2020 is a year most of us might prefer to forget. When the year started, nobody expected natural disasters of historic proportion, the COVID-19 pandemic, or the economic hardships that followed. With the first year of the 20s officially behind us, how can you better prepare your finances for whatever 2021 may bring? We share seven suggestions 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 for 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 it is best to earmark the same amount each month, it may not always be possible. But understand, 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: $500; $1,500; $2,000. Whatever it is, be specific and stick to it.
- Creating a system for making consistent contributions - automate, automate, automate.
- 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 and how much is going out. Additionally, create a monthly budget and discipline yourself to live beneath that budget. It helps to add your monthly savings to your budget. If it is earmarked for savings, it will not burn a hole in your digital pocket.
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 could not contribute as much as you would have liked another month. Additionally, if you have not already maxed out your 401(k)or 403(b) employee contributions, you can increase your employee contribution for the bonus pay cycle.
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: Save More Money
You’ve heard the phrase, “Every little bit counts,” all your life - but it couldn’t be more true. If you enjoy grabbing a coffee before work, start making a pot at home. If you eat twice a week, cut down to once a week or every other week. Many of us are continuing to work from home, which cuts down on the need to buy as many clothes for work, which is another way to save.
While it’s an adjustment, these small “sacrifices” can yield significant results over time. Say you skip eating out one day a week, saving you around $20 on average. In the span of a year, that $20 becomes $1,040.
#3: 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. For example, you may find it more beneficial to have your refund split between paychecks throughout the year. To do this, you would need to adjust your tax withholdings with your employer. Now’s an ideal time to speak with your financial advisor, CPA, or another financial professional to discuss what changes you should be making now to get the most out of your tax situation for the coming year.
#4: 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 getting a promotion at work? Whatever it may be, set a specific (and achievable) goal that you can focus on working towards in 2021. We prefer SMART goals: Specific, measurable, achievable, relevant, and time-bound.
In a world where we’re all recovering from economic and environmental hurdles, progress is worth celebrating - and worth pursuing.
#5: 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.)
Automate as much of your financial life as possible. Automation takes human error and decision-making out of the picture. Removing human error cuts down on late payments, and it can make contributing to your savings account hassle-free.
#6: Remember Your Retirement Savings
In terms of saving, 2020 had a different impact on 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 your financial advisor if you’re adding enough to it or if you should increase your contributions each month. If you haven’t reached your contribution limits by the end of the year, consider making additional contributions - may be from an end-of-year bonus or other additional income.
#7: Watch Out For Identity Theft
There has been a rise in identity theft during the coronavirus pandemic. You must remain vigilant in protecting your finances throughout 2021 and beyond.
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 and shredding anything that contains account numbers or other important information
- Reviewing all bank and credit card statements regularly
- Monitoring your credit reports
We all are hoping for a better 2021; however, it’s always best to be prepared especially when it comes to your finances. These seven 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.
This content is developed from sources believed to be providing accurate information and provided by Twenty Over Ten. It may not be used to avoid any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.