With only two weeks left in 2021, people are reflecting on the last year of their lives and are putting everything into perspective, including their financials. There’s no better time than now to start thinking about what you can do to start the next year off on the right financial footing. Here’s how you can get a jump start on a financially healthy 2022
Change Your Mindset on Your Financials
A lot of people will look at their current financial situation and become discouraged or overwhelmed, often leading to a negative association with trying to change their current state. Instead of negatively dwelling on areas of improvement in your finances, start taking initiative to look at these areas as opportunities to start changing your current situation. Start small and don’t compare your finances to others around you.
Budgeting is the most important thing you can do to be financially successful. You can make a lot of money, yet still struggle if you aren’t properly monitoring your finances and consciously spending. There are two crucial components when it comes to budgeting: creating the budget and sticking with it. Sticking with your budget might seem difficult, but if you properly establish your budget, you will be able to stay on track. For this reason, we recommend creating a budget by reflecting on your essential monthly expenses and prioritizing the needs over the wants. While you must prioritize your essential finances, also consider additional expenses that are important in making your life enjoyable. Going out for dinner or drinks one to two times a week with friends is not essential for survival, but it improves the quality of your life and overall mood. Include a component of disposable income into your monthly budget to keep your goals realistic and attainable, but make sure to limit excessive spending in this category.
Repay your Debts
Recovering from debt is another crucial step in taking control of your finances. Creating your budget will help you determine how much debt you owe and how you will create a debt recovery plan to complement your budget.
The first step in creating your debt recovery plan is to prioritize paying off debt with the highest interest rates (typically credit cards). For example, if you have $10,000 in credit card debt and pay 19% interest, you’re paying $1,900 per year in just interest cost. Reducing the amount of interest you have to pay when recovering from debt will allow you to save or use that money elsewhere and have more freedom.
Start Saving Money
Saving is another key component to financial success. When it comes to saving, many experts suggest putting aside 15% or more of your monthly income, but this can differ depending on the individual. While theoretically, putting aside a set portion of your monthly paycheck seems simple, it’s not always doable. Instead, stay consistent with putting aside money in general, not a set amount. This is where establishing your budget comes into play, as it allows you to see where you can cut back on spending to start saving.
Once you start saving, create an emergency fund with the money you have set aside. Your emergency fund should be able to cover your living expenses for at least six months, and also be used for unexpected circumstances like repairing a car. Having an emergency fund will additionally prevent you from having to put larger emergency payments onto credit cards, which will additionally help you avoid additional interest charges to pay off in the future.
Educate Yourself on Money and Finances
Learning to understand the financial markets, the nature of money, and investments in general, is crucial in creating long-term financial stability. There are many ways you can educate yourself on finances, but remember not to overwhelm yourself with knowledge. Set realistic goals for educating yourself like reading one financial blog per week or one financial book per month to begin. By reading articles and resources online, taking classes, or reading financial books, you can learn how to successfully manage your money.
We have spoken previously about investing and investing tips on our blog, as investing allows you to accumulate money at an accelerated rate. Analyze your financial situation and see how much you have in your budget to invest and where it makes the most sense to invest it. Assess your risk tolerance and invest only what you are comfortable in; Stocks are considered riskier than bonds but they also offer higher returns than bonds. If stocks are too risky for you, consider investing through mutual funds or exchange-traded funds that allow you to pool your money with other investors and get shares in a portfolio of investments. Some suggestions for investments can be found in a previous blog post on investment trends for 2022.
While setting yourself up for financial success can seem intimidating when reflecting on your last year, approaching your finances realistically will limit the amount of pressure you feel. Establishing a realistic budget and setting attainable goals for other aspects of your financial plan, will ease the pressure on your financial health and allow you to work towards long-term wealth and stability
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Check out our previous blog post on Investing in Liquid vs Non-Liquid Assets. If you need personalized financial advice, our team of professionals is always here to help—contact us today to book an appointment!