2023 Wealth Wrap: 3 Financial Housekeeping Tips to Consider to Close the Year Strong!

Before we dive into our last post for 2023, I'd like to take a moment to thank you for your readership, feedback, and support this year! Whether you shared one of my posts with a friend or family member, offered content ideas, caught a spelling mistake (or two), it has been the dialogue and support this community brings that has helped WealthOnThe7 blossom. I am excited to see what the new year will bring!

As a thank you, here's a free template to track your net-worth building journey in 2024!

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This final post of 2023 was inspired by my own financial checklist as I sat down to round out the year. Below are three financial housekeeping tips to start 2024 on strong footing, covering (1) investments, (2) savings and (3) credit.

I. Investments

Year-end Tax Loss Harvesting

Top of my to-do list was to sit down to look at my year-to-date performance in (1) my regular brokerage account and (2) my Roth IRA. But first, some context: Let's remember just how an amazing run the stock market had this year. The S&P500 Index (SPX) is +24% YTD, while the more tech-heavy Nasdaq-100 Index (NDX) is set to finish the year +54%! For context, the NDX has not had a >50% performance like this since ... 1999! This is all more impressive considering most economists predicted 2023 to be a recession year. In fact, according to the February 2023 National Association for Business Economics survey, nearly 60% of economists surveyed predicted a >50% chance of the U.S. entering into a recession in 2023. Good thing they were wrong.

What does this mean for you? With an against-the-odds, impressive stock market run like this, it makes sense to want to profit-take and sell some of the bigger winners in your portfolio (e.g. if you'd bought Nvidia back on Jan 3rd @ $143.15, you'd be >240% up on the year - kudos to you if you did!). What might make less sense is to sell some of your losers. That would mean locking in a capital loss - but why? Taxes.

While you might have felt good about selling your NVDA after an impressive +240% run, you are likely to get a sobering call later in the form of a tax bill for capital gains come April 15, 2024. Tax-loss harvesting allows you to reduce your taxable base from selling profitable investments by netting this with losses from unprofitable investments.

Note: There is a difference between short-term and long-term capital gains. E.g. if you'd held onto NVDA for <1 year, you'd be subject to short-term capital gain taxes at the same rate as your ordinary income, 10%-37% rate depending on your income. If you'd held onto NVDA for >1 year, you'd be subject to long-term capital gains taxes, 0-20% depending on your income.

To sweeten the deal, if your capital losses surpass your capital gains, the loss amount in excess can be claimed to lower your taxable ordinary income up to $3,000 (full details from the IRS here). If the loss amount in excess of your capital gains is greater than $3,000, you can carry over the losses to future tax years. This strategy is called tax loss carryforward.

Bottom line: Consider selling your losers in your regular brokerage account to take advantage of tax-loss harvesting benefits and lower your taxable capital gains base for FY 2023. For a retirement account like a Roth IRA, this strategy makes less sense as any capital gains or losses are by design tax-free. Selling your losers in a Roth IRA will not lower your tax bill, but there are many more market cycles that can play in your favor between now and when you're 59.5 years old!

II. Savings

Competitive Rates for Emergency Funds

With most data points showing signs of cooling inflation and a resilient economy (November CPI YoY 3.1%, unemployment at 3.7%), the Federal Reserve is expected to begin cutting rates in 2024. Just when and how fast this will happen is a topic of debate, but Goldman Sachs is predicting three consecutive 25-basis point reductions (1 basis point = 0.01%) in March, May, and June, with further moves on a quarterly basis.

What does this mean for you? If you have cash parked in a high-yield savings account (HYSA), your APY is likely to come down as the Federal Reserve begins its rate cutting cycle. That means if you're earning 4.5% APY at an online bank like Marcus, that rate is likely to come down to <4% during the summer of 2024.

One way to lock in a higher cash rate in a rate-cutting environment is exactly that - to lock in the rate. A certificate of deposit (CD) is a savings product that earns interest on a money deposit that is untouched for a predetermined period of time. CDs have varying maturities, anywhere from 6months to 6 years. Below you can find the 6-month CD offered by Marcus, which is offering a 5.25% APY. If you were to deposit money into this 6-month CD, you'd be earning 5.25% APY for 6 months, even if rates on an ordinary HYSA fall to 4%. Not a bad deal!

Note: Opening a certificate of deposit (CD) is best only for cash you know you will not need for the duration of the CD - like an emergency fund. For example, if you know you will need to tap into the funds set aside in a 6-month CD in <6 months, then a CD is not for you. Tapping into the money set aside in a CD earlier than its maturity could result in hefty early withdrawal fees.

Bottom line: Consider locking in higher rates on your emergency cash during the incoming 2024 rate cutting cycle by opening a CD (e.g. 6-months). You are exchanging liquidity (i.e. easy access to those emergency funds) for a higher APY during the duration of the CD.

III. Credit Debt Avalanche Your Credit Card Debt

The holiday season is a good opportunity to ramp up your cash reserves before the new year. Have a year-end bonus? Maybe your tia surprised you with a $50 envelope since you outgrew the Old Navy holiday sweaters? All opportunities to set aside cash for good use.

What does this mean for you? One good use of those year end cash reserves is to pay down your credit card debt! There are two main methods to paying down debt: debt avalanche and debt snowball. The debt avalanche method asks you to pay down the debt with the highest APR, while the debt snowball method asks you to pay down the debt with the smallest balance. The debt avalanche method will save you the most on interest over the long run, but the debt snowball method could help you stay consistant with your debt repayment journey as you knock out debt faster.

Bottom line: Consider using year-end holiday cash gifts/reserves to pay down your outstanding credit card debt. One good method - known as debt avalanche - is to organize your outstanding debts from highest to lowest APR and work towards paying down the cards with the highest rates first. Treating yourself to another pair of new shoes feels good, but entering 2024 with lower liabilities will feel even better!

That's it for 2023 - thank you for amazing ride with WealthOnthe7 (no pun-intended).

Happy holidays and see you in 2024.

WealthOnThe7