Ryan Derousseau, Senior Contributor
Dec. 29, 2021
With the New Year, it’s meant to bring an air of optimism. But many people seem to be looking towards 2022 with dread in regards to their finances.
According to a recent survey by Bankrate, only one-third of respondents expect their financial situation to improve this coming year. Those that believe their finances will significantly improve accounted for only 9 percentage points of the 33% that expect to see growth in 2022.
For the other two-thirds of survey respondents, 26% expect finances to get worse and 41% said it would stay the same.
Among those that expect finances to worsen or stay the same next year, 54% cited inflation as the number one reason for their dour outlook.
" Inflation worries have dragged consumer confidence to a decade low,” said Greg McBride, chief financial analyst at Bankrate. “This feeling goes far beyond gas prices, as inflation has broadened out and consumers see higher prices at every turn.”
While that may be the case, it’s also important to remember that these are macroeconomic trends. How they impact your bottom line will depend on your individual circumstances, financial flexibility and income. But you can avoid fretting about these issues by turning to a financial plan. This can help you determine where you can cut, where you can save, and how to address some of your biggest concerns heading into 2022.
The plan might not work out exactly as you expect, but it will still provide you with a marching order that can help you fight your greatest fears of the year and beyond.
Analyze your spending
When looking forward, first you need to take a moment to capture what has already happened. This comes in the form of analyzing your spending. In an inflationary period, this is a vital step to protect your costs at a time when costs are rising.
The problem with inflation isn’t only a retirement concern. If it costs more to pay for everyday items, then does that put you at risk of not being able to afford your basic necessities? Does it put you at risk of being unable to fund your future goals? Or does it force you to pull back on goals that you thought you were near?
You can’t address these questions until you know where you spend and where the money goes. By looking at the numbers, you can also project forward. If you spend $1,000 a month on food and food costs are rising 6.1% (the rate of food cost growth in November 2021 from November 2020), then next year you’re looking at spending somewhere closer to $1,060 a month. While it’s only an estimate based on one month’s rate of inflation, it can provide you with a back of the notebook calculation to project while budgeting. (If you wanted to be really proactive, you could estimate the rate of change for each month, then calculate using the growth from the prior month.)
But this estimate doesn’t necessarily force you into higher costs, overall. Instead, you can look at those costs and determine areas you can reduce to come in closer to $1,000, even with the heightened inflationary period.
Looking through your entire budget in this manner can provide you savings, as well as give you a relatively straightforward way to put a number to your inflationary concerns.
Review your saving strategy
Part of the reason for addressing your short-term spending needs is to provide you with a strategy for looking towards your savings and long-term goals. Assuming that, once looking at your short-term spending, you realize that you have enough to cover necessities, then it’s also important to incorporate your long-term goals into that plan. It’s simple as placing the amount of dollars that you want to save each month into the same budget that you’ve already prepared.
By placing this savings goal into the 2022 plan, it allows you to ensure that these goals don’t get overlooked, even with concerns of higher spending in 2022, simply due to inflation.
To achieve this, you can pick a specific dollar amount that you want to save each month and incorporate that into the plan. The maximum amount that you can save in a 401k will rise from $19,500 this year to $20,500 in 2022. For individual retirement accounts (IRA) and Roth IRAs, the limit remains at $6,000 next year.
Or, the other option, you can determine your spending then take the difference from your income, to calculate what you have left over to allocate to your retirement accounts. The only downside of doing this second: if you’re not vigilant with it, then you may short thrift your long-term goals when money feels tighter than normal.
Reevaluate your long-term goals
Maybe you have goals to retire by the time you turn 50. Maybe your goals are even more aggressive, seeking retirement by 40. Or maybe you simply want to save enough money for a special vacation or seek the opportunity to step away from the day-job for a year. The more you prepare your expectations for these goals, the better you can either adapt the goal or adjust your strategy to reach your preferred benchmarks.
Having that expectation in place will ease any distress you have about your finances overall, even in a situation where inflation is rising.
When resetting these expectations, it’s important to remember that inflation can increase the time it takes to save enough for these large goals – if you’re spending more, then you need to save more to cover the heightened spending. Plus, it can cut into your market returns if you have retirement goals funded by your investment portfolio.
Instead of fretting, re-run your calculations to determine how the heightened spending could impact you long-term. For some, it may have little impact since they can ease spending as needed to adjust to the higher prices. For others, it may require saving more to reach the goal in the time that you have set. And others still will need to readjust the time it takes to achieve the goals.
Whichever it is for you, at least you know the impact. With the impact calculated, you can then prepare effectively. This can ease some of the stress you may have about the upcoming year.
And if you plan well, and the year ends up bringing you greater fortune than expected, well then you’ll have no problem adjusting it accordingly.
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