In addition to the joy of confetti and a new calendar, it's also the time to make major financial objectives for the year. That might imply paying off debt, purchasing a home, or going on a delayed holiday.
With inflation and economic uncertainty clouding the horizon in 2022, this month's budget tightening may seem more essential.
“When you plan to start in the new year or some other important date for you, it can be easier to make that behavioural change, because we feel like we’re making a fresh start,” says senior economist at the University of Southern California’s Center for Economic and Social Research, Jeremy Burke.
Here are five steps recommended by financial professionals to get you where you want to be financially in 2022:
1. ASSESS YOUR FINANCES-PERSONALLY
“The first step for everyone is to get organized,” says Saltbox Financial's Phuong Luong. That entails making a list of your savings, debt, and assets. A clear picture of your finances may assist you in determining what to focus on for the new year, as well as provide a yearly document that is easy to update.
To help you figure out how much house you can afford or which expenditures you may cut, Luong also advises keeping track of your monthly cash flow with a spreadsheet or app. “If you have those numbers organized, it’s easier to have those conversations, with a professional or with yourself, about what you can actually afford,” she says.
Reflecting on your principles is part of a thorough self-assessment, which may have changed as a result of the epidemic. Shari Greco Reiches, a wealth manager in Illinois and author of the book “Maximize Your Return on Life. says:
“Figure out what is really important to you. Maybe you don’t want to spend as much on clothes, or you’d like to help more charities. Maybe instead of a car, you’d like a nice desk and chair. It’s easier to follow your budget when it’s aligned with your values."
2. BUILD YOUR EMERGENCY FUND WITH BABY STEPS
If you face an emergency that requires a financial assistance, you may want to consider using your rainy-day fund. When it comes to building one, behavioural economics suggests starting small, according on Burke. He suggests:
“Instead of setting a goal of saving $400 a month, it could be better to save $100 a week or an even smaller amount daily. There seems to be less friction to getting started when the time period is smaller so it’s pennies per day instead of dollars per month."
If you want to save $1,000 by the end of the year, consider it saving $2.75 each day.
3. MAKE LONGER-TERM SAVINGS AUTOMATIC
According to Burke, one more lesson from behavioral economics is to set up automatic monthly transfers into your savings. “In terms of improving long-term outcomes, it’s really helpful to have things automated as much as possible,” he says.
If you contribute to a retirement plan straight out of your pay, you only need to do it once, and your savings will be subtracted on a regular basis. Burke also notes that you may sign up for additional automatic transfers into a college savings account or a high-yield savings account for other objectives such as saving for a down payment.
4. PAY OFF THE DEBT WITH THE LOWEST BALANCES
According to professor David Gal of the University of Illinois Chicago, his study shows that consumers attempting to pay off high-interest debts are more successful if they start by focusing on the smallest balances, also known as the debt snowball method. “That gives the perception of success and progress, and increases the motivation to pay off the bigger accounts,” he says.
Daphne Jordan, a CFP and wealth adviser in Texas, stresses the importance of maintaining an optimistic outlook. “Think about where you want to go in this new chapter of life... Don’t see your financial past as a mistake. Everything is a learning experience.”
Having an accountability partner to keep you on track can also aid in achieving your goals, according to Rianka Dorsainvil, a CFP in Maryland and co-CEO of 2050 Wealth Partners, a financial planning firm. “Like with fitness, if we can count on one person checking in on us, we’re more likely to be successful.”
5. PLAN FOR SOME FUN, TOO
You don't have to dread budgeting for 2022: You may also include some enjoyable spending plans, such as reconnecting with your friends and family. “If you want to take a trip in August, think about the cost of the plane ticket, hotel and food,” Dorsainvil says. Calculate the total cost, then aim to start saving monthly through August to get there.
If being realistic and setting measurable goals, that will increase your chances of success.