurs, could also affect you more if you don’t allow a lot of time for your home to appreciate in value. Unless you’ll be in your home for around five years or longer, you may want to wait to buy.

By answering these key questions, you can make an informed choice about whether buying a house in 2023 makes sense for you. Since this is a big decision, take the time to think your answers through.

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