What are three simple steps you can take to get your finances in order for 2022? Be familiar with your tax situation, understand when to rebalance your portfolio, and establish a savings goal.
The new year has arrived, and it is moving at breakneck speed. Many people find that this is the time of year when they begin to look a little more closely at their financial situation. The next few months are referred to as “financial season” by me.
Here are three of the most important things to keep an eye out for during this time of the year.
Understand Your Tax Situation
The first step is to gain an understanding of your tax situation from the previous year. To complete the second step, determine what tax bracket you will fall into this year. Consider the following questions as a starting point for your research:
– Will I be obligated to pay money?
If this is the case, make sure you plan ahead of time. Can I contribute to a traditional or Roth IRA in 2021?
– Will I be able to contribute to a traditional or Roth IRA this calendar year?
Should I make contributions to my traditional 401(k) or Roth 401(k) this year? If the answer is a resounding yes, you can set up automatic contributions and investments to these accounts every month or paycheck.
Recognize when it is necessary to rebalance your portfolio
The question of how often you should rebalance your portfolio is one that is frequently debated. According to a quick Google search, you should rebalance your portfolio one to four times per year, depending on your risk tolerance.
Personally, I prefer to keep things as simple as possible and take a “set it and forget it” approach to scheduling. This has resulted in me rebalancing my portfolio once a year, usually around the time I file my taxes.
Using the above example, you set your target allocation to 60 percent stocks in the United States and 40 percent international and emerging markets the previous year.
After a year, your portfolio now consists of 77 percent of stocks from the United States and 23 percent from international and emerging markets. Using the proceeds from the sale of 17 percent of the United States stock, you would invest in international and emerging markets.
Set a savings goal for yourself.
Setting a goal for yourself for the next year or two will give you the confidence that you are on the right track.
Building an emergency fund, funding a retirement account, saving for your first home or real estate investment, or even a vacation are all examples of goals that can be achieved.
My husband and I set a savings goal for ourselves after realizing that we were being overly frugal the previous year. The ability to enjoy ourselves while remaining confident that we are on the right financial path will allow us to do just that.