Part 1 of a 3 Part Series
3 Financial Resolutions for 2022
Brad Perry, Charles Schwab
This is part one of a three part article on financial resolutions you can make for 2022. Please tune in over the next couple newsletters for the entire set of resolutions.
Resolution 1: Create a Budget for Life
When it comes to finances, life can be viewed as cash flowing in—and out. Saving and investing during your working years, if you stick with it, could lead to a rising net worth over time, enabling you to potentially achieve many of life’s most important goals. Creating your own budget and net worth statement can help you build your road map and stay on track.
Create a budget and pay yourself first. If you’re not sure where your money is going, track your spending using a spreadsheet or an online budgeting tool for 30 days. Determine how much money you need to cover your fixed monthly expenses, such as your mortgage and other living expenses, and how much you’d like to put away for other goals. For retirement, our rule of thumb is to save 10–15% of pre-tax income, including any match from an employer, starting in your 20s, then add 10% for every decade you delay saving for retirement. Once you commit to an amount, consider ways you can save automatically. Research shows that if you “pay yourself first,” it makes savings easier.
Calculate your personal net worth annually. It doesn’t have to be complicated. Make a list of your assets (what you own) and subtract your liabilities (what you owe). Subtract the liabilities from the assets to determine your net worth. Don’t panic if your net worth declines during tough market periods. What’s important is to see a general upward trend over your earning years. If you’re retired, you’ll want to plan a drawdown strategy to make your net worth last as long as necessary, and to support other objectives
Project the cost of essential big-ticket items. If you have a big expense in the near term, like college tuition or roof repair, increase your savings and treat that money as spent. If you know that you’ll need the money within a few years, keep it in relatively liquid, relatively safe investments like cash equivalents.
Retired? Invest your living-expense money conservatively. Consider keeping 12 months of living expenses after accounting for non-portfolio income sources (Social Security or a pension) in short-term CDs, an interest-bearing savings account, or a money market fund. Then keep another one to four years’ worth of spending laddered in short-term bonds as part of your portfolio’s fixed income allocation. This can help provide the money you need in the short term, allowing you to potentially invest other money for a level of growth potential that makes sense for you, which could reduce the chances you’ll need to sell more-volatile investments (like stocks) in a down market.
Prepare for emergencies. If you aren’t retired, we suggest creating an emergency fund with three to six months’ worth of essential living expenses, set aside in a savings account or money market fund. The emergency fund can help you cover unexpected-but-necessary expenses without having to sell more volatile investments.
Tune in next month for the second of this three part series.
Are you ready to take on the new year? If you have questions about shaping your financial future, please reach out to me at 972-788-7831. Let’s make your 2022 (and beyond!) great.
Brad Perry is a Vice President Financial Consultant at Charles Schwab with many years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.
*Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. Schwab does not provide legal or tax advice.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
Tax-exempt bonds, like muni bonds, are not necessarily a suitable investment for all persons. Information related to a security's tax-exempt status (federal and in-state) is obtained from third-parties and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.
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