If you want to get control of your financial life in 2022, here is some advice on spring cleaning for your money (at any time of the year!): make a budget, track your expenditures, make a plan to pay off your debt, watch your credit report, adjust your tax withholdings, use dollar-cost averaging to invest, use a 529 plan for education savings, and use an HSA (or FSA) to save for medical out-of-pocket costs.  

Advice: Budget … Really, you need a budget!

If you are not budgeting, you need to. Don’t like the word “budget”? How about “spending plan”? Either way, you need one. It is very difficult to achieve your financial goals if you don’t make a plan to achieve them … and that plan is a budget. There is a selection of apps you can choose from (i.e.: You Need A Budget, Every Dollar, Mint …), you can use a spreadsheet program, or you can use a lined pad and pencil. Fancy or simple, doing a detailed budget makes you feel like you received a raise.

Advice: Budget … better!

For most people who budget, the budget, or spending plan, is the core element of financial control for their family. But given all of the changes in 2020, 2021, and 2022, not the least of which is steeply rising inflation, even those who routinely budget could likely benefit from a budget spring cleaning. The continuing pandemic has created some fundamental changes in people’s lives, so it may be time for some changes in your budget. For example:

• Are you working from home now? A lot of auto insurance companies offer discounts for a vehicle that is driven for low mileage each year (i.e. less than 6,000 miles per year).
• Did you go back to the office and your children back to school? You may not still need that higher data home internet plan.
• When was the last time you reviewed your cell phone plan? Streaming services or cable TV plans? Credit card perks?
• Did you move to another state? You need to re-do your will; wills are state-specific and need to be re-done when you move to a new state. 
• With spring coming, can you shop at a local farmers’ market? How about renting a plot in a community garden?
• With the nicer weather upon us, can you ride a bike to work, to shop, or to your favorite restaurant?

Advice: You need an emergency fund!

2020 has taught us many things, not the least of which is that EVERYONE needs an emergency fund! While easily accessible cash would not have solved many of the hardships 2020 inflicted, having an emergency fund brought many people a quiet peace regarding their finances while the world experienced chaos. So, if you haven’t already, set a 2022 goal to quickly save up an emergency fund equal to three to six months of your household’s expenses. Which should you choose? Three months of expenses if your family has two income-earners with stable incomes; six months if your family has one income-earner or a less stable income. But, you know what? If a three to six month emergency fund seems entirely out of reach right now, start with a $500 “starter” emergency fund. Then build a $1,000 emergency fund. You can do that! Get a side-hustle: walk dogs, mow lawns, babysit kids, deliver food. Sell stuff you don’t need – like the clothes you can’t wear after your pandemic weight gain. Do you have a skill you can exploit to make some money? Even just $1,000 can put some distance between you and a financial emergency.

And don’t invest your emergency fund – your emergency fund’s job is to be there when you need it, not to grow wealth. Just leave it in an easily accessible account so you can access it quickly, should an emergency arise.

Advice: Take advantage of the lowest mortgage interest rates in history, while they are still here!

If you have a house and have not re-financed yet, what are you waiting for? For years, interest rates have been the lowest in history but since the beginning of 2022, mortgage interest rates have risen almost 2%. If you haven’t refinanced yet, the window of opportunity to lock in today’s low rates for most people’s largest monthly payment and largest asset may be coming to an end as the Federal Reserve has signaled that more interest rate increases are likely coming this year. Couples and individuals who may not have qualified for the lowest rates in the past should contact their bank to see if their current financial position could now qualify them for refinancing to a lower interest rate.

Similarly, first-time homebuyers may want to consider moving forward with a house purchase to lock in these low-interest rates. While some housing markets are incredibly tight right now, not all communities are experiencing extraordinarily low housing inventory and, given the increasing ability of people to work from home, moving to attain the dream of homeownership is possible like it never was before.

Relatedly …

Over the past year, many markets have seen significant increases in homeowner’s insurance premiums. These premium increases are driven by the rising prices of home building supplies, increasing overall inflation, and large payouts by insurance companies due to weather disasters. As a result, this spring, homeowners should shop around their homeowner’s insurance policy to make sure they are getting a competitive rate. And, if you haven’t looked at your homeowner’s insurance policy recently, it’s also a chance to spring clean your coverages and use your insurance dollars most efficiently.

Advice: Pay off your debts, especially those with an adjustable variable rate.

When interest rates rise, the interest charged on variable-rate debt such as home equity lines of credit (HELOCs) and credit cards will also rise, resulting in higher monthly payments. Recently, the Federal Reserve raised interest rates by 0.25% and it has also signaled that it intends to raise rates several more times this year (potentially totaling 2.00% – 2.25% in 2022). Given this information, we can expect that to the extent that your family has variable interest rate debt, your budget will feel the pinch of rising interest rates. What does all this mean to the average family? It has never been more important to prioritize paying off variable interest rate debt as the monthly payments will increase with increases in interest rates and that will wreck your budget.

I am not usually in favor of consolidating debt because it makes you feel like you did something to improve your financial situation when all you did was move the debt. But, if you are able to convert your variable-rate debt to fixed-rate debt, that could be a valuable move right now. For example, if you have a HELOC, do you have enough equity in your house to refinance your primary mortgage and roll in the HELOC to get a fixed rate? If you have high-interest rate credit card debt, can you get a loan from your bank or credit union and use that to pay off the credit cards? But also remember to cut up the credit cards so the debt doesn’t “grow back”!

What is the effect of rising interest rates on new debt?

Rising interest rates will also raise the cost of borrowing for individuals and companies (including small businesses). Thus far in 2022, we have seen 30-year home mortgage rates increase by 1.97%, or an extra $117 per month per $100,000 borrowed. According to CNBC, the average new mortgage in February 2022 was $453,000 and for that “average” mortgage, the increase in interest rates resulted in a $528 PER MONTH increase in the monthly payment! Said another way, the $2,022 monthly payment for a mortgage taken out in January for an “average” amount of $453,000, will only pay a mortgage equal to $359,208 at the current interest rates. The increase in interest rates during 2022 has diminished a monthly payment’s purchasing power by 20.7%.

While these numbers are a little scary – be careful of being tempted into a lower rate on an adjustable-rate mortgage because if the rates continue to rise, so will your monthly mortgage payment! 

Prof. Stacy, The Money Teacher

We can also expect to see similar increases in new car loan rates and home equity lines of credit (HELOCs) due to rising interest rates.

Advice: Check your credit report.

Spring is a great time to review your credit report for accuracy. It is one of the best ways to check if you are a victim of identity theft. Everyone is eligible for a free credit report each year from each credit bureau (Equifax, Experion, and Transunion) and with the pandemic, the credit bureaus are allowing a free credit report weekly (AnnualCreditReport.com). Now you don’t really need to check your credit report weekly but it is a good idea to check it annually with each credit bureau. You can set a calendar reminder every four months to get your credit report from one of the three credit bureaus on a rotating basis. 

Advice: Correct your IRS tax withholdings.

You just filed your taxes – did you get a large income tax refund? Don’t give the IRS an interest-free loan, go to your Human Resources department at work and update your IRS Form W4 to have less income tax withheld so you take home more money in each paycheck. If you like having the lump sum once a year, talk to your bank (or credit union) to schedule automatic savings transfers from each paycheck into a new savings account. Then you can pay yourself a lump sum when you want or need it. (You don’t really want the IRS to be your bank.)

Advice: Use the power (and protection) of dollar-cost-averaging and auto-investing.

Dollar-cost-averaging is buying (or selling) an investment systematically in regular time increments – it is the opposite of “timing the market”. Of course, no one knows where the stock market will be next year but using dollar-cost-averaging to buy into an investment allows the investor to focus on regularly scheduled investing and not worry about whether the market is “up” or “down”. This method of investing also plays well with budgeting and auto-investing because if a family budgets an amount of savings each month, that savings can be automatically moved each month directly into the investment (house fund, retirement, college savings). Auto-investing can help a family make sure that amounts budgeted for investing actually are invested as intended instead of “waiting” in a low-interest-bearing savings or checking account.

Advice: Use a 529 plan to invest for your children’s education (or even your own).

Spring equals graduation season so it is a great time to think about saving for your children’s education!

While 529 college savings plans have been in existence since 1996, they are still not extensively used by families; of families that are saving for their children’s college expenses, only 30% of savings are in tax-advantaged 529 accounts. 529 plans offer federal tax-free growth if the account is eventually used for qualified education expenses. However, qualified education expenses are somewhat broad and include most public or private K-12 tuition, college expenses, and post-high school trade school expenses. While there is no federal tax deduction for contributions to 529 plans, many states do offer tax deductions for these contributions. And because the account is actually owned by the parents, it does not reduce college aid dollar-for-dollar as do investments held in the child’s name. Additionally, any unused amounts in a 529 account can be transferred to another child or qualifying relative. And to make it simple, families can set up an auto-investment 529 account and save monthly using dollar-cost-averaging.

If you are concerned that your child (children) may not attend any form of higher education, the money in the 529 account is not forfeited. The account holder can make a non-qualified withdrawal from the account and pay income taxes and a 10% penalty on just the gains (earnings); the contributions were taxed before they were deposited in the account so they will not be taxed again or penalized.

Advice: Did you choose a high-deductible health insurance plan (HDHP) for 2022? Use a Health Savings Account (HSA) to save up your deductible (or more).

Because of the lower monthly premiums, many families are choosing a high-deductible health insurance plan. As a special “thank you”, the IRS allows these taxpayers to use an HSA to save up their deductible (or more). Unlike the “traditional” flexible savings account (FSA), the HSA provides some special benefits over the FSA. The HSA allows for higher annual contributions, but the best feature of an HSA is that you do not need to spend all of the money in the account in the plan year; you can roll an unlimited amount to the next year. And, if your plan allows it, you can even invest some of your HSA account in the market.

However, if you didn’t choose an HDHP, you can still use the FSA to save up for the current year’s medical/dental/vision expenses, but be sure to estimate carefully because you will forfeit to the IRS any amounts over $500 that you do not use in the 2022 plan year (the IRS currently allows a taxpayer to roll $500 to the following year).

You can’t control inflation, rising interest rates, or the availability of yogurt in your grocery store, but you do control your family’s financial plan. So, control the controllables and go throw a ball for your kids … or dog!