2022 Quarterly Financial Review for Millennials

In uncertain times, having a review plan for your finances in place is vital. Needless to say, 2022 has gotten off to a rocky start. Political entrenchment in Washington continues to prevail as stock market volatility has shaken investors.

Despite all the noise, following a plan has been and always will be your best course of action to move forward and weather events like this. 

This list is by no means exhaustive, but here are some helpful tips and actions you can take to ensure your financial plan stands on a solid foundation throughout the year.

First Quarter of 2022

New Year’s resolutions are great and all, but an even better idea? Financial wellness resolutions! 

The start of the new year is a great time to review your overall financial plan and see if you are still on target to reach your goals, as well as whether or not any of your goals have changed. Part of this exercise is taking stock of your retirement plan contributions. 

For 2022, the maximum amount that can be contributed to a 401k is $20,500. If you are over the age of 50, you can make an additional “catch up” contribution of $6,500, so you can potentially save a total of $27,000. 

You should review how much you contributed in 2021 and decide how much you can do and want to do in 2022. What would it take for you to max out your contributions in 2022? As we head into a most likely choppy stock market in 2022, increasing your 401k or retirement contributions presents a great opportunity to take advantage of the power of dollar cost averaging. You also need to consider whether or not you will make traditional or Roth contributions, or a combination of both (assuming your plan allows for Roth contributions.) 

January in particular is a great opportunity to review your cash flows and budget for 2021 and start creating rules and a plan for cash flow management in 2022. 

Ideally, you will take time to review your total spending, saving, and giving amounts for 2021. Yes, your TOTAL amounts for the entire year as it can be eye opening and set a precedent for spending and saving in 2022. Use a website like mint, personal capital, or you need a budget to track your cash flows, at least at a high level,  if you do not already have a method in place.

You should also review all of your investment portfolios if you did not already do so at the end of 2021. For example, do you have automatic rebalancing set up on your portfolios if you are managing your investments on your own? 

If you are within five to ten years of retirement, do you have appropriate levels of cash and bonds to weather any short term market volatility? Or if you are decades from retirement, do you in fact have too much cash on hand creating drag on your investments in an inflationary environment? 

Take time to review all your investments and assess the risks and opportunities across your portfolio. It may also be an ideal time to employ a financial planner to help you manage your investments. 

Second Quarter of 2022

Tax season is already upon us! And the IRS has already made it clear that they are way behind on tax returns from last year, so the earlier and more accurately you can file, the better. 

How much has your tax situation changed since prior years? If you have more complex tax scenarios, such as dealing with employer stock options, selling a business, or even getting married, you might consider using a tax filing professional this year to ensure your tax returns are airtight.

This is also a good time to review your pay stub and make sure your withholdings are appropriate. For example, if you had a huge tax bill last year, it’s possible you are not withholding enough for taxes. On the other hand, if you received a large tax refund, you are effectively loaning money to the government interest free throughout the year. It’s likely worth reviewing how you can get as close to net zero as possible when it comes to paying your taxes throughout the year. 

Get organized! Use this tax season as an opportunity to purge and organize all your personal household files. You should have a filing system for your important documents, either hard copy, digital, or both. Because you will already be going through different documents to file your taxes, this is a great time to organize the rest of your financial documents. 

It’s especially important that you know where your estate documents are kept as well as important passwords. Although, ideally you are utilizing some type of password manager to keep your accounts secure.  

Third Quarter of 2022

We tend to spend a lot on travel and vacations in the warmer months, but before you start spending, take some time to review your emergency savings. 

Ideally, you should target at least three to six months worth of essential living expenses in your standard savings account. As an example, let’s say your essential monthly expenses accounting for things like rent, utilities, and food totals $6,000 on average per month. This would mean at a minimum, you should aim to have at least $18,000 in a savings account which would be three months worth of expenses. 

This number will certainly vary based on your individual situation. For example, if you are a freelancer and your income is less predictable, it may make sense to have up to a year’s worth of essential savings in a standard savings account. 

This money should be in the highest yielding possible savings account and should not exceed the target you have established based on your individual circumstances.

Having too much cash on hand causes “cash drag” on your overall portfolio and net worth, especially in today’s inflationary market. What this means ultimately, is that when evaluating your total portfolio (all assets), cash that does not earn anything (or very little in a savings account) will bring down the total return on your assets. 

Excess cash in your portfolio should be deployed toward other goals like taxable investment accounts or possibly a Roth IRA to allow for additional tax free growth for retirement. 

Take time to check in on your financial goals as you reach the halfway point in the year. Are you still on track? What were you hoping to accomplish in 2022? You still have plenty of time left to accomplish your short term goals by the end of the year. 

Fourth Quarter of 2022

As you approach the end of the year and the holiday season once again, it’s time to review your estate plan. First of all, ask yourself whether or not you have an estate plan in place.

Having a will in place is one of the most important tools for you and your family to ensure your wishes are carried out according to your desires and preferences. There are different types of wills, but the most common type is a testamentary will. 

The major benefit of having a will is the ability to determine how and what happens to your property in a way that clearly defines your wishes. If you pass away without a will, also known as “intestate”, the state laws in place determine what happens to all of your property and assets, which is something you likely want to avoid if you want to have a say in how your property is passed on.   

Most everyone should have a will in place, especially if there are multiple parties involved in your estate planning picture and the end of the year is a great time to set up your estate plan before life gets busy again. 

You also need to consider setting up a power of attorney (POA) to ensure your affairs will continue to be managed in the event you become incapcited. You should designate a trusted person to act on your behalf in the event you are unable to do so. 

The type of POA can take different forms, such as being restricted to matters of health care or finances, but it’s important to determine your need for a POA. The process is relatively straightforward by completing a legal document and designating the type of POA whether that be conventional, durable, springing, or medical. 

A durable POA stays in force for the lifetime of the individual unless altered or cancelled and is a popular structure given the low cost and ease of being able to manage someone’s affairs.

It’s also time to review your beneficiary designations for all of your accounts and insurance policies. For example, if you got married recently, does your life insurance policy reflect those changes? If you got a divorce, do your beneficiary designations truly reflect your wishes? 

This is something that is all too often overlooked, but making the changes needed to your beneficiary designations are not only simple, but vital to your overall financial plan. 

It’s also important to take an honest look at all of your insurance coverage toward the end of the year. This includes your property and casualty insurances like homeowners and auto insurance. If you are a working adult with dependents, having the “bare minimum” auto insurance coverage is not going to cut it anymore. 

Ask your agent for a couple quotes on increasing your coverage levels. It’s also important to assess your need for disability and life insurance, especially if other people in your household depend on your income. 

Of course, as the year wraps up once again in December, be sure to take advantage of year end deadlines such as contributing to your 401k or employer sponsored retirement plan, selling taxable investments to realize gains or losses, and making any other tax sensitive changers before the 31st. 

Summary

The start of the year is a great opportunity to take an honest inventory of your overall financial situation and start making a plan to fill in any gaps. 

Do not hesitate to put a proper financial plan and investment strategy in place. Plan for the emergency, not during the emergency. 

We are here to guide you through any 2022 planning scenarios and make any needed adjustments to your financial plan. 

Before you take on any investment or retirement strategy, it is vital that you seek out proper investment and tax advice beforehand. Investment performance is never guaranteed and investments may lose some or all of their value. On top of that, there may be severe tax consequences if withdrawals are taken improperly and can have a significant impact on your portfolio and retirement. Although we provide Investment Advice and Personal Financial Planning Services, we at MWM do not provide tax advice and any tax advice should be rendered by a licensed tax professional such as a CPA.