In a time when inflation is at a 40-year high and prices are surging on everything from gasoline and food to furniture and cars, many consumers are focused on how to better handle their money. Developing practical strategies for saving, spending and investing can help you build an emergency fund, lower debt and gain peace of mind.
Bankrate asked personal financial experts from across the country for their advice on how you can make the current and future years more financially fruitful.
Managing your finances after COVID-19
Many U.S. consumers put more money into savings during the COVID-19 pandemic, driven by government stimulus payments and a decrease in spending on things like travel, transportation and eating out. Many used the extra cash to also pay down debt.
The U.S. personal saving rate, the percentage of consumer income that’s put into savings after taxes and living expenses, more than doubled in 2020, according to the U.S. Bureau of Economic Analysis. The personal saving rate decreased somewhat in 2021, to 12.2%, and in the first two months of 2022 rejoined pre-pandemic levels at an average 6.2%.
If you saved more during the pandemic, consider keeping up this habit to further boost your savings for emergencies, retirement and any other financial goals.
Step 1: Create a budget
Though some aspects of your personal finances might change — such as where you bank or what stocks you invest in — one personal finance strategy remains constant: You need a budget.
A budget can involve mapping out your spending each month, including line items earmarked for things like savings and debt repayment. A budget should be flexible, as expenses change over time. A common budgeting approach is the 50/30/20 rule, which devotes 50% of your income to needs, 30% to wants and 20% to savings.
“It’s so easy to fly blind when it comes to your income and expenses, but it’s so important to keep close track of 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 is often the best approach, though there are also many useful budgeting apps you can download.”
Many consumers worry that a budget will uncover reasons to feel bad about their money management, but ultimately the process can help you make sound financial decisions and have more money in savings.
“Many people find that focusing on their budget will make them feel badly about how much they spend, but that’s not usually the outcome,” Sterman says. “Instead, people develop a sense of empowerment when they come to see how their spending relates to their income. And by creating a budget, you’ll have a better sense of how much you can spend each year on discretionary items such as contributions to an investment account, a new car or a long-awaited big trip.”
Step 2: Be mindful of expenses
Look through your expenses and determine which ones can be reduced or eliminated. Some areas where consumers tend to spend more than necessary include:
Food: One-third of the average household’s food budget in 2020 was spent on food away from home, according to the U.S. Bureau of Labor Statistics. Cooking more of your meals at home can save you a bundle over eating at restaurants or picking up takeout.
If a busy work schedule keeps you from cooking during the week, prepare some meals in advance over the weekend. Not only can cooking at home save you money, but it can also contribute to a healthier diet.
Insurance: Your insurance rates may be rising to keep pace with inflation, so it pays to shop around to ensure you’re getting the best rates on your home and auto insurance. You can also save money by bundling insurance products with the same provider.
Mobile service: Review your cellphone plan to determine if you’re paying for data or services you don’t need. If you’re up for switching providers, you might find smaller companies like Mint Mobile, Ting and Tello to be more affordable than the large companies. Another way of reducing costs can be going with a prepaid phone plan.
Subscriptions: You may be paying for subscriptions for magazines, streaming services and gym memberships that you no longer use or need.
“Nowadays, many things are on a subscription basis, but sometimes life gets in the way, and we forget to cancel the 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 actually give 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’s possible for this type of investing to outpace inflation, build wealth and save for goals like retirement.
Ways people get started with investing commonly include:
401(k) plans: Many employers offer this type of retirement plan and will match your contributions up to a certain percentage — essentially providing you with free money. What’s more, the money grows on a tax-free basis 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 about 500 large, publicly traded U.S. companies has often brought in returns of about 10% annually. A fund that’s based on this collection of stocks is relatively easy to purchase, requires little monitoring and often has a low expense ratio.
Mutual 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 a simple way to diversify your portfolio and may require a relatively low minimum investment.
“You do not need to have $1 million or all of your bills paid off,” 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 reviewed it recently and with all of the market movement are you allocated properly.”
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, thousands of types of cryptocurrency exist, some of the most popular ones being Bitcoin, Ethereum and Dogecoin.
Cryptocurrency appeals to some investors for its potential for large returns, as well as its decentralized nature — which some investors believe can help protect them from inflation.
Downsides of cryptocurrency include extreme volatility, and unlike many other investments, it’s backed by neither assets nor cash flow. As such, it’s important that cryptocurrency be added to a portfolio that’s diversified.
“If you’re investing in cryptocurrency, keep the allocation to a small part of your portfolio, because it is very risky,” says James Royal, principal reporter on investing and wealth management, Bankrate. “If cryptocurrency is the next big thing, you won’t need a lot to enjoy attractive returns, and if it isn’t, then your overall portfolio isn’t hurt too much.”
Cryptocurrency’s “volatility looks set to continue,” Royal says, thanks to the Federal Reserve raising interest rates in 2022 and draining liquidity from the financial markets, as well as President Biden’s executive order to study regulating cryptocurrency.
Step 5: Think beyond next year
Building 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.
Rather than just planning to save money, set financial goals such as buying a house, taking a dream vacation, funding your children’s education or having a set amount of funds saved by retirement. Setting goals such as these can help motivate you to save and keep you on track.
When it comes to financial life planning, Sheila Padden, CFP, founder of Chicago-based Padden Financial Planning, asks her clients a few key questions.
“If you have enough money, how would you live your life?” Padden says. “Would you change anything? If you only have five to 10 years left to live, what would you do in your time remaining? Would you change anything?
“If you suddenly find out that you have one day to live, what did you miss? What did you not get to do? Who did you not get to be?”
Padden says that the questions are often the catalyst for “clarity and purposeful action.”