Consider This Your Permission to Spend More Money in 2022
Inflation and other factors likely mean you’ll spend more in 2022. Here’s why that’s OK.
Inflation and other factors likely mean you’ll spend more in 2022. Here’s why that’s OK.
Here’s a prescription for money happiness in 2022: Accept the fact that you’ll likely spend more money than you did in 2021.
With inflation driving up the cost of food, rent and more, pressures are mounting on our wallets, so expecting your spending to stay in line with the past year is both unrealistic and a recipe for feeling guilt and self-recrimination. The key, financial planners and researchers say, is thinking ahead about where that extra spending will happen and quieting the voice in your head comparing your expenses from one year to the next.
“What’s going on right now that is so crazy is that no one even has an idea of what the baseline should be. The past may or may not be relevant to the future,” said Abigail Sussman, associate professor of marketing at the University of Chicago who studies how consumers make judgments.
Financial experts advise that future budgets allot more to needs, such as higher rent, as well as wants, such as travel. Here are some ways to do just that.
Keep on Saving
You may have saved a lot of money in the past year, thanks to a strong labor market, rising wages and record-high savings rates. You can save more in 2022.
Adding more to your existing savings can calm a lot of fears people may have about spending more money in other expense categories, said Sarah Behr, financial planner and founder of Simplify Financial in San Francisco. As you’re watching that savings account grow, you can relax knowing that should catastrophe strike, you have a cushion.
Check in on your savings progress from the previous year. Are you happy with the amount you set aside? Do you want to increase your savings rate or maintain the current one? Even as you expand your budget, save first before spending on other things. You can set up regularly scheduled withdrawals to automate the process and eliminate stressful decisions.
Stop Thinking in Dollars
Having frugal habits helps ward off lifestyle creep. Yet you may be hanging on to outdated ideas about how many dollars to spend in different areas of life. The past two years may have reduced your spending on travel, going out and entertainment, but those circumstances aren’t permanent.
Spending more money than you have previously can lead to feelings of shame or embarrassment, Ms. Behr said. She’s previously talked to clients who have moved up from meagre means and struggled to adjust to the new latitude more money affords them.
“I’m the one saying, ‘Whoa, whoa, whoa, you can afford to go out to eat, you can afford a new car, you don’t have to drive your 2015 Prius,’” Ms. Behr said. “[Clients] are saving, and they’re squirrelling away, but there’s no change in perspective.”
Malik Lee, a managing principal and adviser at Felton & Peel Wealth Management Inc., recommends looking at budgets in terms of percentages of your overall income, rather than dollar amounts.
He points to the 20-30-50 model, a tenet of personal finance that encourages putting at least 20% of your take-home pay into savings; allotting 30% for “wants” like travel and socializing; and designating the final 50% to fixed expenses such as housing and bills.
“Thinking in percentages of income makes this a lot easier, and it makes it flexible,” Mr. Lee said. “As you’re increasing your income, that will ensure that your savings will increase with that, and the other ‘good’ categories will increase, too.”
Pick Your Splurges
Most of us have practice downsizing budgets and cutting expenses. Fewer of us have spent time planning what we’ll spend more on, especially in terms of luxuries like travel or entertainment, what Ms. Sussman refers to as “pre-committing to indulgence.”
This doesn’t mean splashing out on everything, but thinking carefully about the spending that will have the most positive impact, such as setting aside money for a long-awaited vacation.
Instead, consider the spending that brings you the most satisfaction, such as vacations, home-fitness equipment or some other priority. Allotting more money to items like those can make your budget feel rewarding, Ms. Sussman said, so that when you’re making trade-offs in other areas of your life—like cutting back on going-out expenses to put more toward your new, bigger apartment—it feels less like a loss and more like a pivot.
Allot money to those savings goals—“I’ll spend more on travel in 2022” or “I want to save for a bigger apartment”—by creating a separate bucket for these funds. Name it something fun in your preferred budgeting app or spreadsheet. This way, as you’re watching the money grow in the account, you can sprinkle some extra anticipation on the future fulfilment.
Last, a Piece of Advice
Whichever budget works best for you, Ms. Behr warns against measuring your own spending or saving against peers’.
“A lot of people ask me, ‘Do we spend too much money?’ or ‘How much do other people spend?’” she said. Worrying about spending is natural, but comparing the size of your savings with others is often unproductive, she added. “It’s like that old saying: ‘Comparison is the thief of joy.’”
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: December 30, 2021.
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Super isn’t your only option. These smart strategies can help you self-fund a comfortable retirement.
Super isn’t your only option. These smart strategies can help you self-fund a comfortable retirement.
Superannuation is the first thought when it comes to self-funding retirement. Yet it is hardly the only option for doing so.
Just as we have a choice in how and where we work to earn a living, many people also have a choice in how to fund their retirement.
It is possible and sometimes preferable to leave your superannuation untouched, allowing it to continue growing. Some or all of your income can come from alternative sources instead.
Here are some alternatives you can consider.
For many who own their own homes, the equity accrued over decades can eclipse the funds in superannuation. However, it’s theoretical money only until it is unlocked.
Selling up the family home and downsizing – or rightsizing – for retirement allows you to pocket those gains tax-free and simultaneously relocate to a more suitable home with lower upkeep costs.
Up to $300,000 from the proceeds can be contributed by a downsizer to boost your super, and the remainder can be used to fund living expenses or actively invested.
Remember that while the sale proceeds of your home are tax-free, any future profits or interest earned from that money will be taxable.
Semi-retirement allows you to gradually step into retirement. You continue earning income and super while working part-time, keeping a foot in the workforce while testing the waters of your new found free time.
Doing so also offers scope to move into different roles, such as passing on your skills to future generations by teaching/training others in your field of expertise, or taking employment in a new area that interests you and is closer to home.
Retirement from a full-time position presents a good opportunity to pursue self-employment. With more time and fewer commitments on your hands, you have greater scope to turn your hobby into a business or leverage your professional skills and reputation as an external consultant.
Also, for the self-employed and those with a family business, director’s loan repayments from the company are typically tax-free, offering a potentially lucrative source of
income and a means of extracting previous investments into the business without selling your ownership stake.
Rental property income (from residential or commercial properties) can supplement or even provide a generous source of income. The same applies to dividends from shares.
These are likely to be more profitable if you own them well before retirement.
Income that is surplus to your everyday needs can be reinvested using tax-effective strategies to grow your future returns.
A family trust could be used to house investments for yourself and other relatives, building intergenerational wealth.
Trusts allow funds to be allocated to beneficiaries to manage marginal tax rates and stretch the money further, you have control over how income is split between different family members and have flexibility for changing circumstances.
You may not realise the value of items you have collected over the years, such as wine, artwork, jewellery, vintage cars, and antiques.
Rather than have them collect dust or pay to store them, they could be sold to fund your living costs or new investments.
Where possible, avoid selling growth assets in a depressed market – wait until you can extract maximum value.
Part-pensions are not only possible but valuable in making your superannuation stretch further. They still entitle you to a concession card with benefits in healthcare, transport, and more.
Take these savings even further by requesting pensioner discounts with other companies, on everything from utilities to travel and insurance to eating out.
Also, don’t overestimate the value of your assets as part of the means test. It’s a common mistake that can wrongly deny you a full or part-pension.
However, you ultimately fund your retirement, planning is crucial. Advice would hopefully pay for itself.
Understand your spending and how those habits will change before and during retirement, then look to investments that offer the best fit.
Consider a mixture of strategies to diversify your risk, manage your tax liabilities and ensure ongoing income.
Above all, timing is key. The further ahead you plan, the more time you have to embrace additional opportunities and do things at the right time to maximise their value. You’ve worked hard and now is your chance to enjoy the fruits of your labour!
Helen Baker is a licensed Australian financial adviser and author of the new book, Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99). Find out more at www.onyourowntwofeet.com.au
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