As kids and teens prepare for “back to school,” now is the time for adults to “get back to basics” when it comes to their finances. Give yourself a financial statement. Examine the current state of your finances and determine what you need to do to be – or stay – on track to reach your financial goals.
How do you spend, borrow, save, invest and protect your money? What changes should you make now to deal with the impact of rising prices, rising interest rates and financial market volatility on your portfolio and investments?
1. Find your personal inflation rate. First, you need to determine the impact of inflation and rising rates on your budget.
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Even though inflation is at its highest in 40 years, we don’t all spend the same amount of money on the same things. Gather bills and bank statements to see what you’ve spent on food, housing, gas, entertainment, clothing, education, and more in the past 12 months. Next, calculate your own personal inflation rate by doing the following:
- Add up your monthly expenses from last month and what you spent on the same goods and services a year ago.
- Subtract your total expenses for July 2021 from July 2022.
- Divide this difference by your monthly expenses for July 2021.
- The result of this equation is your personal inflation rate.
Whether your actual number is above or below the latest government inflation rate is irrelevant. You should review your expenses to see what you’re spending and what you can cut, reduce, or negotiate at a lower rate.
Become a wise spender
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Once you’ve calculated your personal inflation rate, it’s time to better manage your spending.
2. Avoid “lifestyle creep.” You may have gotten a small raise or changed jobs to make more money. So why not treat yourself to takeout almost every night of the week? You work so hard that you don’t have time to cook. If those meal and delivery costs have doubled your food costs, but your take home pay hasn’t kept pace, you could be experiencing “lifestyle creep” because the cost of your lifestyle grows faster than your income. See which expenses you can reduce or eliminate, such as memberships, subscriptions or even travel.
3. Use only one credit card. Get organized to get a better idea of what you’re spending. If you have all your transactions in one place, it will be easier to better track your expenses. Have a credit card in your wallet to swipe at the store or use for online purchases. If you use a digital wallet (Apple Pay or Google Wallet), use that same card for everything you buy.
4. Set limits and alerts on maps. The purchase limit on a debit card can vary from a few hundred to a few thousand dollars per day. The bank usually sets this limit, but you can request a lower limit if you think it will help you control your spending. Some credit cards will also allow you to set your own spending limits. You can also sign up for alerts (email, SMS, push notification) to notify you when you have made a purchase over a certain amount.
Keep saving and investing
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Limiting your spending may be wise with rising prices and higher costs of basic goods and services. How do you deal with the uncertainty of the economy and your investments?
5. Have a mix of stocks, bonds and cash. You should have a mix of stocks, bonds and cash. An adequate emergency fund in cash reserves to cover living expenses is essential. Start by trying to set aside at least three months. You should also have a mix of stocks and bonds (mutual funds and/or exchange-traded funds) to ensure your long-term savings keep up with inflation.
You need an appropriate combination of the level of risk you are willing to take and the level of risk you need to take so that your money can grow and you can afford to live comfortably in the future. Consider a target date fund that invests in a mix of stocks and bonds and automatically rebalances toward less risky investments as you get closer to your retirement or another “target” date.
6.Discover online investment tools. You can check out the online investment tools offered by major brokerage firms, as well as nonprofits, to help you understand some of the basics of investing. Also talk to a representative from your employer’s pension plan — if there is one — to learn more about how you can take full advantage of the investments available at your workplace.
7. Work with a financial advisor. A financial planner can help you put in place a strategy that can withstand market volatility while achieving your goals by spreading your money among different types of assets.
Find a certified financial planner in your area by visiting the websites of the CFP Board, the Financial Planning Association, and the National Association of Personal Financial Advisors. Your first meeting should be free. Talk to a few advisors to find one you trust and who will meet your needs.
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