New Year’s resolution season is once again here, and as the ball drops to start 2023, it’s a great time to consider ways to make more from your money. After such a horrendous year for the financial markets in 2022, a lot of people are reeling and trying to figure out what to do next.
There are plenty of ideas that can make your financial life better. Opening an IRA is a great choice for those who are working, and investing in your first individual stock can put you on the road to long-term riches.
Yet there are times when other priorities have to take precedence. Last year, it was taking advantage of a chance to reap huge rewards from a risk-free investment. And this year, your best move involves better your financial house in order in a much different way.
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Get your debt under control
When most people look into investing for the first time , they want to get started as soon as they can. That makes sense, because the sooner you get moving with a long-term investing strategy, the sooner your finances will start improving. It takes decades to generate life-changing wealth from investing in the stock market, but if you never get moving, you’ll never reach your financial goals.
The challenge, though, is that too many people have a lot of debt. Whether it’s money you’re paying back on student loans, outstanding credit card balances, or loans you took out to buy a car or a home, debt is a trap, and many people are about to find out just how badly it can spring on you at the worst possible time.
The downside of higher interest rates
Some investors have actually liked the effect that higher interest rates have had on their investments. Although nobody likes to see the value of their stocks and bonds go down, higher rates have meant more income for those investors who have considerable amounts of short-term savings.
However, those who have extensive levels of debt have to recognize the threat that higher interest rates pose. It was easy to load up on debt over the past 10 or 15 years, as interest rates were generally falling and stayed at extremely low levels for extended periods of time. Cheap financing was plentiful, and even rates on less attractive debt like credit cards and personal loans were low enough for people to be able to afford.
Now, though, interest rates have shot higher. The prime lending rate, which often gets used as a benchmark for credit card rates and personal loans, shot up roughly four percentage points in 2022.
Mortgage rates climbed sharply as well, putting the brakes on home-buying activity and hurting the housing market. And those who used margin loans to take greater advantage of opportunities in the stock market are now discovering that their financing costs are rising at the exact same time that many of their investments have performed poorly.
Pay down your bad debt
In considering what to do with your money, the biggest question is this: Where are you most likely to reap the biggest return? If you have outstanding debt at high interest rates of 10% or more, then the answer is almost certainly that paying down those debt balances will be your best bet.
With debt that features lower interest rates, the answer isn’t always as clear. However, one key question to ask is whether that low rate is locked in permanently. With fixed-rate mortgages, you can generally count on paying the same rate as long as you own your home. But with some loans, a current low rate can reset to a higher one — and if your loan terms include such a reset, you can expect your lender to apply it as soon as it can in the current market environment.
Moreover, some types of debt have features that make those loans better than other types. For instance, student loan forgiveness provisions could potentially wipe out some or all of your outstanding education debt. So prioritizing paying student loans off over other types of higher-interest debt may not make as much sense right now.
Have a happy, prosperous 2023!
Paying down debt can be a slow and painstaking process. It doesn’t necessarily feel as good as finding a winning stock. However, the beneficial effect on your finances can often be greater from managing your debt well. That’s why the first thing you should do in 2023 is to take a serious look at your debt, and make sure that it won’t come back to bite you.
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