Goodbye – or good riddance – to 2020 and hello to 2021! The new year is fast approaching, and it’s time for a financial refresh. Now is a great time to review your financial situation and set plans for next year.
Here are tips for making sure you are set and that 2021 doesn’t catch you off guard financially:
- Set a budget – Now’s the time to look back over your 2020 expenses, bank statements, and budget, then start setting a plan for 2021. Where was your budget over or under, and what do you need to adjust in terms of spending? Although we are still in the midst of a pandemic, the vaccine rollout has begun. Make sure to consider whether you will travel again in 2021 or eat out more. Get a handle on your sources of income for the year, and set a baseline budget with both income and expenses. It’s also a good idea to schedule regular budget checks throughout 2021 to make sure you are sticking to your budget or can adjust it if necessary.
- Continue saving – This is the time of year to evaluate whether you can increase monthly savings. During the pandemic, many Americans found they were spending less on entertainment, trips, and dining out. Can you turn any of these unused funds into regular savings? Also, revisit your emergency fund needs. You should have enough set aside to fund six months’ worth of expenses.
- Check your withholdings – If you’re employed, review your W-4 and make sure you are withholding enough taxes. If you are self-employed, a gig worker, or retired, you’ll need to plan your quarterly estimated tax payments. You can use IRS Form 1040-ES to calculate quarterly payments.
- Draft or update your estate planning documents – If you haven’t already done so, set a resolution to draft a will, power of attorney, and healthcare directives. If you have but it’s been a few years, review them with your accountant and lawyer to make sure they are in line with current federal and state laws as well as your present-day wishes for passing along any assets. Now is also a good time to review the beneficiaries of any insurance policies and update if necessary.
- Evaluate your retirement savings plan – Are you maxing out your 401(k) and IRA contributions? If not, can you contribute more this year? The maximum IRA contribution in 2021 is $6,000 for individuals under 50 years old, and $7,000 for those age 50 and over. For 401(k)s, the maximum pre-tax contribution in 2021 is $19,500 for those under 50 and $26,000 for those age 50 and over. This is also a good time to review your overall retirement savings plan. Is it still realistic in terms of the age at which you plan to retire, your monthly expenses at retirement, and your retirement goals outside of any 401(k) and IRA?
- Review your insurance policies – this includes life, auto, homeowners, umbrella, and any others. Review your coverage amounts and deductibles. Should you consider adjusting these? If you realistically won’t make a claim for anything under $1,500 on auto or homeowners insurance but your deductible is $500, consider increasing your deductible. The higher the deductible, generally the lower the premium (assuming you haven’t had any speeding tickets or other infractions that would affect your rate!) If you made home improvements during the pandemic, make sure you increased the value of your house in your homeowner policy.
- Pay down debt – Interest rates are incredibly low right now. This can aid in paying off debt. While your variable-rate credit card and other debt might offer a lower payment, consider keeping your payment the same. This will enable you to pay more principal and pay off your balance sooner. Also, if you haven’t already refinanced your mortgage, take a look at doing so.
If you have any questions about budgeting, retirement goals, withholding, insurance strategies, or the financial aspects of estate planning, we can help. Call us today.