Every New Year brings with it the allure of a fresh start. The years 2020 and 2021 have been incredibly challenging for many. The Covid-19 pandemic has wreaked havoc on the global economy and many people’s finances. But, with the economic recovery currently gathering momentum, the year ahead already looks brighter, which means it’s a great time to set some serious financial goals for your future.
The first thing you need to do to get a head start on 2022 is to take stock of your current budget, debts, and investments. This will be invaluable when starting to set up your financial resolutions and will allow you to create achievable goals that will have a positive long-term impact on your financial health.
Setting Up Your 2022 Financial Goals
The tale of unachieved New Year’s resolutions is as old as time. Make this year’s resolutions stick by setting S.M.A.R.T goals. These goals provide a sense of direction and motivation, plus, more importantly, they are achievable. Here is a breakdown of what a S.M.A.R.T. Goal is:
When you start thinking about what you want your 2022 goals to be, you should be clear and specific. An example of a specific goal is having an emergency fund with $5,000 by the end of the year.
Another key to creating your resolution is to have specific criteria to measure your progress towards achieving the goal and keep track of how close you are to reaching it. You can then check your progress regularly throughout the year and adjust your tactics if you start to lag.
- A-Actionable and Achievable
Make sure your goals are reasonable and attainable, with a clear path towards successfully meeting them by your deadline. It’s essential to be honest with yourself. If you only have a few hundred dollars in disposable income monthly, setting a goal to save a million dollars by 2023 is likely not a reasonable target.
Create a spreadsheet of all of your current financial responsibilities and income. This will help you assess your current situation and determine where you want to be in the future. For instance, maybe you want to purchase a home in 5 years, analyze what steps you need to do to achieve that goal, and start taking the necessary steps now.
Give yourself a hard deadline to reach your goals. If you followed the steps above, your goals should be achievable within the time frame you have set for yourself.
That said, let's look at some of the changes you can make this New Year and make 2022 the best financial year on your books.
1. Reassess Your Household Budget
Everyone should have a budget - it's the very foundation of financial fitness. Even a simple budget is better than no budget at all. Make the most of the time-tested by using the 50-30-20 rule to help you manage your money in an effective and sustainable way. The basic rule of thumb is to divide your monthly income into three spending categories: 50% goes towards your essentials, 30% towards your wants, and 20% goes to savings.
Consider assessing the line items you no longer want or need in your budget, like a subscription or membership you barely use. You can redirect those money savings towards achieving your financial goals.
2. Work on Improving Your Credit Score
Your credit score is one of the most important measures of your financial health and one of the first things that gets checked whenever you want to make a big purchase. A high credit score will make you more attractive to lenders and open the door to additional savings by helping you get the lowest interest rates available in the market. Review your credit reports regularly and take the following steps to improve up your score:
- Start working on paying off high-interest debt
- Strive to always pay your bills on time, and consider setting up automatic bill payments
- It’s always a good idea to always pay at least the minimum balance due on time.
- Check your current credit utilization and work on getting it under 30% (or even 20% if you can)
- Consider consolidating your debt before things get out of control
- Limit your requests for new credit and hard inquiries like getting a new credit card
3. Invest in Your Future
Invest in a way that matters most to you. Identify your goals and open up financial accounts that will help you achieve your goals. Getting a financial advisor can help you build a portfolio that aligns with your goals and values.
Consider maxing out your 401(k) and your Roth IRA if you're saving up for retirement. If you're saving up for college, setting up a college fund could help you save for your kids' futures. Remember to start small and build progressively.
And by the way, you’ll need to set up an emergency fund before you start investing. Not saving for emergencies could jeopardize your financial health and put your future investments at risk. First, build an emergency fund that covers 3 to 6 months of expenses, then you can start investing. Also, choose investments that match your risk tolerance.
Gear Up for the New Year
Poor money management can be costly, considering how high-interest rates can get when you have a lower credit score. Perhaps, the most important investment you can make is learning about personal finance. It's crucial to educate yourself on different tools before settling on those that best match your risk profile.