If 2021 was the year that introduced us to the "new normal" of the COVID-19 pandemic era—with vaccines rolling out, travel resuming, and businesses and schools reopening—then 2022 might be the year of accepting that the new normal is our permanent reality. In these changed times, it may be time to align our financial plans, too.
While the vaccinations seemed like they would end the pandemic, says Liz Frazier, a New York-based financial planner, speaker and author, “I think we’re now seeing the new normal isn’t over, it isn’t going anywhere and we’re not going to ‘shift back.’”
So how can we prepare financially for a future that continues to be cloudy? “The pandemic is going to be with us. So, it’s learning how to manage it in every part of our lives and financially shift and adapt with it,” says Frazier. We’re not going back; we’re going forward. Here are some money management tips that can help you stay in step in 2022.
Prepare for the Unforeseen
Whether times are good or bad, a solid financial foundation begins with building up your savings, paying down your debt and budgeting to live within your means. While it feels like the world has been turned upside down during the pandemic era, some things haven’t changed, says Frazier. “One of those things is the importance of having an emergency fund.”
Your emergency fund target might need to be reevaluated if you felt financially unprepared recently. While traditional wisdom says an emergency fund should be three to six months of living expenses, maybe you burned through your emergency fund more quickly than you expected. Or maybe you need to consider factors other than just living costs. “A homeowner may need money for repairs, for example, or a business owner may need more money set aside than if they were an employee,” says Chloé A. Moore, a financial planner and founder of Financial Staples, a financial planning firm based in Atlanta, Georgia.
Debt is another major financial factor that can chip away at your financial foundation. If you’re torn between saving and paying down debt, remember that both are worthy goals. “When it comes down to it, either will have a positive outcome,” Frazier says.
Budget for the New Normal
As 2022 begins, consumer spending is increasing, and the world has reopened for business. But Americans’ savings are dropping off from the high levels of 2020. While it may be the new normal, old expenditures are returning. People who squirreled away money during lockdowns, quarantines and periods of travel restrictions may be feeling the temptation to spend, spend, spend.
For people who are coming into 2022 on secure financial footing, some expenditures might be meaningful as well as budget appropriate, says Frazier. But balance out the urge to spend with reflection: How did you feel about your money during the financial roller coaster of the last couple of years? Were you up at night thinking about lost income? Did your savings feel inadequate? The process might change how you allocate the extra money in your budget.
Many financial advisors point to values-based spending as a good way to keep your budget reined in and focused on what really matters to you. “Review your expenses and ask yourself where did your spending align with what’s most important to you, and make adjustments going forward,” Moore advises.
Consider Zero-Balance Budgeting
One way to stay on track throughout 2022 is to try zero-balance budgeting. With this technique, you account for all your spending, down to the last dollar. Track your earnings and all your expenses (including debt payments and discretionary spending) as well as everything you save. Your income minus your expenditures should equal zero. If you’re over budget, decrease your spending (or boost your income). If you’re under, find a place for those funds (ideally saving or investing the extra cash).
It’s a strict system, but it helps you get a sense of where your money is going and prevents stress when bills come due, since they’re already in the budget. “Zero-balance budgeting has a lot of value,” says Frazier. “It gets people in the habit of tracking and recording all expenses. It also keeps them accountable for what they’re spending and if they’re going over.”
The best budget is one you stick to, so find what works for you. “If you aren’t disciplined enough for zero-balance budgeting, just keeping a basic record of incoming and outgoing cash is one of the most important steps in being financially healthy,” says Frazier.
Set a Course for Smart Investing
In applying what we learned in 2021, Frazier says the one thing that stands out for her was the resilience of the market. “This year showed us the importance of having a smart investment strategy and faith in the marketplace,” she says.
What does a smart investment strategy look like? First off, understand your risk tolerance. If you were invested in 2020, you probably learned what your real risk tolerance looks like. “What were your feelings back in 2020 when the market tanked?” asks Moore. Based on that information, you might need to rebalance your portfolio, she advises, or ensure your portfolio is diversified to manage risk. “Those who have been through any financial crisis come out tougher and with a greater sense of their true risk tolerance,” says Frazier.
What does diversification entail? Frazier points out that you want to consider being diversified across industries as well as in bonds versus equities and international versus domestic investments—noting that international investments may be high risk in today’s volatile world markets.
Remember that investing is a long game. “Regardless of the market, the economy or a pandemic, my advice is always the same,” says Frazier. “Invest for the long term in high-quality and diversified funds. And use dollar-cost averaging to provide some protection from market turbulence.”
Make Note of Tax Changes and Policy Proposals
When it comes to new policies that could affect your bottom line, possibilities are just that—possibilities. Discuss them with your financial advisor and then keep an eye on developments. “Until something is actually passed, we just have to focus on sticking with the fundamentals and making sure our financial foundation is in place,” says Moore.
On the other hand, policy changes that passed this year could be affecting you as early as your 2021 tax return. For example, older Americans who are eligible for required minimum distributions from their retirement accounts—they were waived in 2020—need to be sure to withdraw them before the last day of the year in 2021 or face high penalties. Likewise, in 2022 student loan repayments will also restart after being delayed during the pandemic.
The American Rescue Plan increased the Child Tax Credit for 2021 to $3,000 for families with kids under 17 (and an extra $600 for children under six). In addition, subsidies for health care premiums were increased by Congress in the spring, so be sure to discuss your eligibility for both tax breaks—or whether you need to pay money back if you don’t meet the income requirements—with your tax planner.
How Can I Plan for My Financial Future?
Carrying over the lessons of the pandemic is a good way to keep your budget in line. Focus on your goals and build a financial cushion that helps you sleep at night. But managing your money is about more than just emergencies. After all, emergencies may or may not happen—but retirement definitely will.
That’s why investing for your financial future and stashing away money for retirement is so crucial. As you begin 2022, take a good look at your retirement contributions. If you haven’t been saving enough, use any financial windfalls to play catch up (remember that extra money in your budget?) and get more aggressive with your contributions, Moore advises.
Each new year is a stepping stone toward building a future with a secure retirement that is as flexible as your goals. The pandemic continues to cloud the horizon, but that doesn’t mean you need to worry nonstop. “When it feels like so many things are out of control, focus on what you can control; it’s too much stress to worry about things we’re not sure are going to happen,” says Moore. “Make sure you keep your expenses in line and build your savings. Do those fundamental things to put yourself in a better situation.”
Julie Anne Russell is a Brooklyn-based freelance journalist. She writes on personal finance, small business, travel and more.
Strategic preparation for the future is key. And there are tools that can help you save and plan for tomorrow as you closely manage your budget. Get started today—learn how to spend smarter, especially during times of inflation.