Have you made your New Year’s resolutions yet? After a year like 2020, you may find it helpful to focus on your financial health. Here are four financial New Year’s resolutions that can help improve your financial life in 2021.
1. Build Your Emergency Savings
If last year taught us anything, it’s to expect the unexpected. Emergencies can creep up anytime, anywhere. A car accident where you end up needing a new car, a burst pipe that floods your home, a company downsizing that puts you out of work—all these can throw your finances into a tailspin if you aren’t ready.
If you don’t have a budget, now’s a good time to create one. Online budging tools like Mint or YNAB (You Need a Budget) can help simplify the process, or you can work with a fiduciary financial advisor who provides cash flow planning as part of your comprehensive financial plan.
In setting up your budget, make sure to earmark a portion of your paycheck to build an emergency fund. We generally recommend that people have six months’ worth of expenses for their emergency fund in their savings account.
2. Pay Off Your Credit Cards
Credit card debt—or too much debt in general—can derail your savings goals. The interest you’re paying for purchases that you no longer remember represents an opportunity cost. It is money that could have gone toward your savings, your retirement, or your dreams.
Make a plan to pay down your debt in 2021. The first step is to take inventory. Order your free credit reports at annualcreditreport.com and assess your credit picture.
What are your highest-interest-rate credit cards? Call your credit card companies to try to negotiate a lower interest rate. This can work if you have a good credit score and a track record of on-time payments. Credit card companies want to get paid, and if you are a good customer, they don’t want to lose you.
Make the minimum payments on your lower-interest-rate loans while you focus on paying off the credit card with the highest interest rate. Once that’s paid off, you can then tackle the debt with the next highest rate.
You might also try shopping around for a new credit card with an introductory period of low or no APR. You can transfer your existing balances to that credit card, then pay off your new card’s balance within the initial period.
Debt can be suffocating—don’t let it keep you up at night. If your credit score is lower than you like, reducing the balances on your credit cards will help.
3. Focus on Your Retirement Savings
Every working American should be saving for retirement. It may be cliché, but life moves fast. Retirement will be here in a blink of an eye. The more you can save for that day, the better your chances of enjoying the lifestyle you want in retirement.
If you have a company retirement plan like a 401(k), start there. Save enough to get the company match if they have one. And continue to increase your retirement contributions by at least 1 percent each year. If you are able, contribute the maximum, which is $19,500 in 2021. If you are 50 or older, you can make an additional $6,500 “catch-up” contribution.
You can also open a traditional IRA or Roth IRA and contribute up to $6,000 in 2021, plus a $1,000 catch-up contribution. Just make sure you understand the deduction and income limitations. If income limitations prevent you from contributing to a Roth IRA, you might consider a Roth conversion.
Also consider opening a taxable account, such as a brokerage account, to contribute even more money to your retirement. Unlike 401(k)s or IRAs, you can withdraw money from your brokerage account at any time without penalty—try to avoid that temptation. Remember that this money is for your retirement. And if you need the cash? That’s what your emergency fund is for.
4. Assess Your Investment Accounts
While you are opening your brokerage account, take a look at your entire investment portfolio. What fees are you paying, and are you getting enough value and service for the cost? Is your investment account diversified appropriately? Are you taking on too much risk or too little risk? Is your portfolio putting you on track to achieve your long-term goals?
If you are unsure how to answer these questions, consider working with a fiduciary, fee-only financial advisor. The right advisor can help you construct an investment strategy and portfolio in line with your financial situation and goals. Our Plantation, FL financial planning firm provides this service as part of the ongoing wealth management we offer to clients.
Make 2021 the Year of Financial Well-Being
It seems like most New Year’s resolutions revolve around physical fitness. We would argue that financial fitness is essential too.
As with any change in habits, reaching your financial goals starts with baby steps. Keep track of your spending and cut any expense that isn’t serving you. Build a fund for life’s emergencies, and reduce your debt burden. Then incrementally increase your retirement savings, and make sure your investments are aligned with your long-term goals.
Finances can be complicated, especially as your wealth increases. If you want a professional’s help to reduce your worries and achieve your goals, consider talking with a financial planner. A fiduciary, fee-only financial advisor will help you get on track while always putting your best interests first.
Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.