The New Year is a great time to reflect on the past and plan for the future. These plans can include health goals like hiring a personal trainer to motivate you at the gym. They can also include wealth goals like getting your finances under control.
Developing better money management skills is about more than using a simple tax calculator or downloading a budgeting app. Though it won’t be the easiest thing you’ve ever done, taking control of your finances may enable you to finally save up that emergency fund, get out of debt, get into stocks, and get your life on track.
Follow the five strategies below for a more financially secure 2022.
1. Commit to one specific short-term goal
Thinking about better money management can quickly become overwhelming. That feeling of overwhelm can lead to analysis paralysis – thinking too much and doing too little. That’s why it’s important to focus on one tangible short-term goal that’s reachable in the near future. Regardless of what it is – establishing a budget, asking for a pay raise, or investing in the stock market – the important part is to pick one and commit to it. Check it off once it’s done, and then move on to the next!
2. Reduce your debts as much as possible
Although this is evergreen financial advice, it’s especially important in 2022. Due to the pandemic, the Federal Reserve has kept interest rates low in order to stimulate the economy. However, as the pandemic (hopefully) wanes and the economy starts growing again, the Fed will most likely raise the interest rates.
That means it will be more expensive to borrow money, and it might be more expensive to pay off balances. Therefore, paying off credit card debt should be a priority.
3. Add to your emergency fund
As we all know from the past few years of pandemic uncertainty, the job market and economy can change dramatically. Although we can’t do much about that, we can take control of our personal finances by sticking to a budget and living within our means. Another important part of that is developing an emergency fund to pull you through any losses of income or unexpected bills.
Most experts suggest having at least 3 to 6 months of expenses in a savings account that can be easily accessed.
4. Consider investing in the stock market
If you have extra money after paying off debts and adding to your emergency fund, then consider investing it in the stock market. Average annual returns in the stock market are around 10% compared to 1% or less for most savings accounts (the latter of which is well below the inflation rate).
Since there are risks involved, most casual investors choose to go with passively managed index funds. That’s because these generally have low risk, low fees, and allow investors to own a wide variety of stocks. In the long run, they tend to work out well – which is why Warren Buffet recommends them.
5. Become more financially literate
Since financial literacy is rarely taught in US schools, it’s something that most of us must pick up as adults. Luckily, the internet is chock full of resources for becoming financially literate at any time of day. You can listen to podcasts on saving money as you commute to work, read an article on budgeting during your break, or watch a YouTube video on investing once you get home.
Keep these five strategies in mind, and you’ll be on your way to better money management in 2022 and beyond.