How to financially plan for the second half of 2022 amid volatility, inflation and rising interest rates
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As we enter the second half of the year, it’s a great time to check how you’re heading towards your 2022 financial goals. Because economic conditions have changed since the start of the year, it’s also the right time to make the necessary adjustments to ensure you stay on track.
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Here’s how to plan financially for the second half of 2022.
Check exactly where you are now
“When it comes to doing a mid-year financial checkup, I like to think of it as an opportunity to make sure I’m set for success for the rest of the year,” said Amy Richardson, CFP at Schwab Premium Smart Wallets. “I like to keep it simple and focus on three things: (1) assessing your budget, (2) reviewing progress toward your goals, and (3) putting you in the most tax-efficient position.”
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Check your budget
Richardson said to use the middle of the year as an opportunity to hold yourself accountable to the budget you set at the start of the year.
“Life goes by and sometimes we’re unaware of how our spending may have changed over the last six months, so it’s important to review your spending throughout the first half,” she said. . “It’s also important to make sure you review any automatic payments and subscriptions you may have overlooked.
“If one of your spending categories is out of alignment, you can focus the rest of the year on staying within your limits. Your budget doesn’t have to be static. Be prepared to make adjustments. Deciding to spend less for the rest of the year can give you greater peace of mind and relieve anxiety if you’re worried about the economy.
It’s also a good time to make sure your emergency fund is where it should be.
“This account should have enough money to cover at least three to six months of living expenses to avoid running up credit card balances or having to dip into funds set aside for your goals at long term,” Richardson said. “A key part of having emergency cash is saving you from having to sell other investments at inconvenient times in the market.”
Review progress towards your goals
“The most important thing for your future is to regularly review your life goals and assess whether you need to make any adjustments,” Richardson said. “Consider setting yourself some personal challenges. For example, you can set a goal to grow your savings each year by saving $50 in a fixed account each month, then $100 the following year, and so on. It’s a fun way to view growth; and, when you see results, you are more likely to pursue progress.
You should also check how you are progressing towards paying off any debt you may have.
Put yourself in the most tax-efficient position
It’s not too early to start thinking about next tax season.
“Review your 401(k), HSA, or FSA contributions, and any charitable accounts to make sure you’re maximizing tax-advantaged accounts,” Richardson said. “It’s important that you don’t leave money on the table by making sure you contribute to your company’s pension plan and other tax-advantaged accounts up to the maximum.”
If you can contribute more than your company matches, try to do so, Richardson said. Ideally, you’ll contribute up to the annual limit, which can be as high as $20,500 for 401(k) plans.
“And, if from there you still have room in your budget, it’s great if you can save more by funding an IRA,” she said.
The middle of the year is also a good time to review your payroll deductions to make sure they are correct.
“Seeking advice from a financial planner can be helpful in making sure you’re not overpaying in taxes and giving the government extra money that could be used for your savings,” Richardson said.
How to Adjust Your Financial Plans to Account for Market Volatility
Even though we have gone from a bull market to a bear market since the beginning of the year, Richardson recommends to stay the course.
“Regardless of the current market environment, it’s important to remember that volatility doesn’t mean you should stop investing and saving,” she said. “You should always focus on your long-term financial goals. The best approach to long-term success is broad diversification that matches your risk appetite. That said, you can make changes to your investment strategy to take the environment into account. Consider protecting your portfolio by incorporating Treasury Inflation-Protected Securities (TIPS), Series I Savings Bonds, and other asset classes that hedge against higher inflation.
The middle of the year is a good time to rebalance your portfolio if allocations have moved away from your target allocation, Richardson said. Make sure your allocations are in line with your time horizon and risk appetite.
“Use this as an opportunity to harvest tax losses in your taxable accounts in addition to other significant portfolio cleanups and adjustments,” Richardson said.
While you may want to make some adjustments, don’t let the bear market deter you from investing completely.
“Keep investing and don’t let short-term market volatility affect your long-term goals,” Richardson said. “Time in market produces better results for investors than market timing. If the bear market is making you unsure of what to do, consider working with a financial advisor who can help you make informed decisions in the context of your larger financial situation and calm your worries.
How to adjust your financial plans to account for inflation
“With inflation on the rise, chances are that a lot more of your income will be spent on day-to-day expenses like groceries, gas, etc.,” Richardson said. “It’s important to think about where you can cut spending to keep your budget and savings on track for the long term. This may mean cutting back on dining out, entertainment, or non-essential purchases. The key is to identify the expenses that are most important to you and that you can afford.
You may also want to increase the size of your emergency fund to reflect the higher cost of living, Richardson said.
“It’s important to stay flexible and stick in areas where you can — think dining out and shopping — so you can keep your budget on track,” she said. “You can still enjoy the things you love to do. Just be aware of the cost and find ways to get creative (like having a) picnic in the park (instead of dining out), riding more bikes (to save gas), etc.
How to adjust your financial plans to account for higher interest rates
“If you’re going to take out a loan this year for a house or a car or something else, it’s probably going to cost you more, which you’ll need to factor into your plans,” Richardson said. “The good news is that there may be more opportunities throughout the year to find higher interest bank accounts and savings vehicles, offering the chance to get the most out of your saving.”
As for the impact of the interest rate environment on your investments, there are different impacts for stocks, bonds and other asset classes, but it’s still important to stay diversified and keep an eye on the long term, Richardson said.
“We can’t predict where interest rates are going or how any given investment will react, so it’s important to avoid putting your eggs in one basket,” she said.
Richardson said to stay focused on the big picture when planning for the second half of 2022.
“We don’t want today’s environmental headlines to distract or derail the goals and priorities you have for yourself in the long term,” she said. “Interest rates fluctuate, but your financial plan looks to the next 10, 20, 30 years and beyond. will not affect your existing loans.If you have variable rate loans, this may be an opportunity to consolidate or reassess the structure of those fixed rate loans.
What to keep in mind when planning for the rest of 2022
Consider the current economy when making financial plans for the rest of the year.
“During times like this, it’s important to think about how you can put yourself in a better position to stay ahead of inflation,” Richardson said. “That means your money has to earn more than many traditional checking and savings accounts earn. It’s essential, if you’re planning your long-term goals, that you remember to start investing as early as possible and to keep investing, no matter what you hear or read in the markets.
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