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The new year is right around the corner, which means it may be time to start thinking about how you see your finances panning out next year. But before you can do that, you may want to think about wrapping up a few loose ends from this year's financial activities. Doing this now can help you get a strong start on your goals come January.
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Budgeting may not be the most exciting part of managing your money but having an idea of where your money goes is important for your financial health. It can help you figure out what's working for you and what isn't, and if there are any expenses that no longer serve you.
Keep in mind that some years you may have larger expenses — like a wedding or tuition costs for yourself or your children. It's important to plan ahead for these kinds of expenses so you don't feel blindsided when they come around.
"We have to create a new budget every year because things change all the time, so get used to updating your budget to address all the shifts," Castro said.
Budgeting can also be tough because sometimes it's just hard to take an honest look at the numbers in our account.
"Often times we are afraid because there are extra emotions that we attach to our money," Castro explained. "We're so self-critical sometimes. But looking at the numbers is the only way to overcome this."
According to Castro, automating your investment contributions is a great way to make sure you're putting money toward your wealth building goals. Sometimes when faced with the decision to spend money for something we can have right now versus putting it away for something far into the future, we choose to spend now. Automating your savings lets you bypass this decision.
You can typically set up automatic deposits from your bank's online account into your brokerage account, or you can use an app like Digit, which randomly saves small amounts of money for you each day. Acorns is another app that automatically invests your spare change from everyday purchases so you don't even have to remember to invest that money yourself.
The end of the year is a good time to take a peek at your retirement accounts to see if you're on track to reach the goals you set. This will help you figure out whether or not you need to make adjustments to your contributions (or any other part of your retirement strategy) in the new year.
Most people have an employer-sponsored retirement account like a 401(k), so that would be a good place to start. Maybe you decide that you can afford to increase your contributions by 1% next year, bringing you a little closer to maxing out your 401(k) contributions. Or, maybe you aggressively contributed to the account this year and due to some lifestyle changes you'll need to scale back a little bit next year.
Think about any other retirement accounts, like a Roth IRA, in the same way. And according to Castro, you should also think about what your retirement goals are and whether or not you're on track to meet them.
Spending tends to increase around the holidays since we're purchasing gifts for loved ones, decorations for our homes and ingredients for holiday meals. In fact, according to a report from the National Retail Federation, Americans may expect to spend an average of $998 this year on holiday shopping, food and decorations.
It's easy to unintentionally put more money on your credit card than you can actually afford to pay off, or dip a bit further into your savings than you intended, even if you're usually good about sticking to a budget. These things happen — just create a strategy for paying down the balance as quickly as you can. Maybe that means paying $50 toward the balance every week until it's paid off; or on the other hand, you might automatically move $50 into your savings account each week until you recoup the amount you spent for the holidays. Or, perhaps you like the idea of just not using the credit card again until you've made enough monthly payments to pay it off.
Debt sounds like a scary word because it seems to imply something negative. While there are many ways to use debt positively, for most people debt is a drag on their finances. Completely paying off just one form of debt can free up cash that you can redirect toward your other financial goals, like saving for a home or investing more. And the debt problem becomes even worse if you don't even know how much you owe.
"A lot of times people are afraid to look at those numbers," Castro explained. "But you have to be willing to work through those emotions."
According to Castro, sometimes we attach feelings of shame or guilt to our debt, which can make it feel much harder to deal with it. However, we need to overcome these feelings to start making impactful change. Just taking a look at your debt balances is a good start. If you use Experian, you'll be able to view debt balances for every line of credit you have, including all your credit cards, car loans, student loans and more.
Once you know how much you owe, you can figure out the best way to start paying it back. Many people use the snowball method where they focus on aggressively paying down the debt with the lowest balance first while only making the minimum payment on their other debts. This helps them pay off one account faster, which in turn makes them feel a sense of achievement and motivation to keep going.
But one form of debt that may be on your mind lately is your student loan debt, since payments will resume next year. However, President Biden announced on Dec. 22, 2021 that the pause on student loan repayments will be extended to May 1, 2022. The transition to making payments again may leave some people feeling a bit financially pressured, but Castro notes that it's still important to plan for this re-introduction as well.
This could mean making a decision on areas where you may need to scale back your budget to fit the payment in (read our tips for easing back into student loan payments for more suggestions).
Lastly, one of the most impactful things you can do to improve your financial situation next year is to educate yourself on what you don't already know about your money. Taking a passive role with your finances can lead to mistakes with your money and actually cost you more in the long run. It's important to make sure you set yourself up for success and according to Castro, upping your knowledge can help you do that.
"It's important that we all commit to the next level of our financial lives, and education is the way," she said. "Financial literacy is a great goal for 2022."
You might start by listening to some financial podcasts and reading books about personal finance. According to Amazon, a few best-selling personal finance titles include Rich Dad, Poor Dad by Robert Kiyosaki, Think and Grow Rich by Napoleon Hill and I Will Teach You To Be Rich by Ramit Sethi.