I'M gearing down for Christmas, my favourite time of year, and am looking forward to the celebrations and opportunity to rest. However, there are still several items unfinished on my year-end to-do list.
The same is true for most of us as 2023's dying embers fade away and the beckoning blaze of a new calendar looms near. Toward that end, I was asked by a local radio station to discuss how we may boost our finances next year.
The wide-ranging interview covered personal finance-related eternal principles, long-term strategies, and short-term tactics.
So, in today's Money Thoughts column, I'll elaborate on parts of what I shared in that interview. In my opinion, to make intelligent guesses about what 2024 might have in store for us, we should first glance back to 2022 and to our almost completed 2023:
Throughout that frenetic period, we saw:
1. The waning of Covid's death grip upon Earth's economy;
2. Vladimir Putin's evil declaration of war against Ukraine and that conflict's thankfully short-term choking off of about a fifth of global wheat supplies, which triggered planetwide food inflation;
3. The ensuing spike in general and Earth-straddling inflation, which gathered momentum as a predictable, although delayed, knock-on effect of the money supply expansion initiated by major central banks in 2008, and which further erupted in early 2020 to help Earth partially cope with pandemic-triggered closures of businesses and borders; and
4. Vigorous albeit predictable moves by central banks across the world in raising jurisdictional interest rates to battle high inflation.
All that is too much for most of us to digest.
So, as we look forward to next year, what seems likely (to me) is at some stage, perhaps before September 2024, if I were to make an intelligent guesstimate, global inflation will be dealt with. Interest rates will then flatten before they begin falling.
FINANCES IN ORDER
Assuming all that occurs, then because low interest rates are better than high ones for most drivers of business expansion and consumer spending, the capital markets everywhere — comprising the global equity and global fixed income markets — should rise healthily.
This means those of us who seek to grow richer in the coming year should judiciously begin or, better yet, continue to invest in line with our main short-, medium- and long-term goals.
However, to do so on a firm and safe footing in 2024, we should first set our financial house in order. How might we do so? By taking care of two aspects of our personal finances, which are oddly counterintuitive in a near-future environment of falling interest rates:
1. Pay down (and pay off) our debts; and
2. Rebuild our liquid cash reserves.
The reason many people will resist taking those two steps as interest rates fall is that the cost of borrowing will also drop in an environment of monetary easing. They will then be tempted to borrow more, not less, and to spend more instead of saving more.
Nonetheless I stand by my advice for these following linked reasons:
1. When we reduce our debts, we strengthen our financial standing and capacity to take advantage of future opportunities; and
2. When our cash savings rise, we grow better able to (1) deal with financial emergencies, and to (2) invest aggressively to take advantage of burgeoning equity, investment real estate, bond, preferred securities, and — as our global economy perhaps further ramps up growth in 2025 — especially commodity valuations.
RAMPING UP FINANCIAL LITERACY
For those who have been exercising financial prudence over the last several tough years and have thus been able to accumulate deep pools of excess liquidity (cash), I would recommend setting aside three to 12 months of normal expenses in bank savings, fixed deposits and money market funds as a cushion or reserve account which I refer to as the EBF: Emergency Buffer Fund. The purpose of our EBF is two-fold:
1. To provide financial stability in a volatile world; and
2. To inject emotional stability into our strained psyches as Earth's worsening geopolitical turmoil causes both external and internal unrest.
All excess funds beyond our EBF needs should be invested with two distinct yet complementary goals in mind:
1. To generate long-term capital gains to beat inflation over the coming several decades; and
2. To create current streams of passive income to boost our near-term financial strength.
(Note: To help retirees and pre-retirees gain a practical, better handle on those two goals, I plan to run a public webinar on December 18tomorrow. Details: https://learn.rajendevadason.com/what-if-you-do-not-die-young.)
My recommendation to everyone in this tumultuous period of history is to invest in knowledge by intentionally ramping up personal financial literacy because it is the ultimate defensive "vaccine" against Earth's rising tsunami of financial scams.
I hope you have a wonderful yuletide season. Merry Christmas from me and mine to you and yours!
© 2023 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com. He may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on X @Rajen Devadason and on YouTube (Rajen Devadason).