By Bryan Mapenzi
As we close out another year in a pandemic, we may wonder how we should approach 2022. We may be considering a large purchase next year, such as a house. Or maybe we’re really excited about the opportunity to travel internationally without the imminent danger of contracting COVID-19, with all of its mutations and variants (fingers crossed). Whatever your goals may be, starting 2022 off on the RIGHT foot can dictate how the rest of your fiscal year shapes up. This checklist outlines key steps that you can take to set yourself up for a successful new year.
Reflect on 2021
Reflecting on our past is one of the most important steps when we look toward the future. Drawing on the Akan word of “Sankofa,” we can look back at the past and retrieve that which is useful. Reviewing our personal finances could highlight the good, the bad, and the ugly. Making a full assessment of all that transpired in 2021 can provide direction in the new year.
Eyeball your emergency fund
A fundamental piece of any financial plan is an emergency fund. The last two years have taught us that life can be unpredictable. Establishing or continuing to build our emergency funds can save us a tremendous amount of anxiety and stress down the road.
As we embark on our journey into the new year, the traditional rule of thumb is to save three to six months’ worth of expenses. For most people, that is a hefty sum of money, so starting small is more realistic. Aiming for a goal of $1000 can make your aspirations more attainable. Setting up monthly deposits on pay day can be a quick and easy way to pay yourself first. This allows us to bypass using extra will power to decide on emergency fund contributions vs. dining out expenses.
Review your insurance policies
A key driver of potential savings is re-evaluating our insurance policies. Often, we can shop around for better rates at different companies. Even if you are comfortable with your current insurance provider, you can often communicate that you’re shopping for more affordable rates elsewhere and they might lower your rate. Whether it is home, car, or life insurance, being an informed consumer and finding opportunities to save are paramount. These moves can increase overall financial well-being and pay dividends in the long run.
Check on your investments
The year’s end is a good time to review our investments. Whether they exist in a company 401K, a Roth IRA, or an individual brokerage account, gathering a landscape of how the year has transpired can help us make informed decisions. Although being a long-term buy and hold investor is most beneficial, harvesting losses in some of our investments can help us save on our tax bill. This especially rings true if we have sold other investments for a profit. In addition, the year’s end may involve receiving a bonus, which could provide an opportunity to bolster your retirement contributions. Ultimately, your tax professional and financial advisor can provide you with guidance on the best moves to make for your unique financial situation.
**Retirement deadlines and maximum contributions for 2021**
401K-December 31st, 2021 and $19,500
IRA-April 15th, 2022 and $6,000 for those under 50; $7,000 if over 50
Revisit your budget
Budgets are not sexy or exciting, but they are a foundational pillar that helps us see the direction of our cash flow. There is no better time to reassess cash flow than at the end of the year. Our budget helps us paint a picture of our money story. The encouraging thing about this story is that we have the authority to write and rewrite it. Finding more ways to limit frivolous spending and making our money work for us can create a more fruitful and prosperous new year for ourselves and our loved ones.
Assess your credit score
Credit scores can dictate our access to valuable resources such as the ability to purchase a home or car, credit limits, interest rates, and the ability to obtain certain jobs. Closing the year out and putting your current score under a microscope puts you in position to set up the new year with a strategic financial plan. Keep in mind, the most crucial components that affect your score are credit utilization rate and timely payments. Those factors constitute 65% of your total score. Tackle these two items first. If you start by paying down revolving debt and making on-time monthly payments, your credit score may receive a necessary boost. This may fuel your ability to execute on a big purchase in the upcoming year. Lenders typically give the best rates, starting at a credit score of 740. Be mindful of all aspects of your credit score; on-time payments and credit usage below 10% are your foundation!
Carve out your 2022 money story
Now that we’ve provided several ways to target our finances during the close of the year, let’s talk about 2022 financial goals.
One thing that we’d all love to do is make more money. It often provides more freedom, either via time or less stress. However, “more money, more problems” is true as it gets if we have not created a framework to use this money. The focus should not solely be to make more money, but make more “money memories.” For some, this may mean paying it forward through tithes to their church, donating to a charity, or blessing a loved one. For others, it may be starting a custodial account for a newborn child and setting them up for the future. Others may look forward to taking that long postponed vacation.
Whatever it looks like for you and your personal finances, preparation and intention are key drivers for making our dreams a reality.
As we all reflect and review 2021, it is important that we acknowledge all that has happened, both the highs and the lows. An honest and accurate assessment of our finances can provide a blueprint for a new year that highlights our wants and needs. I encourage everyone to find what matters to them and take a little time to prepare for a prosperous financial new year.
Peace, love, and prosperity!
*Featured image via Shutterstock