2022 is the year to beat inflation and make your money work for you. Savings peaked both times stimulus checks went out. And in September 2021, the typical low-income household experienced a median cash balance increase of around 70%, with high-income households coming in at around 40%. While there are no more stimulus checks earmarked, you still have a chance to turn your savings around with a savings roadmap.
Step 1: Cyberstalk your payments like Joe from 'You' would stalk his new neighbor!
It’s tempting to start cutting subscriptions and switch your daily latte fix to a home-brewed cup of coffee. But let’s face it, lattes are happy juice! Instead, we want you to dig deeper and look at bigger-ticket expenses in your budget.
- Mortgage or rent payments. Your housing costs should max out at no more than 35% to 40% of your income. If you're spending more than that, it’s time to make a change! If you’re renting and not location-bound, look for a more affordable property in another city or suburb. If you have a mortgage, talk with a few reputable brokers to see if you can refinance to a lower APR (before rates start going up again).
- Utilities. Try turning the thermostat down a few degrees (cozy sweater time!). Or what about opening some windows during the summer months instead of defaulting to AC? At a minimum, aim for setting your temp in the "green zone," which is usually 65-67 °F in winter and 78 °F or higher in summer. If you can afford to, replace appliances with energy-efficient ones, especially refrigerators and washing machines.
- Commute costs. Upgrading your daily commute can be a great way to free up some extra cash. For instance, trading in that gas-guzzling truck for a more affordable (and environmentally friendly!) electric or hybrid option. Take public transportation and turn your drive into quality reading (or Wordle) time. Or, consider biking to some of your errands instead of driving for a built-in workout.
- Food. Do the math and find out if you're overspending on takeout, extra snacks, or pricey beverages. A surprising money pit is food delivery apps because they're oh so convenient. Just put the phone down and cook that chicken parmesan you're thinking about. Better yet, get into a habit of meal planning to make sure that you use up everything you buy instead of throwing out wilted or rotten perishables on trash day every week.
When you’re done chipping away at the big-ticket items, it’s time to look at smaller payments to see whether there is room for you to reduce your spending.
Step 2: Supersize your savings
0.50% APY is considered a good savings rate on savings accounts, which is well below the inflation rate hovering around the 7% mark. That means you will need to pull out all stops and increase your savings to make the best impact.
- Emergency and short-term savings. Opt for a high-yield savings account where the balance is protected, either fully or partially, and offers easy access when you need it. Once you’ve saved up what you need, consider investments or financial products that could potentially produce a higher yield, so you're not as affected by inflation. When it comes to emergency savings, your financial position will determine the amount, but financial pundits recommend anywhere between three to 12 months.
- Health savings account. Certain tax benefits contribute to a high deductible health plan (HDHP). The annual cap for 2022 is $3,650 for individuals for those who qualify. Speak to a tax consultant to find out how this might work for you.
- Your retirement. Another way to maximize tax benefits is to max out your retirement funds. If you're lucky enough to have an employer-matched contribution plan, take advantage—that's free money!
Now, if we haven't dazzled you with the information already provided, we're hoping the triple tax benefit will wow you. It works like this:
- Contributions are pre-tax (HSA, 401(k), and Roth IRA)
- Earnings such as simple interest aren't taxable
- If the proceeds are used within the parameters of the product, there are no additional taxes
Step 3: Cut the fluff
Getting into a regular savings habit is a no-brainer with the right tools.
- Automate your savings. This is the holy grail of wealth-building. Each paycheck has a certain amount deducted automatically into a savings account. You're basically pretending that money doesn't exist. This is important in getting to where you don’t have to consciously decide to save. You can also automate savings that aren’t fixed, such as pennies on the dollar that you won't miss on the daily. Check out apps such as Acorns and digit.
- Create savings pockets. Savings pockets allow you to save for individual items instead of pooling all your saved money into one account. Banks such as Ally and Capital One allow customers to set these up in no time. It also helps to get the money out of your checking account, so you don’t accidentally use it on everyday spending.
Step 4: Say "bye Felicia" to high interest
Any smart savings plan starts with taking a hard look at your debt. If you're thinking of paying off your credit card (which carries an average APR of 15.56% to 22.87%) vs. saving some extra cash (which earns around 0.5%) for that high-ticket item you want, the credit card might require a closer look. This means it's important to have a look at bringing down high-interest credit products before allocating too much of your disposable income to savings. Balance, amiright?
Ways to reduce your debt quickly:
- Pay more than the minimum monthly payment to reduce your overall interest spending
- Target higher-interest items first to reduce the interest charged over the period. Or, tackle small debts first and create a debt snowball effect
- Restructure your loans and financing to better terms if you can
Step 5: Increase your income
It may not always be possible to reduce your expenses. Instead, you may have to find ways to increase your income. Can you swap a night of binge-watching to pick up an extra shift or start a side hustle? Or maybe it's time to ask for that long-overdue raise. Here's how:
- Just ask!
- Research the going rates for your job
- Create a personal portfolio to back up why you deserve more money
- If you have a new job offer (congrats!), tell your boss in case they can match or improve it
Invest in yourself for peace of mind
As we've learned in the last two years, life is unpredictable! Taking control of your savings is one of the best ways to ensure future stability. Even if you can only afford to save $5 a week, do it! Over months and years, it adds up. And chances are, you won't miss that money as much as you'll love when it's stacked up later.