New year, new you! Let’s be honest, most of us have just been hanging on for dear life over the last two years. We all got thrown a major curveball and now we’re finally starting to get back on track inside whatever this new version of life will look like. If you’re anything like me, 2022 feels like a rebuilding year, which makes it the perfect time to actually take those big steps toward getting your finances in order. To help you reset and rebuild I’ve put together seven steps that will help you get your money all the way together.
Budget: Separate your fixed and variable expense accounts
When it comes to budgeting, I believe in taking a big picture approach. I don’t believe in trying to stick to specific dollar amounts for each category of your spending—it’s unrealistic and almost impossible to maintain. However, I do think it’s imperative to understand how much it costs for you to live your life. Now that we’re at the beginning of the year, this is the perfect moment to sit down with your credit card and bank statements to figure out how much money you spent in 2021.
Break these expenditures into your fixed expenses (anything with a due date like your mortgage, utilities and subscriptions) and your variable expenses (the things you buy consistently each month like groceries, haircuts, Amazon purchases, etc.). Be sure to factor in periodic expenses like travel, car insurance and concert tickets. Once you have an idea of your total expenses for the year, divide this by 12 to figure out your average expenses per month.
Ideally, for the rest of 2022, you will start to keep a certain amount of money in one account to autopay your fixed expenses, put a certain amount into savings to take care of your one-off expenses (this is called a sinking fund), and then move the last amount into a separate checking account to handle your variable expenses.
Even if you don’t take the time to reset your financial infrastructure, just knowing how much it costs you to live your life will help you understand if you are over or underpaid, where you might be able to cut back on some expenses, and how much you should be trying to save for your eventual retirement.
Emergency Fund: Create an automated direct deposit into a high-yield savings account not attached to your spending account
When you know how much you spend on a monthly basis, it also helps you know how much you should have saved in case of emergencies. For the longest time, I thought I was spending $2,000 per month to live my life, but it turns out that as prices have gone up and my lifestyle has changed, I’m actually spending closer to $2,250. I was able to adjust my emergency savings goal number based on this audit to make sure I’m able to survive the next major life upheaval that comes my way.
If you realize that you haven’t saved quite enough into your emergency fund (six months of expenses if you work a corporate job, 12 months if you work for yourself), I recommend setting up automated direct deposits into a savings account that’s NOT attached to your spending account to start saving more now. I’m assuming that you have already moved your emergency fund into a High-Yield Savings Account (if you haven’t, stop what you’re doing and do that now).
So, now your job is to either go to your HR software and have your direct deposit split so that some amount goes into your savings during each pay period or to have an automated withdrawal come from your main checking account and go into savings every time you get paid. The goal is to make your savings consistent, automated, and easy so you don’t have to use willpower to reach your goal.
Goal Savings: Map out all of your goals and make a timeline, figure out how much money you can set aside for your next goal
Presumably, you also have other life goals beyond preparing for emergencies. The beginning of a new year is the perfect time to sit and determine what those are. As I ask all of my new clients, “What do you want your life to look like in the next 1-3 years?” Make a new list of your short, medium and long-term goals and then figure out how much money you can start consistently saving to help you get to the next one on your list. For a lot of my clients, that means setting up a travel savings fund to take that next big trip. However, if you’re living well below your means, you may be able to save money for multiple goals, or start investing for goals that are a few years farther out. Now is the time to make that timeline for yourself and to start breaking those future expenses into current savings.
Investments: Figure out what you’re investing for
Speaking of investing for your goals, if you are investing, what do you want to do with that money? A lot of my clients tell me that one of their goals is to start investing more. However, when I ask them what they want to do with the gains they earn, they have no idea. We place so much emphasis on hustling, earning money, getting to the bag, etc., that we’ve lost sight of the fact that money is a tool—it’s not the goal in and of itself.
It’s great to have more money because it’s the raw material we use to do the other things we actually want to do. At the end of the day, you can’t eat money. You can’t live inside of a mutual fund, you can’t fly to Paris in a moneycopter; as an intrinsic good, money is actually worthless. However, as a medium of exchange, money can help you get all of the things that you actually want—like organic food from the nice grocery store, a home in the zip code with the really good schools, or that eat, pray, love trip that you’ve been pining for.
When it comes to investing, I encourage all of my clients to figure out how the money can actually make their life better. Once you know that, it becomes a lot easier to understand where, how, and for how long you should be investing it.
Life insurance: Determine if you actually need it
The number one move to make regarding your insurance this year is to determine if you actually need it. While I would argue that all of the different insurance types available definitely have a place in society, they have been commodified and marketed to us in such a way that sometimes makes them feel more imperative than they actually are. A new year is a great time to look at all of your insurance policies and determine if you actually need them, or where you may be missing coverage. Health, homeowners, renters, and car insurances are all almost mandatory and necessary. Everything else could use a bit more scrutiny.
Black Americans especially tend to get sold on the idea of whole life insurance as an investment. While it’s true that there are some policies that will pay out cash when you reach a certain age or that have a guaranteed rate of return, these policies do not work as hard for you as your own money could in a regular well-diversified investment account. These policies are also very expensive, especially compared to their term-life brethren. Also, if you don’t have a beneficiary who is counting on your income, you may not need this type of policy at all. If you have a spouse with limited income, children, extended family member dependents, or some reason to think that you may not outlive your parents who count on your income, then it makes sense to buy life insurance. Otherwise, you may want to reconsider this cost.
Retirement: Calculate your F.I.R.E. number
The one best thing you can do for your retirement savings in 2022 is to calculate your F.I.R.E. number. If you don’t know what F.I.R.E. is, I highly recommend checking out this website to learn more. The quick version is that F.I.R.E. is an acronym that stands for Financial Independence / Retire Early and is a movement that helps you reframe the way you think about your life and what retirement means for you. The idea is that through careful lifestyle design and aggressive saving, you can set yourself up to have the ultimate flexibility— to choose to work or not. I think of it as creating your own Personal Basic Income. Even if you’re not interested in taking on the challenge of trying to retire on an abbreviated timeline, it’s worth it to know what your “retirement number” is based on your current expenses.
The good news is that this is an easy number to calculate. Literally, take your total monthly expenses (you calculated this in part one of this article) and multiply by 300. This new number is how much you should have saved in an investment account with the expectation that you’ll earn a 7% rate of return on average. That will allow you to withdraw 4% of your portfolio each year to live off of, lose about 3% to inflation and keep on keeping on throughout your retirement.
Sinking Fund
Figure out which types of “unexpected expenses” tend to pop up for you. Try to calculate how much they cost for the whole year and divide by 12. Look at your budget to see if you can set that much aside.
All the way back in tip #1, I suggested calculating your total monthly expenses. We talked about fixed and variable expenses, but I also quickly mentioned those one-off costs like car insurance and travel. This is where we get to break that concept down a bit. If you’ve never done it before, 2022 is the year that you set up a “sinking fund.” Some people have separate sinking funds for all sorts of things: gifts, car repairs, kids’ expenses, healthcare costs, etc. Some people decide to just set up a “slush fund” to pay for the things that aren’t exactly an emergency, but that don’t occur every day. Now is the time for you to sit down and think about what makes the most sense for your life. I find that most of my clients tend to have one category that consistently costs them more money than they budget for and could use some backup.
Once you have figured out which category/categories you would like to set money aside for, go back through your 2021 expenses to…
