At a time when inflation is at a 40-year high and prices are rising for everything from gas and food to furniture and cars, many consumers are focused on how to better manage their money. . Developing practical strategies for saving, spending, and investing can help you build an emergency fund, reduce debt, and gain peace of mind.
Bankrate asked personal financial experts from across the country for their advice on how you can make current and future years more financially successful.
Managing your finances after COVID-19
Many American consumers have invested more money in savings during the COVID-19 pandemic, due to government stimulus payments and decreased spending on things like travel, transportation and restaurants. Many used the extra money to pay off their debts.
The U.S. personal savings rate, the percentage of consumer income that is spent on savings after taxes and living expenses, more than doubled in 2020, according to the U.S. Bureau of Economic Analysis. The personal savings rate declined somewhat in 2021, to 12.2%, and in the first two months of 2022 rejoined pre-pandemic levels at an average of 6.2%.
If you saved more during the pandemic, consider keeping that habit to further increase your savings for emergencies, retirement, and any other financial goals.
Step 1: Create a budget
While some aspects of your personal finances may change, like where you bank or what stocks you invest in, one personal finance strategy remains constant: you need a budget.
A budget can involve mapping out your expenses each month, including line items for things like savings and debt repayment. A budget should be flexible because expenses change over time. A common budgeting approach is the 50/30/20 rule, which devotes 50% of your income to needs, 30% to wants, and 20% to savings.
“It’s so easy to fly blind when it comes to your income and expenses, but it’s so important to keep a close eye on your finances with a budget,” says David Sterman, CFP, President and CEO of New Paltz, Huguenot based in New York. Financial planning. “For people comfortable with spreadsheets, this is often the best approach, although there are also many useful budgeting apps you can download.”
Many consumers worry that a budget will reveal reasons to feel bad about their financial management, but ultimately the process can help you make smart financial decisions and have more money in savings.
“A lot of people find that focusing on their budget will make them feel bad about how much they’re spending, but that’s usually not the result,” Sterman says. “Instead, people develop a sense of empowerment when they see how their expenses relate to their income. And by creating a budget, you’ll have a better idea of how much you can spend each year on discretionary items like contributions to an investment account, a new car, or a long-awaited big trip.
Step 2: Pay attention to expenses
Look at your expenses and determine which ones can be reduced or eliminated. Some areas where consumers tend to spend more than necessary include:
Food: According to the US Bureau of Labor Statistics, one-third of the average household food budget in 2020 was spent on food outside the home. Cooking more of your meals at home can save you a lot more than eating out or taking out.
If a busy work schedule prevents you from cooking during the week, prepare a few meals in advance during the weekend. Not only can cooking at home save you money, it can also contribute to healthier eating.
Assurance: Your insurance premiums may increase to keep pace with inflation, so it pays to shop around to ensure you get the best home and auto insurance rates. You can also save money by bundling insurance products with the same provider.
Mobile services: Review your cell phone plan to see if you’re paying for data or services you don’t need. If you’re willing to switch providers, you may find that smaller companies like Mint Mobile, Ting, and Tello are more affordable than larger companies. Another way to cut costs can be to opt for a prepaid phone plan.
Subscriptions: You may be paying for magazine subscriptions, streaming services, and gym memberships that you no longer use or need.
“A lot of things these days are subscription-based, but sometimes life gets in the way and we forget to cancel things we don’t use,” says Elizabeth Buffardi, CFP, Founder of Crescendo Financial Planners. , based in Oak Brook, Illinois. . “By canceling things you no longer want or use, you free up money for things that actually bring you joy.”
Step 3: Start investing with a small amount
If you already have emergency savings, consider investing in the financial markets. Although it can be risky, it is possible that this type of investment can beat inflation, create wealth and save for goals like retirement.
Ways people start investing typically include:
401(k) plans: Many employers offer this type of retirement plan and will match your contributions up to a certain percentage, essentially giving you free money. Plus, the money grows tax-free until it’s withdrawn. Bankrate’s 401(k) calculator can help you predict how much you’ll save over time.
S&P500: This collection of around 500 large publicly traded US companies has often generated returns of around 10% per year. A fund based on this collection of stocks is relatively easy to buy, requires little monitoring and often has a low expense ratio.
Mutual fund: A mutual fund pools the money of many investors to invest in a collection of stocks, bonds and money market funds. These professionally managed funds can be a simple way to diversify your portfolio and may require a relatively low minimum investment.
“You don’t need to have $1 million or all your bills paid,” says Andrew Feldman, CFP, president of Chicago-based AJ Feldman Financial. “Start with a small amount and be proactive. If you already have a plan, be proactive. Make sure you have reviewed it recently and with all market movements you are properly allocated.
Step 4: Take a second look at cryptocurrencies
Cryptocurrency is a form of money that exists only in digital form and is managed without a central bank. Today, there are thousands of types of cryptocurrency, the most popular of which are Bitcoin, Ethereum, and Dogecoin.
Cryptocurrency attracts some investors for its potential for large returns, as well as its decentralized nature – which some investors believe can help them hedge against inflation.
Cons of cryptocurrency include extreme volatility, and unlike many other investments, it is not backed by assets or cash flow. As such, it is important for cryptocurrency to be added to a diversified portfolio.
“If you’re investing in cryptocurrency, limit the allocation to a small part of your portfolio because it’s very risky,” says James Royal, senior investment and wealth management reporter, Bankrate. “If cryptocurrency is the next big thing, you won’t need a lot to enjoy attractive returns, and if it isn’t, your overall portfolio isn’t affected too much.”
The “volatility of cryptocurrency looks set to continue,” Royal said, thanks to the Federal Reserve raising interest rates in 2022 and drawing liquidity from financial markets, as well as the President’s executive order. Biden aiming to study cryptocurrency regulation.
Step 5: Think beyond next year
Developing a financial plan can help you achieve your financial goals for 2022 and beyond. Creating a financial plan involves calculating your net worth, income, and expenses, and developing a savings strategy to meet your goals.
Rather than just planning to save money, set yourself financial goals such as buying a house, having a dream vacation, financing your children’s education, or saving a certain amount. before retirement. Setting goals like these can motivate you to save and keep you on track.
When it comes to financial life planning, Sheila Padden, CFP, founder of Chicago-based Padden Financial Planning, asks her clients some key questions.
“If you had enough money, how would you live your life?” said Padden. “Do you want to change anything? If you only have 5-10 years left to live, what would you do with the time you have left? Would you change anything?
“If you suddenly find you have one day to live, what have you missed? What couldn’t you do? Who have you not become?
Padden says questions are often the catalyst for “clarity and focused action.”