Spending

Jean Chatzky's advice for getting on track financially in 2022: 'It all hinges' on one money tip

"The only way to build a budget that works is to know where your money is going today."

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Now that the afterglow of the holiday season is starting to wear off and your Douglas fir is on the curb, you may be tempted to take a peek at your finances. And if you're like many Americans, you may not feel so festive about them. After all, 7 in 10 Americans say they typically go over budget for the holidays, according to a recent survey from buy-now-pay-later financing firm Affirm.

Depending on the damage, you may feel like you need to finally get your financial life together in the new year. If so, you'd be wise to focus your energies on one key goal, says Jean Chatzky, CEO of HerMoney.com and host of the "HerMoney" podcast. "For me, it's always getting that savings number up — it all hinges from there," she says. "That means knowing where your money is going."

If 2022 is going to be your year, you'll need more extra cash on hand that you can then put to work intentionally, says Chatzky, who chatted with Grow during a media tour with American Home Shield. Read on for her three best tips for how to get it done.

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Take inventory to 'know where your money is going'

Getting your money under control means creating a budget. But you can't craft your budget of the future without understanding what's going on now, says Chatzky. "The only way to build a budget that works is to know where your money is going today," she says. "It's impossible to look forward and say, 'I'm going to spend like this' with no data about where you're currently spending."

Whether you use software or a pencil and paper, you'll need to spend a month tracking your expenses to understand how you're currently spending. "From there, you can make changes based on where you want your money to go," Chatzky says.

It's an exercise Chatzky recently underwent with her young adult daughter. "She felt like she was overspending, so we went line-by-line to find out which expenses were racking up faster than expected," Chatzky says. "No surprise with surge pricing — a lot of money was going to Uber and Lyft. She started taking the subway more, and things turned around really quickly."

Anticipate big expenses that could 'get you into trouble'

When it comes to getting and staying on track, it's not, in fact, your Uber rides or morning lattes that will derail your finances, but rather, large life events, says Chatzky. "You have to try to forecast the big expenses that are going to get you into trouble and [figure out] how to protect against them," she says.

One way to protect against budget-busting surprises is to make sure you're properly insured, notes Chatzky. "This is where health insurance comes in. Young people think they're invincible, but only until they get the flu," she says. "If you're renting, renters insurance is very inexpensive, and if you're a new homeowner, if your AC or refrigerator goes, you could be up a creek. This is where homeowners insurance for emergencies or even a home warranty which covers routine repairs and maintenance might make sense."

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It's also important that you build up cash in an emergency fund, which Chatzky notes may have dried up given the events of the past two years. "If you had to use your emergency cushion during the pandemic, that's OK. We're living through a big, fat emergency," she says. "But now it's time to make a plan to replenish it."

The best way to do that, she says, is to set up automatic contributions to a savings account each time a paycheck comes in. Ideally, Chatzky says, aim to save three months' worth of expenses if you're in a two-income household or six months' worth if you're living on one income.

Prioritize goals 'to get the best return'

If you do manage to carve some extra cash out of your budget, you may be thinking, what now? After all, just about everyone is trying to tackle multiple financial objectives at once, goals such as saving for retirement or retiring debt.

"Look at the numbers," says Chatzky. "That way you give yourself a pretty clear roadmap of where that money should go. The goal is to get the best return on any and all of your money."

While you're building an emergency fund, make sure you get any matching contributions toward retirement funds that your employer may offer, says Chatzky. "The best return is matching money in your 401(k). It's typically 50 cents on the dollar, and you may or may not have to contribute to get it, but that money is guaranteed," she says. "If you're offered an incentive plan for an HSA, that's right up there, too."

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From there, she says, think of the interest rate on any debt you owe as a return on an investment. In other words, paying down a debt that carries a 10% interest rate is equivalent to earning a 10% return on your stock portfolio. With that in mind, "the second item on your list is paying off high interest rate debt," she says. "If you have credit card debt at 24%, paying that off is a guaranteed 24% return."

After that, she says, evaluate your remaining debts, and try to make payments on a schedule that works for you. If you owe student loan debt, for instance, see if it makes sense, once payments resume, to get on an income-based repayment plan. Otherwise, depending on the interest rate and remaining amount on your loan, it could be wise to refinance to a lower rate, especially before the Fed begins its plans to hike interest rates next year. But avoid any refi that drastically extends the life of the loan, Chatzky says. "You could end up with a lower monthly payment, but you'll end up paying much more in interest."

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