Many people experienced economic or personal shocks in 2020. There were extensive job losses, thousands of closed businesses, astonishing death tolls and even larger numbers of people hospitalized or unable to work because of COVID-19. The economy reacted to all this trouble by slowing down, leading to a virus-induced recession.
The economy is recovering. Markets came back pretty quickly and some jobs have returned, even though unemployment remains high. The government also provided some quick economic assistance with the CARES Act, but the election derailed efforts to provide more. Now, the second wave is upon us. While big strides are being made on a COVID-19 vaccine, the likelihood of it being widely distributed in the next few months is slim.
Having been caught largely unaware in 2020, how can businesses and individuals financially prepare for 2021? While it is a large undertaking, it is achievable if people make solid financial plans and stick to their budgets.
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Plan, plan, plan
Planning to survive harsher setbacks will be essential for getting through another COVID-19 wave financially intact. The first task is to make sure that you have an emergency fund in place, preferably of up to a year's worth of expenses in cash or highly liquid investments.
To realistically accomplish your savings goal, especially when your income is variable, save a percentage of your income rather than a set figure. Set a do-able percentage and follow it religiously to provide a nice cushion to fall back on. Additionally, people should reduce their debt loads and try not to take on any new significant debt this coming year.
Finally, everyone should re-evaluate their well-prepared financial plans regularly as 2021 goes on to make sure they are in the best financial situation possible. Where do you start? Here are five steps to consider.
First, take a close look at your budget
To optimize financial plans, review regular expenses and cut any unnecessary items. It's easy to forget automatic payments, and those unwatched streaming channels can add up to a lot of extra money going out annually. It is important to review these expenses to make sure that the items paid for are actually used. Otherwise, cancel or discontinue them.
People should also create a plan for if or when the worst occurs. Your bare-bones budget should only include what has to be spent to stave off catastrophe until better times arrive.
Next, review your portfolio
Certain stocks took a particular beating this year, while others — such as general health care and medical stocks — did well. It is a good idea to review and fine-tune financial portfolios now while there is still flexibility in place for 2021. Given the interest rate environment, consider planning for other portfolio income too. For example, you could look at buying publicly traded real estate companies. Although there are still risks that should be considered on a case-by-case basis, many of these names have sold off due to the pandemic and are trading at attractive values.
Equally important in times like these, is avoiding reacting solely out of fear when drastic market shifts occur. Financial advisers can help those worried about their stocks and explain what can be done without reacting in panic.
Max out your retirement savings
Many individuals discovered that, as their jobs or employers disappeared in 2020, they were suddenly and unexpectedly retired. Given that ongoing risk, retirement savings must be increased to the fullest extent possible. Savers may be using them far sooner than expected, as some people have decided it’s worth it to retire early.
Those who are already retired and are approaching 72 next year should also prepare for required minimum deductions in their financial plans. If not timely made, RMDs can have devastating financial consequences.
Review your tax situation
If April could be holding any surprises, it is worthwhile to anticipate and deal with them now. According to the IRS, unemployment compensation, including the extra $600 per month from the federal government, is taxable, and if taxes were not withheld, it may be a good idea to make an anticipatory payment in the fourth quarter of 2020 to reduce the payment shock in April. Also consider whether liquidated investments might have had an impact on your tax situation.
In addition, there is still a very small window for a $300 CARES Act cash charitable contribution this year, and it could help with a deduction, even for those who don't itemize. Finally, for those who expect a refund, it would be good to file as early as possible and get those funds in hand for savings or investment.
Review insurance
When times are uncertain, it is vital that insurance coverage be adequate and up to date. Life insurance should be in place, especially where there are minor children, in case one or both parents are no longer able to contribute income to the family. Additionally, review health insurance to make sure that the pandemic will not cause calamitous expenses that even careful planning will not cover sufficiently.
Finally, where the climate requires, make sure that homeowners and flood insurance are updated to guard against disasters that may occur regardless of COVID-19.
In sum, 2020 caught everyone by surprise. A thriving and healthy market dropped like a stone in a few days, job losses piled up fast, and businesses failed left and right. But as 2020 turns into 2021 and COVID-19 appears ready to strike heavily again, it is possible — and essential — to plan for the fresh developments that may be around the corner. Making financial plans, building up savings and reviewing all the relevant situations can make surviving another plague year an achievable goal.