As the year comes to an end, we are all taking a collective sigh of relief that one of the toughest years in recent history is almost over.
We will head into the new year with strength and optimism, better understand what we can do better in the new year. One of those aspects should be financial preparedness, especially after the year’s unemployment and economic devastation.
The good news is that it’s only up from here! Here are the 8 best money tips you will need for a successful year.
1. Rebuild Your Emergency Fund
If the pandemic has taught us anything, it’s to prepare for quite literally the worst. Unemployment rates were at record highs in the United States this year at 14.7%. If you were one of the 23 million people who lost their jobs, you know just how important it is to have an emergency fund as a safety net to continue supporting yourself and your family.
Take time early in the new year to rebuild your emergency fund or, if you don’t have one started, create one as soon as you can. It’s typically recommended that you save somewhere between three to six months of your monthly expenses, including mortgage or rent, utilities, groceries, and other bills in an emergency fund.
2. Revisit Your Budget
While we hope this year will bring back some sense of normalcy, it’s possible lockdowns and quarantines will still be active early in the year, especially during the colder months. If this is the case, review your spending history for the last few months of the year to determine where your money went. If restaurants are shut down, have you spent more money on delivery or takeout? If you can no longer go to your gym, can you save your monthly membership for another expense? Have you saved money on gas by not traveling?
These are important questions to ask yourself as you revisit your monthly budget. Perhaps you’ll find you can increase your monthly savings rate and eliminate unnecessary expenses. Or, maybe you will find you need to reallocate money towards at-home entertainment like a Netflix subscription. Using various budgeting tools and a free monthly budget calculator can help you calculate and take control of your spending.
3. Embrace Multiple Streams of Income
If your job is the only stream of income you have, you have seen the dangers of that this year. Unfortunately, when you only depend on your job for income, there is a risk of losing that job for an extended period of time without any supplemental income.
Don’t worry: there are plenty of ways to generate new sources of income. One of the easier ways is to pick up a side hustle for extra money. This can be as a dog walker, babysitter, or a freelancer. Find ways to fill your free time over the weekend or in the evenings to generate this extra side income.
You can generate more income through passive income streams such as investments, business, or real estate with rental properties. While most of these require a larger upfront investment, they can eventually generate hundreds to thousands of extra income per month, creating a large financial safety net if something happens to your job.
If you can build the foundation for passive income, you will be setting yourself up for success in years to come.
4. Prepare Your Taxes
Tax time is just as chaotic as the rest of the year with confusing and pushed deadlines. Don’t let yourself get behind!
Begin to audit the new business expenses you may have spent to see if you qualify for additional tax deductions. Unfortunately, if you work for someone else, you won’t be able to write-off home office tax deductions. However, if you are self-employed and your home is your principal place of business, you may write off home office expenses for tax deductions.
Additionally, the IRS offers coronavirus tax relief for businesses and tax-exempt entities, including the Employee Retention Credit and Families First Coronavirus Response Act.
If you can, consult a tax professional to determine any additional deductions or benefits you may be able to unlock for the tax year. It could save you hundreds or thousands of dollars!
5. Maximize Your Retirement Savings
The key here is to look at the long-term picture and understand how much you will need to have the retirement you want. The last year may have put a small kink in your retirement outlook, but it’s not too late to get back on track.
You will be allowed to contribute up to $6,000 to an IRA if you are under 50 years old and up to $7,000 if you are older than 50. If you have a 401k with your employer, the contributions are even bigger: $19,500 if you are under 50 and $26,000 if you are 50 or older.
Planning for retirement can seem daunting, especially after a crazy year. Fortunately, using various tools such as an online retirement calculator can help you determine an easy to follow retirement strategy and savings plan for you in just a few minutes.
6. Keep an Eye on Your Health — And Insurance
The pandemic certainly brought many lifestyle changes. On top of the risk of contracting the virus, it has been more difficult to go to the gym or even workout outside in public spaces. As a result, many Americans have been skipping out on elective medical procedures or exams typically covered by their insurance plans.
When selecting a health insurance plan this year (if you haven’t done so already), consider what your average health coverage costs you now versus what it will be with increasing premiums and deductibles. Kaiser Family Foundation estimates a 4% increase in premiums in the new year in addition to out-of-pocket medical costs increasing 10%. And don’t forget to analyze the annual wellness exams and prescription coverage that your plan carries.
Another way to get the most from your health insurance is to take advantage of your tax-advantaged Flexible Spending Account (FSA) before it expires. You can use your FSA money towards various things, including eye exams, eyeglasses or contact lenses, dental treatment, over-the-counter medication, chiropractors, and more.
Be sure to plan on what medical expenses you need the most and use them before your funds are gone forever.
7. Revisit Your Investment Accounts
The start of the year will certainly be a rollercoaster with the distribution of the COVID-19 vaccine and the inauguration of a new president. These events can trigger many reactions on Wall Street. In fact, when the vaccine trial results were determined better than expected, the major stock indexes jumped to record highs.
If you invest in the stock market, take some time to reevaluate where you have invested your money. Industries such as fast food, streaming entertainment, and at-home fitness have performed exceptionally well.
However, airlines, hospitality, and travel industries may see a huge improvement.
The lesson? Evaluate the societal changes as we enter into the new year and how your investments may shift to meet those changes.
8. Secure a Life Insurance Policy
Since the beginning of the pandemic, life insurance companies have seen a major uptick in the number of insurance policies purchased. In fact, some of the largest life insurance sellers in the country saw a 15% increase in policies sold between April and September versus the same time period as last year. As morbid as it may seem, many young adults were driven to buy policies as a financial safety net in the event of death from COVID-19.
Life insurance is almost always encouraged for parents or partners who would need to provide extra financial support in the event of their death. If you are the primary breadwinner, consider life insurance as a way to support your loved ones after you’re gone financially.
In 2021, consider exploring life insurance options that are right for you and your family for extra financial protection.
We made it through, a sign that we can handle almost anything that comes our way. As you enter the new year with this newfound strength and hope, be sure to prioritize your personal finances, so that this will be your best year yet.
Kristian is an experienced marketing leader who has helped multiple fintech startups scale their marketing over the past few years. He is currently the Director of Marketing at Future Vault an online digital vault where advisors and their clients can securely share documents and communicate.