2021 is upon us! What can we do now, at the onset of the new year, to set ourselves up for financial success in the next 12 months? We have all made new year’s resolutions before, but a resolution is just a wish without a plan with concrete steps. So here are 12 concrete things to do to make your new year’s financial resolutions come true.
1. Forecast major purchases or expenses coming this year and adjust your savings and spending plans to anticipate it.
Do you have big expenses coming up this year? Maybe something like having a baby or starting a business? (Or both?) Hopefully you’ve been operating on an organized saving and spending plan already so these big expenses aren’t catching you by surprise, but nonetheless, the start of the year is a great time to review your projected income, spending, and savings to make sure you’ve got enough cash to cover those expenses without going into debt.
2. Clean your house. Sell the junk.
Spring cleaning doesn’t have to be just a chore. It can be lucrative too. Not only does downsizing and simplifying have an effect on our mental outlook which can certainly affect our finances; it can actually mean cold, hard cash in our hands.
With tools like eBay, Craigslist, Facebook Marketplace, OfferUp, Swappa, and countless other online services, selling has never been easier. For example, over the Christmas holiday, I pruned my fig tree collection and instead of throwing the branches into the burn pile, I listed the cuttings online at FigBid.com and ended up making over $1,000. I literally sold garden waste that would have gone in the garbage. One man’s trash is another man’s treasure!
3. Cancel any subscriptions you don’t need.
Subscriptions have become the money-sucking leach that every business is trying to apply onto their customers. It can be a huge drag on our finances, so only subscribe to things that you absolutely need.
Take the time to cut out the subscriptions that you aren’t using anymore. Gym memberships, music/TV/magazines/entertainment, software, hardware, product/home deliveries, etc. there are memberships for everything now. Remove the leach and stop the bleeding!
4. Decide what you will do with your stimulus money.
In case you haven’t heard, there’s another stimulus check on the way for many of us in the US. If you qualify for the windfall, decide BEFOREHAND what you will do with that money.
The currently expected $600 per person will look like a lot when compared to the small pleasures and trinkets that we may be tempted to treat ourselves to, and contrarily it will likely look miniscule when compared to our car notes, student loans, or home mortgages. But please don’t blow this opportunity wastefully, rather take advantage of it to make a permanent improvement to your financial health!
5. Tackle your debts by starting or accelerating the debt snowball.
Take inventory of your debts, list them from smallest to largest balance and renew your commitment to eliminate every item on that list as quickly as humanly possible. How to do that? Here are a few suggestions:
- Check your credit report – Make sure there aren’t errors or problems with your credit report. You can get your free annual report from each of the three credit bureaus here: Annual Credit Report. Doing this will be helpful for the next step.
- Refinance if needed – With historic low interest rates, you may be able to save a bundle by refinancing some of your debts. Whether it’s student loans, home mortgages, or other types of debt, it is worth investigating. But the important caveat to remember is that refinancing should be for the goal of saving on interest and paying off the debt sooner, and NOT simply to reduce monthly payments and drag out the loan longer! That’ll end up costing you more money in the long run!
- Increase your payments – Ultimately, there isn’t a more effective way to pay off debt than to just making bigger payments. So how about use that stimulus money to accelerate your debt snowball? Got a year-end bonus from work? Chunk that in there too. All that stuff you sold cleaning out your house? This is a great place to put the earnings. But above all, optimize your income and spending so a greater percentage of it can go toward debt elimination this year.
6. Review your W-4 form with your employer.
The W-4 form has been updated recently and it is rather different than before. I’m not qualified to give you tax advice, except to suggest that you make sure you aren’t withholding too little or too much. You may want to consult with your CPA about it if you have questions.
7. Review your 2020 and 2021 IRA Contributions
Did you contribute to your IRA or Roth IRA in 2020? Would you still like to? Remember that you have until April 15 to contribute into your IRAs for the previous tax year (except in 2020 when that deadline was extended). So in your evaluation during point one above, make sure to factor in any IRA contributions you have remaining for 2020 as well as the new contributions for 2021. (If you’re out of debt, this would be a great place for your stimulus money, year-end bonus, and extra cash.)
The contribution limit is $6,000 per person in 2021. If you are over age 50, you qualify for a $1,000 “catch-up” contribution for a total limit of $7,000.
It is important to note too that there are income limits for IRA and Roth IRA contributions, so if you earn too much, you may not fully qualify. The income limits and rules are varied and complex, so check out this article on Investopedia to see where you fall in the income brackets.
However, for the purposes of this discussion, the point is to make sure you don’t unknowingly fall under a limitation and make contributions that have negative tax consequences later. If you don’t qualify for either a deductible IRA or Roth IRA, you may still be able to use a non-deductible IRA and convert it into a Roth IRA afterwards. That’s a complex maneuver, but certainly something worthwhile to investigate with your financial planner or CPA if it affects you.
8. Look at your 401k/403b/457 or other workplace retirement plan contributions for the new year.
Related to the previous point, the start of the year is a great time to review your workplace retirement plans to make sure you are contributing the amount you’d like. If you haven’t been taking advantage of an employer match, now would be a great time to reconsider! If you are over 50 years old, you also qualify for a catch-up additional contribution into your 401k too.
9. Review your asset allocation within your investment portfolio.
Speaking of your investment portfolio, the start of the year is a good time to take a look at your overall asset allocation across all your accounts. (That is, if you didn’t already do it at the end of the year.) Review if your allocations are still in balance and properly aligned with your risk profile. With a properly designed investment strategy, these annual reviews shouldn’t take very long as it should largely be a “set and forget” operation.
10. Review the beneficiaries on your financial accounts and your estate plan.
If you haven’t done so in a while or if you have had some big changes in life (like say, having a baby or starting business), it is a good idea to review your various life insurance, annuity, investment products, etc. to update the proper beneficiaries listed on those accounts. This is an important aspect of estate planning as these beneficiary designations take precedent over the will, and so can pass outside of probate.
In line with this, it’s a good idea to review your overall estate plan annually to make sure everything is still adequate and properly accounted for. If you don’t have a will or other estate planning documents, then now would be a great time to make one!
11. Plan your charitable giving.
Because of the year-end coronavirus relief bill passed in December, individuals get up to $300 and joint filers up to $600 of tax deductions in 2021 even if they don’t itemize their deductions. So plan on giving away at least $300 (if you’re single) or $600 (if you’re married) this year to take advantage of that tax break!
Moreover, in an extension of a provision of the CARES Act passed last year, those who itemize in 2021 can deduct charitable cash donations up to 100% of their Adjusted Gross Income (normally 60%). If you are fortunate enough to be contending with this “problem”, it would be wise to consult with a CPA to see if there are strategies that can help you leverage this temporary provision to save you more on taxes.
12. Review your insurance policies to make sure they are still adequate.
We’re past the open enrollment period already for health insurance, so hopefully that’s already been taken care of. But for all of the other insurance policies such as home/auto, life/disability, umbrella, business, professional liability, etc. take some time to review them to make sure the coverages are still adequate and to see if premiums have gotten out of hand. Make note of the ones that will need to be shopped around for better rates when they come up for renewal.
Taking a bit of time to maintain our financial affairs each year is like keeping our car tuned up. If we are diligent in the basic maintenance, it saves us from major headaches down the road. It’s not the most exciting thing in the world, but it’s the definition of “adulting.”
Naturally each of our situations will be different, so there will certainly be items on your list that aren’t on this one.
What else is on your financial to-do list to start off 2021?
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