New Year Resolutions
New Year Resolutions: Should you pay off debt, buy a house or take a long-delayed vacation in 2022? Image Credit: Wiki Commons

In addition to the new year bringing a fresh calendar, it's a time to set big money goals for the next 12 months. That might mean finally paying off debt, buying a house or taking a long-delayed vacation.

With inflation and economic uncertainty clouding 2022, shoring up your finances this month can feel even more urgent.

“When you plan to start in the new year or some other important date for you, it can be easier to make that behavioural change, because we feel like we're making a fresh start,” said Jeremy Burke, a senior US-based economist.

Here are five steps money experts recommend to help you reach your money goals in 2022:

1. Get a clear view of your finances

“The first step for everybody is to get organised,” said Phuong Luong, a US-based certified financial planner. That means making a list of your savings, debt and assets. A complete picture of your finances can help you decide what to focus on for the new year, she added, and provide a document that's easy to update annually.

Credit card cut Emergency fund 092
The first step for everybody is to get organised in 2022.

Luong also suggested tracking your monthly cash flow with a spreadsheet or app to help you answer questions about what mortgage payment you could afford or which expenses you might be able to cut. “If you have those numbers organized, it's easier to have those conversations, with a professional or with yourself, about what you can actually afford,” she added.

A complete self-assessment includes reflecting on your values, which may have shifted during the pandemic. “Figure out what is really important to you. Maybe you don't want to spend as much on clothes, or you'd like to help more charities. Maybe instead of a car, you'd like a nice desk and chair. It's easier to follow your budget when it's aligned with your values,” said Shari Greco Reiches, a US-based wealth manager and author of the book ‘Maximise Your Return on Life’.

2. Take baby steps with your emergency fund

Emergency funds offer flexibility and comfort should you face unexpected expenses, but building one can be tricky. Behavioural economics suggests starting small, Burke said.

“Instead of setting a goal of saving $400 (about Dh1,500) a month, it could be better to save $100 (about Dh400) a week or an even smaller amount daily. There seems to be less friction to getting started when the time period is smaller,'' Burke suggests.

That means if you have a goal to save $1,000 (about Dh4,000) by the end of the year, increase your chances of success by thinking of it as saving $2.75 (Dh10) a day.

Emergency fund
Take baby steps with your emergency fund

3. Automate longer-term savings

Another lesson from behavioural economics, Burke said, is to set up automatic transfers into your savings each month. “In terms of improving long-term outcomes, it's really helpful to have things automated as much as possible,” he added.

For example, if you contribute to a retirement account directly from your salary, you have to set it up only once, and your savings will continue to be deducted. You can also sign up to automatically increase the percentage you are saving each year or each time you get a salary increase, Burke added. You could set up similar automatic transfers into a savings account or a high-yield savings account for other goals like saving for a down payment.

4. Pay off the debt with the lowest balances

For those hoping to pay off high-interest debt this year, David Gal, a US-based marketing professor, said his research shows that consumers are more successful if they start by focusing on the smallest balances first, called the debt snowball method. “That gives the perception of success and progress, and increases the motivation to pay off the bigger accounts,” he added.

Daphne Jordan, a US-based certified financial planner and wealth adviser, emphasised the importance of staying positive. “Think about where you want to go in this new chapter of life,” she suggested. “Don't see your financial past as a mistake. Everything is a learning experience.”

Addition debts:
Pay off the debt with the lowest balances

Having an accountability partner to check in with can also help keep you on track, added Rianka Dorsainvil, another US-based certified financial planner and co-CEO of a financial planning firm. “Like with fitness, if we can count on one person checking in on us, we're more likely to be successful.”

5. Plan for some fun, too

Budgeting for 2022 doesn't have to be a downer: You can also fit in some fun spending plans, which might include reconnecting with friends and family.

“If you want to take a trip in August, think about the cost of the plane ticket, hotel and food,” Dorsainvil said. If it totals $3,000 (Dh11,000), then aim to start saving $375 (Dh1,377) a month through August.

That way, she said, “You're being realistic and setting measurable goals” – two approaches that increase your chances of success.