The year 2025 could bring economic changes that could affect the pockets of millions of people in different ways.
A series of stock market gains have boosted retirement investing at the same time that catastrophic damage from the storms is driving high repair costs and making thousands of homes virtually uninsurable. Meanwhile, the incoming Trump administration is considering deeper tax cuts along with a rollback of newly built guardrails around consumer financing.
While uncertainty abounds in the year ahead, “people can become more empowered by focusing on what they can control: those things that will be valuable regardless of what happens in the world,” said Kevin Mahoney, founder of Illumint, a Washington company. , DC. -financial planning company based in.
Here are some ways to put yourself in the best financial position for whatever the next 12 months bring.
Look for high yields as interest rates fall
Interest rates are falling, and the impact should be felt more widely in the coming months by anyone with a savings account, mortgage, credit card or car loan. For many borrowers, that will bring a little more relief from the exorbitant costs of carrying debt. But for many savers, it means less generous returns.
High-yield savings accounts still top 4.5%, outpacing the annual inflation rate of 2.7% in November. But as banks reduce the interest payments they make to depositors, it’s important to make sure theirs remain competitive, said Malik Lee, managing director at Felton and Peel Wealth Management, an Atlanta-based firm.
“It’s one of the red flags I’ve been warning clients about for all money market accounts,” Lee said, referring to a popular type of deposit account that limits debit transactions but often has high yields. . “You’re sitting there thinking, ‘Hey, I’m getting 4 or 5% on this, because that’s where they were initially when rates were high, and now I’m getting 3%.’
While banks typically alert customers about rate changes, those notifications may be delayed and some account holders may not have them activated. Earlier this year, a Bankrate survey found that about two-thirds of Americans were earning suboptimal interest on their savings accounts.
The Federal Reserve is set to continue cutting rates, but has signaled a slower pace than many expected, and with President-elect Donald Trump’s economic proposals raising the risks of fueling inflation, the path forward for rates of interest is far from certain.
So Lee said now is a good time to consider certificates of deposit, which can ensure a return for a specific period. Start thinking about “what you need in daily liquidity versus what you need six months to a year from now,” he suggested.
Money in CDs generally can’t be withdrawn without a penalty before the account fully matures, but customers can find rates of 4.25% to 4.65%, according to Bankrate. And those interest rates can be fixed for anywhere from a few months to five years, eliminating the need to anxiously monitor rates on other types of savings accounts for fluctuations.
Bolster your emergency funds
The economy has been unpredictable since recovering from the pandemic, and that’s not likely to change after President-elect Trump begins implementing his proposed agenda, which includes sweeping new tariffs and mass deportations that could affect what consumers pay for everything from baked goods. and beer to homes.
Keeping extra funds in case something unpredictable happens is one of the most enduring principles of financial advice, and planners say that hasn’t changed. Samuel Deane, president and CEO of Deane Wealth Management, a financial advisory firm, said he typically encourages clients to save enough to cover three to six months of living expenses. But workers in industries prone to high turnover or mass layoffs should consider a larger cushion, he said.
Deane and other planners said they have noticed that customers have expressed more concerns about their financial well-being over the past year, a period in which retailers have also had to deal with more budget-conscious shoppers.
During emergencies, many people turn to family members, relatives, and even strangers for financial lifelines, as happened after two devastating hurricanes last fall. Even if you manage to dodge a crisis over the next year, Deane suggested thinking ahead in case you have to help other people in your life who may not be as fortunate. This way, he said, “you’re not downplaying your own goals and you’re not sacrificing too much.”
Reevaluate your retirement strategy
Many retirement savers with accounts tied to the stock markets have seen their balances grow over the past year, and despite some tough days on Wall Street, many investors remain optimistic about the impact of the next administration.
But while that remains to be seen, there’s already one certainty that 401(k) holders can take advantage of: The maximum contribution will increase by $500 next year, peaking at $23,500 in annual pre-tax savings. The limit for catch-up contributions (money that older employees can add to their 401(k) at the end of the year) is also increasing for people ages 60 to 63, effectively allowing them to increase their retirement contributions. up to 14% from 2024.
The Republican Tax Cuts and Jobs Act, implemented during Trump’s first term, is set to expire at the end of next year, a deadline that has already prompted changes in retirement planning: Fidelity Investments said it saw a year-over-year increase of 45%. on Roth conversions starting last July, as account holders sought to avoid a potentially higher tax bill.
During the election campaign, “I had been advising clients that now is the time to do a Roth conversion to profit, because your tax rate will be higher when these rates decrease,” said Kristen Euretig, founder and chief planner at New Brooklyn plans based in York. Converting an existing retirement account to a Roth IRA allows investors to take advantage of high-yield stocks and tax-free withdrawals in exchange for paying taxes on those savings contributions up front.
But Euretig said there is now less uncertainty on that front. “I think there’s a lot of political will to raise those rates” in Washington, he said, so investors should consider talking to an advisor to determine what long-term strategies might best suit them.
Lee said one piece of that puzzle should include government bonds, which “were getting hit pretty hard” by the Federal Reserve’s interest rate increases to curb inflation. Now, with rates falling, it may be worth taking a fresh look at those investments, often considered safe assets.
Since rate cuts raise long-term bond yields, those who invest “will likely have longer duration risk, which will then give them greater appreciation when rates fall,” Lee said.
