At a time when inflation is at its highest point in 40 years and the prices of everything from gasoline and food to furniture and cars are rising, 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 finance experts across the country for their advice on how it can make the current and future years more financially successful.
Manage your finances after COVID-19
Many US consumers saved more money during the COVID-19 pandemic, buoyed by government stimulus payments and a decline in spending on things like travel, transportation and eating out. Many used the extra money to pay off debts.
The US personal savings rate, the percentage of consumer income saved after taxes and living expenses, more than doubled in 2020, according to the US Bureau of Economic Analysis. personal savings decreased somewhat in 2021, to 12.2%, and in the first two months of 2022 it returned to pre-pandemic levels by an average of 6.2%.
If you saved more during the pandemic, consider keeping up this habit to further increase your savings for emergencies, retirement, and any other financial goals.
Step 1: Create a budget
Although some aspects of your personal finances may change, like where you bank or what stocks you invest in, a personal finance strategy remains constant: you need a budget.
A budget can involve mapping your spending each month, including line items for things like savings and paying off debt. A budget must be flexible, as expenses change over time. A common budgeting approach is the 50/30/20 rule, which spends 50% of your income on needs, 30% on wants, and 20% on savings.
“It’s so easy to go blind when it comes to your income and expenses, but it’s so important to track your finances with a budget,” says David Sterman, CFP, president and CEO of New Paltz, New York-based Huguenot. . Financial planning. “For people who are comfortable using spreadsheets, that’s often the best approach, although there are plenty of useful budgeting apps you can download as well.”
Many consumers worry that a budget will uncover reasons to feel bad about managing their money, but ultimately the process can help you make sound financial decisions and have more money saved.
“Many people find that focusing on their budget will make them feel bad about how much they spend, but that’s not usually the result,” says Sterman. “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: Factor in expenses
Review your expenses and determine which ones can be reduced or eliminated. Some areas where consumers tend to overspend include:
Food: According to the US Bureau of Labor Statistics, one-third of the average household’s food budget in 2020 was spent on food away from home. Cooking more of your meals at home can save you much more than eating out or picking up takeout.
If a busy work schedule prevents you from cooking during the week, prepare a few meals ahead of time on the weekend. Cooking at home can not only save you money, it can also contribute to a healthier diet.
Sure: Your insurance rates may increase to keep up with inflation, so it’s worth shopping around to make sure you’re getting the best rates on your auto and home insurance. You can also save money by bundling insurance products with the same provider.
mobile service– Check your cell phone plan to determine if you’re paying for data or services you don’t need. If you’re willing to switch carriers, smaller companies like Mint Mobile, Ting, and Tello may be more affordable than the larger companies. Another way to cut costs may 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.
“Today, a lot of things 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 Oak Brook, Illinois-based Crescendo Financial Planners. . “By canceling things you no longer want or use, you free up money for things that really bring you joy.”
Step 3: Start investing with a small amount
If you already have emergency savings, consider investing in the financial markets. While it can be risky, it is possible for this type of investment to beat inflation, build wealth and save for goals like retirement.
Common ways people start investing 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 have saved over time.
S&P 500: 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 oversight, and often has a low expense ratio.
Investment funds: A mutual fund pools money from many investors to invest in a collection of stocks, bonds, and money market funds. These professionally managed funds can be an easy 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 recently reviewed it and that all market movement is mapped correctly.”
Step 4: Take a second look at cryptocurrencies
Cryptocurrency is a form of currency that exists solely in digital form and is managed without a central bank. Today there are thousands of types of cryptocurrencies, some of the most popular being Bitcoin, Ethereum and Dogecoin.
Cryptocurrency appeals to some investors for its high profit potential, as well as its decentralized nature, which some investors believe can help protect them from inflation.
The downsides of cryptocurrency include extreme volatility and, unlike many other investments, it is not backed by assets or cash flow. As such, it is important that cryptocurrency be added to a diversified portfolio.
“If you’re investing in crypto, keep the allocation to a small part of your portfolio, because it’s very risky,” says James Royal, senior investment and wealth management reporter at Bankrate. “If cryptocurrency is the next big thing, you won’t need much to enjoy attractive returns, and if it isn’t, then your overall portfolio won’t be affected much.”
“Cryptocurrency volatility looks set to continue,” Royal says, thanks to the Federal Reserve raising interest rates in 2022 and draining liquidity from financial markets, as well as President Biden’s executive order to study crypto regulation. the cryptocurrencies.
Step 5: Think beyond next year
Developing a financial plan can help you reach your money goals for 2022 and beyond. Creating a financial plan involves calculating your net worth, income and expenses, and mapping out a savings strategy to reach your goals.
Instead of just planning to save money, set financial goals like buying a home, taking your dream vacation, financing your children’s education, or having a set amount of funds saved for retirement. Setting goals like these can help motivate you to save and keep you on track.
When it comes to life financial 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?” Padden says. “Would you change anything? If you only have five to 10 years to live, what would you do in the time you have left? Would you change something?
“If you suddenly find that you have one day to live, what have you missed? What didn’t you get to do? Who did you not become?
Padden says that questions are often the catalyst for “clarity and purposeful action.”