What’s the outlook on student loan debt, inflation, interest rates, markets, and more? Wait, what is happening to student loan debt???

Times are changing fast, and so much has happened in the last year that it's hard to keep track. But one thing is for sure: things won’t be the same this year as last year. That's why we must consider how things have changed and what that means for our finances. 

And as we look to start the year off right from a financial perspective, it’s critical to understand what to look out for in 2023 and highlight any opportunities you can take advantage of. So, from inflation to interest rates to investments, here is everything you need to know about 2023.

Here Are 5 Things to Consider From a Former Financial Advisor:

1. While Inflation May Have Increased Significantly Over the Past Two Years, It May Now Be On It’s Way Out

While 2022 was the year of rampant runaway inflation, 2023 looks like it could be different.

At the time of writing, the most recent inflation report released in December of 2022 marked the sixth month in a row of declining inflation, according to The Washington Post. This means that inflation may have peaked back in July of 2022 and is now reverting to more normal levels. 

The news that inflation is out is undoubtedly a welcome relief for American families. 

As inflation begins to recede, so does the fear of higher costs for goods and services. This stabilization of prices can open up more cash flow for individuals as living expenses normalize and they have more wiggle room in their monthly budget.

In addition, cooling inflation can be a victory for investors.

When inflation is high, companies' costs go up. In turn, companies pass these higher costs to the consumer as higher prices for goods and services. As a result, consumer spending typically declines, leading to lower profits for businesses. This affects companies' earnings, ultimately impacting the value of their business, resulting in a decline in stock prices. As a result, in 2022, many investors lost money as the market declined.

But, if inflation has peaked and is cooling, this could be an excellent year for investors and American families alike. 

On the consumer side, some businesses have held out for as long as they could before raising their prices during the inflationary period, so you may see some companies with readjustments for their cost of goods sold this year, if they were steady for the past few years. For example, after steadily offering a $1 fries deal once a week located strictly in their mobile app through 2022, McDonald’s raised the price to $1.29 for 2023.

2. While We Saw Interest Rates Raise Exponentially Last Year, They Are Still Trending Upwards

As we start 2023, interest rates are the highest they’ve been in 15 years.

With high rates, it's essential to understand the impact on your financial situation. 

On the one hand, from a consumer perspective, higher rates can put a burden on budgets. Higher rates mean more expensive credit card debt, increased mortgage payments, and steeper car loans. In other words, new debt has become more expensive, and any variable rate debt has likely increased. So, while it may not have been the best idea to pay down debt when rates were low, it may be time to reassess that decision now that rates are high.

On the other hand, high rates can be great for savers. For savings accounts, CDs, and other fixed-term investments, higher rates mean higher yields — so that extra money you set aside will start to bring in more substantial returns. This is welcome news for investors looking to maximize their return on cash.

Additionally, anyone in the market for a new home may have to reassess their plans. As interest rates have gone up, so have mortgage rates. Unfortunately, home buyers are getting hit with higher monthly payments because a larger portion is going toward interest. Ultimately, home buyers may need to reduce the price they can afford to account for higher mortgage rates.

Remember, understanding the impact of high-interest rates can help you make smarter financial decisions for yourself and your loved ones in 2023.

3. Stock Markets and Financial Markets Still Yield Uncertainty

Markets are unpredictable — you never truly know what's around the corner, and that’s likely to be the case for 2023 as well.

Some experts believe everything is pointing towards a good year for the market. Inflation is cooling, meaning interest rates could decline and strengthen the economy. So 2023 could be a big year for investors.

In addition, historically, stocks have done very well in the years following a large drop like we saw in 2022. So investors could be significantly rewarded for staying in the market if that holds true.

But other experts aren’t so sure. They argue that while inflation has been cooling, we don’t know if it’s peaked. In addition, the fact is that nobody knows for sure whether the Federal Reserve will begin lowering interest rates or not, even if inflation has peaked. So, many experts believe we could be in for another bumpy year in the market.

But that's why it pays to have an eye on both the short-term and long-term trends and do your best to plan for potential bears or bull runs. While one should always hope for the best outcome, it's prudent to prepare for worst-case scenarios. This could be as simple as creating an investment plan that details how you’ll invest your money this year and why, to as complex as diversifying or rebalancing your portfolio to better position your investments.

Ultimately, no matter what this year brings, investors should remember that, on average, the stock market rewards long-term investors. So even if 2023 is a challenging year for investors, it’s just a tiny bump along the journey to financial freedom.

If you have retirement accounts in place or are working with a financial advisor, stay the course. Your investments will have a high likelihood of panning out over the long run. If you want to keep up to date and monitor your existing financial advisor, or are searching for a new financial advisor, you can use our search tool to locate your current advisor, or one near you, to monitor their activity over time. 

4. Emergency Funds Are More Critical Than Ever

With so much uncertainty, emergency funds are more critical than ever for individuals, families, and businesses. 

By establishing an emergency fund, or e-fund, you ensure you have access to a cash reserve in case life throws you a curveball. It may not be the most exciting use of your funds, but with interest rates up, you can be sure that your e-fund will get a decent yield while still being liquid and accessible as needed. Therefore, an emergency fund should be high on your list of priorities as it provides vital protection in uncertain times.

There have been massive layoffs recently with the economic uncertainty of 2022, and it’s possible we could see that continue into 2023. Having a fully funded emergency fund ensures that you and your loved ones would be okay in a worst-case scenario. This can provide financial security and peace of mind as you move into this new year.

Specifics vary by situation, but under normal conditions, most financial professionals recommend somewhere between 3 to 6 months of living expenses saved in an emergency fund. Considering the economic downturn we are currently facing, six months of an emergency fund should be a minimum target for most. Still, many advisors believe three months could be acceptable in certain situations, like a two-income household or with a very stable career or employer. 

That said, many advisors recommend that retirees keep extra funds set aside to help balance out their portfolio withdrawals in case of a market downturn. That means retirees may want to keep closer to 1 to 2 years of living expenses in an emergency fund as part of their overall plan.

In the end, whatever you decide for your situation, just be sure you have the funds you would need in a worst-case scenario, like the loss of your income.

5. SECURE 2.0 Brought Some New Rules to Your Retirement Accounts (Huge News for Student Loan Debt Holders)

Lastly, the latest iteration of the SECURE Act, named SECURE 2.0, has brought some significant changes for 2023.

It was signed into law at the end of last year and included nearly 100 new provisions that will substantially impact US retirement planning. It's important to understand these new rules and their implications so you can adjust your plan accordingly. 

Key among its provisions are measures that allow student loan payments to qualify for employer retirement matching contributions. 

This is a massive win for student loan borrowers who may not have been able to take advantage of employer matching previously because they were focused on paying down their student loans. Unfortunately, the old rules created a situation where borrowers had to decide between setting themselves up for a healthy retirement versus paying down their student loan debt. 

Now, they can do both. 

With the new rules, student loan borrowers are eligible for their employer match even if they aren’t contributing to their 401(k), as long as they make qualified payments to their student loans. And with roughly $1.76 trillion in total student loan debt and the average borrower owing $37,000, this key feature of SECURE 2.0 is poised to have a great impact on retirement readiness in the United States.

“Student loan debt has increased to record shattering numbers and while President Biden has done what he could to offset some of the negative exposure that graduates face when entering back into the workforce, by allowing employers to help contribute to student loan debt is going to work immensely for employee satisfaction and retention, come the following years,” says Leonard Kim of AdvisorCheck. “Not only are employees going to stick around with their employers for longer periods of time, the companies that offer this to their employees and future employees are going to have an edge when it comes to the recruitment of new, highly skilled talent as well,” Leonard continued.

In addition, SECURE 2.0 brought new provisions allowing for 529-to-Roth IRA transfers, starting in 2024. This can be a massive benefit for anyone who has been saving in a 529 plan for their child’s college and has money left over after college is paid for. The new rule won’t take effect until 2024, but it will allow a lifetime maximum of $35,000 per beneficiary to be transferred from the 529 plan directly to a Roth IRA for the 529 plan beneficiary. 

But, there are key rules to keep in mind. First, the 529 plan must have been maintained for 15 years or longer and any contributions to the 529 plan within the last 5 years are ineligible to be moved to a Roth IRA. And the maximum amount you can roll over each year is subject to the IRA contribution limits found on the IRS website (currently $6,000 per year), and it’s important to note that the beneficiary must have “compensation” to be eligible for these rollovers. This can be a great way for parents to use extra 529 funds to help their children get a jump start on retirement.

Other noteworthy provisions include increased access to Roth accounts, specific rules for high-earners who are catching up on retirement savings, increasing the required minimum distribution age over time, and higher catch-up contribution limits. But keep in mind that not all changes are effective immediately, and be sure to research how these new rules could impact your financial plan.

Ultimately, the new legislation is intended to make saving for retirement more accessible and more secure while allowing individuals more flexibility in making money last during retirement. So if you're already saving for retirement or plan on doing so, understanding SECURE 2.0 is a must!

There are many changes in 2023 that we haven’t seen in the year before, so the landscape of this year is going to be very different from what we’ve seen in the year prior. 

The recent changes in inflation and interest rates will have wide-ranging implications for investors. In addition, with continued uncertainty surrounding the markets, it's essential to have an emergency fund. This way, you have some financial security should something unexpected happen. 

And remember, higher interest rates may offer more lucrative opportunities if you're savvy with investments, but they could also increase your debt burden and make it difficult to afford a home. Lastly, getting familiar with the new SECURE 2.0 will help you better understand the changing regulations and how to take advantage of these new rules to fast-track your path to retirement and financial security.

Ultimately, by understanding current economic forces and staying prepared for any scenario, you're in a much better position to make wise investment decisions and have a great year, no matter what.

If you need help with your investments, working with a financial advisor is always a more solid course of action than taking on investments alone. Find a financial advisor near you and keep tabs on them using our search tool. 

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Written by Anders Skagerberg, CFP

Fact checked by Billy Quirk

Reviewed by KJ Kim

Disclosure

The information provided in this article was written by the research and analysis team at AdvisorCheck.com to help all consumers in their financial journeys, by providing the resources and the insights to help improve one’s financial health, make it through recessionary and inflationary periods of time, and save their earnings to use them towards building a secure financial future. 

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