As we prepare for end of year parties and fireworks, it’s a time when many people take a moment to evaluate their life. Whether you’ve saved an extra 10% or lost an extra 10 pounds, the new year gives you a chance to refocus on your goals.
Spending patterns
Many people had a rare opportunity with the COVID pandemic. As reported across the media, a large portion of the population was able to save more than they had in the past. Even with the world reopening, stimulus checks and reduced spending combined to bump up our savings’ rates. How did you do?
Take a look at what was important to you when you were dealing with COVID. Were there subscriptions that you didn’t need? Did your clothing budget balloon since you weren’t going into the office? How many of these categories can you keep permanently reduced? Try to keep your spending at or near your reduced spending during COVID.
Emergency Funds
With all that money you saved, have you considered putting it into a separate account before you spend it on mindless consumer goods? Even having a few thousand dollars can help if something unexpected happens to you. And saving the recommended 3- to 6-months of expenses will further insulate you against bad times.
Some people get weighed down by the lack of return on their emergency fund. The whole idea is to have cash at the ready in case your car breaks down or you have a health emergency. However, if you invest in a Roth IRA or retirement plan, you can essentially use it as an emergency fund because you can withdraw contributions tax-free (since they are after tax to begin with). This is not the solution for most because you may need to withdraw a substantial part of your account balance, thereby reducing potential earnings. However, if this is the only way you’ll save for an emergency, some cash is better than none. Just make sure that the IRA or retirement plan will allow contribution-only withdrawals.
Interest rates
We will likely see higher interest rates in 2022. The Fed has already started hinting that one (or more) are coming, trying to prepare the markets so they don’t swoon when it happens. This can affect you in several ways:
Mortgages. If you have an adjustable-rate mortgage, take the time to look at how and when the rate will adjust. Consider refinancing your house if you will stay for the requisite number of years to pay off the costs of the refi and also will receive a better fixed rate than the potential adjustable rate.
Other loans. It’s not as easy to refi other types of loans (personal, student, auto). But it pays to check on your rates and see if there are opportunities to refi at a fixed rate. Like with a mortgage, run the numbers and make sure the refi doesn’t end up costing you more in the long run.
Credit cards. Even though the Fed hasn’t raised interest rates, credit card interest rates have been increasing over the last few months. This may accelerate in the coming years. If you don’t already have a plan in place to pay off any credit card debt, make one now.
Savings. The good side to interest rate increases is your savings rates may increase as well. Naturally, this won’t happen as quickly as an increase in your adjustable mortgage rate or credit card rate. Still, keep an eye on savings rates and be open to moving your money if you find a better deal.
Finalize your estate plan
This one is probably hitting me a little harder now than in the past. I’ve spent many hours searching for accounts, bills, etc. since my mother passed away. She did well with most of her planning but there was still some missing information.
Writing a will or living trust isn’t fun. We all think we’re going to live forever, so it’s easy to think I can just deal with that tomorrow. But too often tomorrow smacks you in the face. For your family’s sake, take some time to complete the documents they will need if something happens to you. Perhaps as importantly, sit down with them (or write a letter) and detail what kind of service you want. Provide your digital information. Try to think like someone who has no clue about your financial assets and give them more information than you think they need. Trust me – they will appreciate it.
As part of this, look into ways to skip probate. After personally dealing with this, I’m convinced probate was cooked up by a cabal of lawyers in the 5th circle of hell. Don’t put your family through this unless absolutely necessary. Make sure you have beneficiary information on all of your accounts and make as many as possible payable on death/transfer on death. That way, your beneficiaries will receive the money without going through probate.
Keep learning
I’m not sure why, but I’ve started a weird dichotomy of reading a fiction book while also reading a non-fiction financial planning book. I’ll read the fiction book at night, then before I fall asleep I read the financial planning book. Maybe a part of me finds financial writing soothing (wouldn’t it be awful if I found it boring?).
I don’t expect anyone to read financial planning books every day but keeping abreast of the industry can only help you. Perhaps pick out one per quarter to read. If it’s really good, take some notes and implement it into your life. If it’s more “meh” just chalk it up to experience and move on.
The coming new year gives us all a chance to regroup. After 2021, I for one will be happy to see 2022 arrive. Here’s hoping it’s a banner year for all of us.
Photo by Tim Mossholder