It’s 2022, that means we all have a clean slate when it comes to new habits and plans for the year. If you’ve been meaning to buckle down and get better with your finances, here are a few quick tips to get you started.
Check Your Retirement Contributions
The average person stops increasing their retirement contribution once they get the full employer match offered. But in reality you likely need to save a lot more than that to have a secure retirement. For 2022, the IRS increased the maximum 401(k), TSP, and 403(b) contribution to $20,500 (up from $19,500 in 2021). That’s $854.17 per paycheck if you get paid twice monthly. If you’re over 50 or self employed you can save even more. Most people don’t know how close they are to maxing out. So to find out, take a look at your paystub. Check the dollar amount going into retirement per paycheck and multiply by the number of pay period you have in a year.
Don’t freak out if you’re saving the bare minimum or haven’t looked at this in a while. You don’t have to try to max out all at once. Here are a couple ideas for ratcheting up your savings over time.
- Minimum: Choose a percent to contribute rather than a dollar amount since your contributions will then automatically increase as your income increases. Start with the percent needed to get the employer match and then increase the percent annually from there.
- Better: Start with 10% of pay and increase your contribution by a 1% per year. For example, if you make $70,000, start by contributing $7,000 to retirement and then next year increase to $7,700.
- Best: Start where you are now and split half your annual raise with your retirement. For example, if you get a 6% raise, increase your retirement contribution by 3%.
Note that employer contributions don’t count toward the federal maximum of employee contributions. So you can save even more than $20,500 per year by getting the full employer match.
Be a Good Consumer and Practice Online Hygiene
Scammers are always trying to come up with new ways of stealing and selling valuable information which could get used to open an account in your name without you knowing. There were almost 4,000 data breaches in 2020 according to an article in TechRepublic. If you HAVEN’T been the victim of a data breach, you must be a unicorn.
You can’t protect people from stealing your data, but you can protect your credit from being used unscrupulously. You can also take several steps to protect against identity theft. The first step should be to monitor your credit report periodically.
If you don’t already have Credit Karma set up – it is a good service to use for ongoing monitoring of your credit reports. You get an alert when new credit has been opened in your name or there is unusual activity on one of your credit cards. Plus it provides your credit score and you can see how various actions impact your score.
Paid fraud alert services offered by credit cards or the credit bureaus themselves are poorly rated by Consumer Reports and don’t do anything different than credit karma. Don’t waste $19.99+ per month on these services.
Credit Karma does make money by offering in app offers for credit cards, tax services, etc, however, they don’t charge for the monitoring service.
The analog way to monitor your reports if you don’t like using the app is by requesting and reviewing your free credit report at one of the 3 credit bureaus every 4 months. Start by going to Annualcreditreport.com.
I also want to address three MYTHS about your credit score.
- Keeping a balance on your credit cards doesn’t build credit. This is a myth. Keeping a balance just creates interest.
- Applying for credit doesn’t impact your score all that much, especially once you have an established score. Only 10% of your score relates to “new credit” and FICO absolutely will not penalize you for rate shopping (also known as credit inquiries). If you are in the process of apply for a loan to refinance your student loans, get a mortgage or buy a new car — DO NOT be afraid to price shop, even if they run your credit before giving you a rate. This decision could save you thousands!
- There’s no prize or benefit for getting a “perfect credit score,” Anything over a score of 730 will give you access to the best offers and rates.
Measure Your Net Worth
The word Wealth comes from old english and it’s a mix-match of the words Well (as in well being) and Health. There are many aspects to wealth, of course, but monetary wealth creates resilience and allows us to have the option to change our mind, finance our dreams, or adjust our career plans. We must take care of ourselves financially as a part of creating a healthy lifestyle. One of my mottos is, if you measure it, it gets done. So one good action to take is to start tracking your net worth, one measure for wealth, annually. Here’s how to do it.
Using software or a spreadsheet. Figure out everything you OWN (your assets like cash, investments and the market value of your property.) Take a minute to find all the things you own that have a monetary value. Create one row for each account and a column for the name and the balance of each account. Then add them up — these are your “assets.”
Now, pick out the things you OWE (your loans like mortgage, student debt, credit card balance, car loan, etc.). Create the same rows for each account just as you did for what you own. Then add them up — these are you “liabilities.”
Then subtract everything you owe from everything you own. This is your net worth.
Your net worth is a good measure of how you’re doing financially, not because it’s good to hoard money or build wealth for the sake of being a wealthy person. It’s a good measure because all of us eventually will have to depend on our assets rather than our income to retire. Your net worth should be increasing from year to year. In fact, it’s a good idea to re-measure your net worth annually just to check in.
Some people, especially when they’re just starting out, or have student loans, have negative net worth. That’s ok. You’ll be focused on getting a smaller and smaller negative net worth until you finally turn positive and start growing positively.
Growth year over year is a sign that you’ve made good financial decisions. Decreasing or stagnate net worth can indicate problems with your finances.
What do you think? Is there anything else you want to learn about your finances in the new year?