Financial Pep for 2022

December is the perfect time to prepare the financial plan for 2022.

I want to share my approach and what I am doing now to enter the new year feeling in control over my financial situation. This is not an instruction for everyone. Personal finance is as good as it is personal. However, maybe you will find some of the ideas or approaches useful for your situation.

1. I start with estimating my expected income. In my case, it's pretty easy as I rely on my employer and predictable paychecks and somewhat predictable bonuses. If your income is variable, that may require a little more thought.

There is Warren Buffett's famous quote, “Don't save what is left after spending; spend what is left after saving”. I absolutely agree with the philosophy. However for managing my personal finances, given my responsibilities in front of kids, and the overall lifestyle I want to keep up, I want to estimate my minimum required spending first. So the next step becomes:

2. Understand my minimum required yearly expenses to support my life. Here goes: my current rent & bills, my current car auto loan payment, current school and daycare payments for kids, minimum groceries spend, minimum clothes spend, student loan minimum payment, and other payments I cannot stop without significantly impacting my life (i.e. moving to a cheaper house, or changing the car, or changing school for kids). So my basic assumption here: what is my minimum spend to continue my current arrangements, without any additional (optional) things. Different people will attribute different categories to necessary vs optional. And that is totally fine. For some people travel may be an absolute must, or supporting their hobby. Some people can leave a pretty frugal minimalist life. It's all ok, just be honest with yourself.

After completing that exercise, I have the number of the minimum spend. Obviously, it has to be lower than my expected income, and the bigger the difference - the better. If that's the case - go to step 4.

If the minimum required spend is higher than the expected income, or it is lower, but I am not satisfied with the delta, go to step 3.

3. Revisit your income, expenses, and lifestyle. Are there any expenses you can cut or optimize? Is there any additional income you can generate? This is not a simple exercise of calculating numbers. If you found yourself in that situation, it's time to revisit holistically your financial situation and relationships with money, and maybe it's time to start changing something. Maybe change a car, or place to live. Or maybe figure out an additional income stream. That's not easy, for sure. But only balancing your income and expenses, that way or another, will lead to financial health and wealth.

4. Now that I have my expected income number, my minimum spending number, I can calculate the delta - this is the available money I need to allocate. This money will go to saving & investment, and all additional activities and purchases I want to have next year which are not necessary but nice to do and to have.

5. I calculate how much I need to save and invest to meet my strategic long-term goals: feel financially secure day by day, achieve financial independence by a certain year, plus save some money for kids for college. Given that these goals have a specific year to be achieved by, and the final goal dollar number, I can easily understand what should be my yearly contribution to my goals.

The financial independence concept deserves a separate write up or even a series of write ups, but worth mentioning here the very important part of it is to understand what is enough. If your answer is "it's never enough and I want to have as much money as I can" - you will never become financially independent. But if you can identify a specific number after which you can stop worrying about money - that's where your independence comes. My number is not that huge, and I don't know if I want to retire completely once I reach it, but this is my persona goal to achieve.

6. Once I have the saving and investment goal number, I need to decide on execution. That's what I do in order of priority:

• max out all retirement accounts (traditional 401k, Roth IRA, Roth 401k) up to the year limit

• max out HSA account up to the year limit

• increase a little bit my emergency cash fund

• invest to kids educational 529K accounts

• invest the rest to Index Funds and individual stocks

For my strategic goals, I use only low-risk investment options. For sure there are some interesting ways to invest money like Crypto Currency, and I am happy to do that with my excess of money and maybe win big (or lose all!), but I am not gambling on my strategic goals.

Another personal preference is to frontload these strategic payments at the beginning of the year as much as possible. I.e. I use my year bonus to max out my 401K account, and several first paychecks to max out my HSA account. There are pros and cons to frontloading, but, again, my personal preference is to get these things done as early as possible and be sure that my strategic goals are on track.

7. If I am lucky enough, and after my necessary spendings and contributing to the strategic financial goals I have something left, I am deciding where to allocate the rest of the money:

• travel

• education

• gifts

• charity

• maybe move to a bigger house or buy a fancier car

• invest in Crypto and see how it goes

• make alternative investments like Real Estate funds

• everything and anything else as you wish

...or maybe you want to accelerate your strategic goals achieving and invest more there!

I didn't mention taxes anywhere, but of course, you need to consider tax implications when making your financial decisions.

That's it for me for this year.

Will see how it goes!

It sounds easy and logical for me now and it is executed almost intuitively, but took me years to come to that ease and clarity.

I remember the first time I opened excel and calculated some numbers for myself. I was 20 years old. I was renting an apartment on my own for the first time, I had a debt equaling to 1.5 monthly salaries, zero savings, zero assets. That calculation was as simple as 6 numbers but allowed me to plan my money, be calm, and get out of debt asap. It's been a long journey since then, and a long journey ahead of me. But worth every step of it.