As the end of the year draws near, now is the time to reflect on the highs and lows of 2021 – and what may lay ahead for 2022. And with the new year on the horizon, today’s consumers are facing some challenges from the get-go – namely soaring inflation rates, potential changes to the tax code, an unstable supply chain, and the lingering effects of the ongoing COVID-19 crisis. And for retirees, these challenges will likely come on a fixed income.
With this in mind, there is no better time than now to get on the right financial footing ahead of the new year. Check out some of these ways to organize your finances for 2022.
1. Review 2021 spending
While budgeting is an important step to managing your money in retirement (we’ll cover more on that in a bit), the first step is to fully understand your spending habits. Start by looking at your 2021 expenses. Was your spending higher than you’d like it to be? What did you spend the most on? Your credit card statements are a great place to begin in understanding where you tend to spend money. Better yet, many credit card companies break down the expenses by category so you can identify spending patterns at a quick glance. You may be surprised to see just how much you spend in certain categories like food or entertainment! And with a better idea of the numbers, you’ll be able to make adjustments to your spending plan ahead of the new year.
2. Create an attainable budget
With a better understanding of your spending habits, you’ll be able to create a budget for 2022 – and one that you can actually stick to. While it’s impossible to forecast every expense you’ll incur in the new year, having a general idea of what you can realistically afford to spend is a must. Start with your fixed costs – insurance, utilities, housing, and any subscriptions you belong to. Since these costs tend to be relatively stagnant, you can easily account for them in your budget. Similarly, set aside some funds for birthdays and holidays that you know you’ll need to spend money on. And since life is unpredictable, it’s important to budget for some larger expenses like a car or home repair that may be on the horizon. Keep in mind that an attainable budget is not written in stone – and you may need to adjust throughout the year, especially given today’s inflation environment.
3. Plan to repay debts
Nobody likes debt – especially in retirement. Yet, despite this sentiment, debt is on the rise. According to the Federal Reserve Bank of New York, total debt for Americans ages 70 and older skyrocketed 543% from 1999 through 2019, amounting to $1.1 trillion1. If you’re a retiree with debt, you’re in good company. And fortunately, there are ways to pay off these debts – even on a reduced or fixed income. Since credit cards and car loans tend to have high interest rates, start by prioritizing making payments towards those. Once these are accounted for, determine how much you can put towards aggressively paying off your mortgage. With the average monthly mortgage payment in the US hovering around $1,275 on a 30-year fixed mortgage2, eliminating this expense frees up significant cash flow. You’ll also save money on interest payments and enjoy the peace of mind that comes with a paid off house and comfortable retirement. Read more about eliminating your monthly mortgage payment with a reverse mortgage, here.
4. Fund your ‘rainy day’ fund
If the past few years have taught us anything, it’s this – prepare for the unexpected. This is especially true when it comes to finances in retirement. Whether it be household repairs after a storm, a large medical bill, or auto repair – research has found that Americans face unexpected expenses each year with the median costs in the ballpark of $2,0003. Without an emergency or ‘rainy day’ fund in place, such expenses have the potential to set you back quite a bit.
Fortunately, with some proactive planning, you’ll be well equipped to handle any unforeseen expenses without having to borrow money. While experts recommend maintaining three to six months of total living expenses in a liquid, easily accessible emergency fund, even a small fund of $1,000 or $2,000 is a good starting point. You can also adopt the “pay yourself first” mentality and make regular contributions to this fund. If/when the unexpected happens, you’ll be glad you did. And if you’re short on funds or could use another source of cash flow to bolster your savings, tapping into your home equity may be a viable solution. With a Home Equity Conversion Mortgage (HECM) – also known as a reverse mortgage – you can establish a line of credit to help you prepare for any unexpected or future expenses. This financial “safety net” provides peace of mind today, as well as financial protection for the future.
5. Revisit your insurance
It’s no secret that insurance has the potential to be a large expense – home, auto, health, and life. While health insurance is traditionally provided via Medicare, you’ll want to assess your needs for the year ahead. If you opt for supplemental Medicare coverage or a prescription drug plan, you’ll want to make sure you’re taking advantage of all the benefits of the plan to truly maximize your investment. In terms of home and auto insurance, you’ll also want to revisit your plans. Are you happy with your current plan? Are you being over-insured or underinsured? Once your coverage needs are decided on or adjusted, review your costs. And don’t be afraid to price shop – especially since some insurance companies offer senior discounts. What’s more, some insurance companies offer savings opportunities if you bundle your home and auto coverage, so it pays to do some research – literally.
Just like a regular health checkup, financial checkups are key – and should be done on an annual basis. Take a moment to touch base with your finances, whether it be by yourself, with your family, or with a trusted financial advisor. It’s all about getting organized and having a strategy in place to maximize your money in the new year.
And if you could use another source of cash for 2022, consider tapping into your home equity with a reverse mortgage. With homeowners ages 62 and older accounting for a record $9.57 trillion in housing wealth4, you may be surprised to see just how much equity is in your home.