2020 is a year most of us are happy to leave behind. When the year started, nobody expected natural disasters of historic proportion, the COVID-19 pandemic or the residual economic hardships that followed. But with the first year of the new decade officially behind us, how can you better prepare your finances for whatever 2021 may bring? Our six suggestions are below.
#1: Establish an Emergency Fund
If 2020 taught us anything, it’s the importance of preparing for the unexpected. Establishing an emergency fund is crucial when it comes to being financially ready for medical emergencies, house repairs, car maintenance, etc.
Money tucked away in an emergency fund is meant to help cover the costs that are not part of your normal monthly expenses. Without an emergency fund, any unexpected event, even a small one, could set you back significantly. While you may not be able to put the same amount away every month, every little bit helps, and it’s important to put aside what you can.
The Consumer Finance Protection Bureau recommends a few simple strategies for establishing and adding to your emergency fund:1
- Create a savings habit
- Manage your cash flow
- Take advantage of any additional money coming in
- Automate your savings
Create a Savings Habit
Try to be as consistent as possible when putting away money.
To turn your ability to save money into a regular habit, you could try:
- Setting a specific goal for yourself and your savings
- Creating a system for making consistent contributions
- Monitoring your progress
- Rewarding yourself for meeting your goals (within reason) before setting new ones
Manage your Cash Flow
Keep track of how and when money is coming in, as well as how much is going out. Consider using free tools like mint.com (easiest), or personalcapital.com (better display, but more marketing), or YNAB.com (the most in-depth, but not free).
Take Advantage of Additional Money Coming In
If you get a bonus at work or receive a monetary gift, consider putting that extra cash towards your emergency savings. This is a great time to either get ahead or catch up if you were not able to contribute as much as you would have liked another month.
Automate Your Savings
Establish automatic transfers through your bank, which will allow money to be directed to your savings account automatically each month. Choose an amount, pick a date each month and adjust as you need throughout the year.
#2: Review Your Tax Situation
With tax season approaching, there are a couple of things you could consider doing now to maximize the financial impact of your tax refund.
Now’s an ideal time to speak with us to discuss what changes you should be making now to get the most out of your situation. For now, consider reading our in-depth article on Tax Planning titled: Keep More of What You Earn.
#3: Set Goals
Ask yourself what you want to accomplish in the months to come. Is there a certain amount you’d like to have tucked away in your savings? Or maybe you’re focused on advancement at work? Whatever it may be, set a specific (and attainable) goal that you can focus on working towards in 2021.
In a world where we’re all recovering from economic and environmental hurdles, progress is worth celebrating - and worth pursuing.
#4: Start Automating
Automation is an incredibly effective tool when it comes to working toward and achieving your financial goals.
Some things to consider automating include:
- Bill paying
- Loans (Your mortgage, student loans, car payments, etc.)
Automating as much of your financial life as you can takes the human connection and decision-making out of the picture. It cuts down on late payments, and it can make contributing to your savings account hassle-free.
#5: Remember Your Retirement Savings
In terms of saving, 2020 had a different impact for everyone. Many lost their jobs, which impeded their ability to grow their retirement savings. For others, 2020 was an opportunity to sock more away than usual, since big expenses like vacations, concerts, weekend trips, etc. were canceled.
With enough stashed away in your emergency fund, 2021 may be the year to focus on padding your savings for retirement. If you have a 401(k), 403(b) or IRA, ask us if you’re adding enough to it or if you should be upping your contributions each month.
If you haven’t reached your contribution limits by the end of the year, consider making additional contributions - maybe from an end-of-year bonus or other additional income.
#6: Watch Out For Identity Theft
There has been a rise in identity theft during the coronavirus pandemic, meaning you need to remain vigilant in protecting your finances throughout 2021.
Some ways to avoid being a victim of fraud include:
- Asking questions before sharing personal information with others
- Creating complex passwords and changing them often
- Keeping track of your mail
- Reviewing all bank and credit card statements regularly
- Monitoring your credit reports
What Comes Next?
These six tips should help with the transition into a new year - hopefully, all of us can breathe a little easier, save for the future and have some fun.
While we all are hoping for a better 2021, regardless of what the year brings consider that there are always opportunities to improve your finances, from Keeping More of What You Earn to smart homeownership and mortgage financing. If your investments didn't get the results you wanted last year, consider reviewing an updated version of our “fire drill" list of 10 investment actions to take, published while markets were tanking in in late February 2020.
As always, we’re here to help you implement any or all of these practices. We hope to hear from you. Contact us here.