5 Financial Resolutions to Help You Prepare for 2021
We’re all looking forward to turning the page on this year — but if 2020 has taught us anything, it’s that it’s always good to be prepared for the unexpected.
“This year has been anything but normal, and everything is still so uncertain,” says Jennifer Raess, CFP®, a member of the Advice Practice Team at Northwestern Mutual. “Making sure you have all your ducks in a row in 2021 can really help give you peace of mind.”
So as you enter the new year, think about what you can do to help balance reaching your goals with protecting your finances. These financial resolutions can help you prepare financially for 2021.
MAINTAIN AN EMERGENCY FUND
One of the silver linings of 2020 is that we’re saving more money than we ever have: 45 percent of Americans say they are setting aside more money than usual, according to an Associated Press survey. That makes it a good time to start an emergency fund or build upon the one you already have.
“Emergency funds help provide stability,” Raess says. “We usually recommend having around six months’ worth of expenses in an emergency fund. But with all the uncertainty right now, you might want to add to your existing emergency fund or save a bit more.” This would allow you to cover unexpected expenses without having to use a credit card or be tempted to dip into your retirement accounts.
Raess says the amount you need will depend on your situation and household. For example, if you’re an entrepreneur, a freelancer or your income tends to fluctuate for another reason (like you’re paid on commission), then you might need more of a cushion than someone with a predictable paycheck.
KEEP TABS ON YOUR SPENDING
Even if your income wasn’t affected in 2020, it’s likely the pandemic changed how you spend. So now’s a good time to look at where your money went this past year and create a budget for 2021 that reflects where you want your dollars to go.
“Often people spend more than they intend to on non-essential costs, so take a closer look at that spending,” Raess says. “There may be areas where you can free up extra dollars that you could be putting towards other important financial goals like building your emergency fund or paying down credit card debt.”
So check your bank and credit card statements and do an audit. Are there subscriptions you can cancel that you aren’t interested in anymore, or that you may have completely forgotten about? Or are there costs you can cut back on because your daily situation has changed?
For instance, you may not need to pay a premium for an unlimited data plan if you’re at home most of the time using Wi-Fi. Or you may find you’re not going to pay regular commuting costs in 2021 because your company is transitioning to more frequent work from home. These are the types of cost savings that could go toward your goals.
BUDGET FOR THE FUN STUFF
Most of us will remember 2020 for all the things we couldn’t do, which makes it that much more important to focus on what we can do in 2021. If you’ve got fun goals on the horizon, like taking a long-awaited post-pandemic vacation or turning your basement into the family game room, save toward those goals as part of your budget.
If you like to treat yourself on a more regular basis, like ordering weekly take-out from your family’s favorite restaurant, make room for those mini splurges, too. The point of a budget isn’t about cutting out all the fun expenses, it’s about making sure you’re spending on the things that contribute to your happiness and your financial wellness, Raess says.
REEVALUATE YOUR INSURANCE COVERAGE
Making sure that your family is protected is always an important financial to-do, but it may feel even more urgent during a time when Americans are as concerned about their physical health as they are about their financial health. Disability insurance and life insurance can help provide that peace of mind.
“Employers will often offer a base level of disability insurance, but it often isn’t the greatest amount of coverage you could obtain,” Raess says. “Usually you can get a supplemental policy to increase that amount of coverage so that you are getting as much income from your disability policies as possible if something happens.”
She also suggests you look at different kinds of disability coverage, which can include policies for stay-at-home spouses or entrepreneurs. If your income has gone up recently, you may qualify for more coverage than you have in the past, so it’s a good idea to review your coverage when you get a bump in pay, too.
Life insurance is also something that Raess believes needs to be routinely revisited. If you’ve taken on a mortgage or have had more kids since you first got life insurance, then it might make sense to increase the value of your policy to ensure it will cover the financial needs of your family. Or if you have term life insurance, you may be thinking of converting it to permanent insurance in order to take advantage of all the ways you can use cash value in the future.
If you aren’t sure if you have enough coverage, a financial advisor can talk through how much you may need and the types of insurance that work best for your situation.
TAKE CONTROL OF YOUR DEBT
Got credit card debt? Make 2021 the year that you get serious about paying it down.
The first thing you should do is take an inventory of your debts, including their interest rates and how much you owe on each. Then contact your credit card companies and see if they’re willing to lower their interest rates. If not, you may be able to refinance your high interest credit card debt at a lower rate.
When tackling your payments, “I recommend you look at which debts have the highest interest rate and then start paying those debts down faster, while paying the minimums on the others,” Raess says. This is a debt paydown method known as the debt avalanche. “Doing so will decrease the amount you pay over the course of your loans and help you get out of debt faster.”
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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