Financial Planning

Tune Up Your Finances for a Better 2021

Resolve to start the New Year prepared for whatever life delivers.

If adversity builds strength, many of us will start 2021 with the muscles of a professional bodybuilder. The past year de­livered multiple gut punches: a pandemic, an economic downturn, a volatile stock market and a vituperative election.

However, the calamitous year also provided valuable lessons, particularly where your finances are concerned. Because while pandemics are rare, personal setbacks are distressingly common. Your roof could fall in. Someone in your household could become seriously ill. You could lose your job.

An emergency fund is your first line of defense against such disasters, particularly unemployment. The standard rule of thumb is to save enough to cover basic living expenses for three to six months, but that may no longer be sufficient, says Liz Windisch, a certified financial planner with Aspen Wealth Management in Denver. “When entire industries disappear overnight, it can take much longer than that to find new work or train for a new career,” she says. The amount you need to save will depend on your personal circumstances. Three to six months of expenses may be enough if you’re in a dual-income household. If you are the sole wage earner, you may need to save up to 12 months of expenses, or more.

This is money you can’t afford to lose, so keep your emergency fund locked down in a federally insured bank account or short-term certificate of deposit (see Find Higher Yields for Your Cash). Sadly, with interest rates at historic lows, you won’t earn much, but look at it this way: If your income drops or disappears, you won’t have to turn to credit cards—which, despite a low-rate environment, still charge interest of 15% or more—to pay the bills.

Have a Plan B. Another lesson from the pandemic: The best-laid plans can be derailed by events beyond your control. Andrew Marshall, a CFP in Carlsbad, Calif., says he has heard from several people who are close to retirement age who fear that they’ll be laid off and won’t ever be able to find another job that pays what they’re earning now.

“The lesson from these situations is that you should be prepared for alternative scenarios in case you are not able to work right up until your desired retirement date,” Marshall says. Even before COVID, many older workers were forced to retire earlier than planned, due to corporate downsizing, health problems or family circumstances.

The lesson? No matter how much you love your job or how long you think you’ll be able to work, save like you’re retiring much earlier. If you manage to retire on your own terms, the extra money will be gravy (and you’ll probably have no problem figuring out how to spend it).

Percentage of Americans who have delayed spending on discretionary items during the pandemic.

Source: TransUnion

Protect your loved ones—and yourself. The pandemic is a painful reminder that even healthy people get sick and sometimes die. Make sure you have enough life insurance to cover your dependents in the event that something happens to you, and that your estate plan is up to date (see Estate Planning During the Pandemic). If you’re the sole provider, you may also want to explore disability insurance. Many people have disability coverage through their job, but it may not be sufficient to cover your expenses if you’re sidelined for months. Contact your company’s human resources department to find out how much your policy will pay out each month, along with eligibility requirements.

This is also a good time to review other types of insurance, such as homeowners, auto and umbrella liability policies. If you’re driving less, you may be able to get a discount on your auto insurance, for example. While most auto insurers gave policyholders credits or refunds last spring, only 10% offered long-term payment relief, according to Insurify, an insurance-comparison website. You may be able to lower your premiums by shopping around.  

Take advantage of opportunities. Even in dark times, there are glimmers of light. With interest rates at record lows, you may be able to refinance your mortgage or private student loans and lower your monthly payments. This is also a good time to review your budget. If the pandemic has forced you to cut back on spending, consider whether you really need things you previously considered must-haves, says Jason Williams, a CFP in McLean, Va. “If you can continue without them, you may have an opportunity for more savings and, ultimately, financial flexibility going forward,” he says.

Gauge your investing tolerance. If the stock market’s wild swings in 2020 caused you to make investment decisions you later regretted, it’s time to take a hard look at your portfolio. “If it was completely overwhelming for you, or you lost sleep at night because of it, it may be time to consider making your investments more conservative,” says Haley Tolitsky, a CFP in Carolina Beach, N.C. That said, the past year also demonstrated the value of sticking with your investment strategy, no matter what happens in the short term. For our advice on investments in the new year, see Where to Invest in 2021.

Most Popular

When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit
Tax Breaks

The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit

If you didn't get a stimulus check, or you didn't get the full amount, you may be able to claim the recovery rebate credit on your 2020 tax return.
January 18, 2021

Recommended

Secrets to Setting and Keeping Financial Goals for the New Year
personal finance

Secrets to Setting and Keeping Financial Goals for the New Year

If you’ve ever broken a New Year’s resolution (and who hasn’t?), don’t worry. You really can reach your goal this time. You just need to set yourself …
January 13, 2021
A Marriage Starter Plan for Finances: Even If You’re Late to the Party
personal finance

A Marriage Starter Plan for Finances: Even If You’re Late to the Party

Of course, the sooner the better, but it’s never too late for couples to get on the same page financially. Here are some points to discuss ASAP.
January 6, 2021
Time to Go on a Financial Diet? Get Your Finances in Great Shape in 2021
personal finance

Time to Go on a Financial Diet? Get Your Finances in Great Shape in 2021

If you’re ready to get in the best financial condition of your life, here are some easy, sustainable tips to whip you into shape this year.
January 5, 2021
How to Avoid 2021 Being as Much of a Disaster as 2020
personal finance

How to Avoid 2021 Being as Much of a Disaster as 2020

Maybe it’s time to try a different kind of financial resolution for the new year: one that’s more about helping others than helping yourself.
December 31, 2020