Five Smart Money Moves to Make in 2021
From starting an emergency fund to making new investments, this financial planner shares advice.
One of the things that we have learned in 2020 is that circumstances can change at a moment's notice and that some things are outside of our control. Many of us were laid off from our jobs or even lost a business, and even those who were fortunate enough to keep working felt disruptions that caused a strain on their finances. This was all in addition to the risk of catching the novel coronavirus known to cause the disease COVID-19. We talked with Lauren Wybar, CFP, senior financial advisor with Vanguard Personal Advisor Services to gather some practical advice on the ways we can better our current position, financially, as we enter 2021.
Review your budget.
For many of us who are not able to begin saving right away, we can make the following moves to position ourselves better in the near future. Wybar suggests reviewing your budget as the first move. "If you don't have one already in place, create one. Start by developing an itemized list of all of your expenses," she says. "I recommend bucketing expenses into categories, such as housing and entertainment, to ensure you understand where your money is going. Determine if these expenses are necessary or discretionary. Consider reducing or eliminating discretionary expenses until you return to work."
Reassess all monthly payments.
Next, you'll want to analyze your monthly payments and see which ones you can postpone or reduce (after talking to your creditors). "Many banks and financial institutions have introduced policies to ease the burden on those who are unable to meet their payment obligations. Flexible payment options, including deferred payments and waived late fees, may be available, though remember that interest may still accrue if you are deferring payment," explains Wybar.
Consider new investments.
Finally, develop a game plan for how to cover emergency expenses. According to Wybar, you can withdraw from your investments or a Roth IRA without penalty at this time and the CARES Act made withdrawing from a 401(K) much easier. However, she notes: "I would only recommend considering tapping a 401(k) plan once other financial resources have been exhausted, as the long-term impact on retirement savings can be significant."
Start an emergency fund.
You still want to review your budget and your expenses. Start an emergency fund if you are able to put aside some money. "An emergency fund is always an important component of a financial plan, but given the uncertainty around the pandemic, it has never been more important to ensure you have emergency reserves to withstand a potential financial blow. To begin, it's important to identify the financial shocks that could arise, as not all emergencies are alike," she explains. You will want to determine the right account for your emergency fund needs, like a regular savings account for unexpected expenses or a taxable brokerage account or Roth IRA for sudden job loss or other income shocks.
Diversify and evaluate your investments.
This means that you will want some savings in easily accessible accounts while others will go into long-term accounts. "Assess your risk tolerance, review your goals, and evaluate your portfolio's asset allocation to ensure they are all aligned. This year's market volatility can provide a good barometer for the amount of risk you're willing to take," Wybar says. "If you're comfortable with how your portfolio responded to this year's market volatility, keep an eye on how your asset allocation compares with your target. Rebalance if there's a difference of five percentage points or more between your current portfolio and your target. During the spring downturn, that may have meant selling fixed income and purchasing equities. Now, with markets reaching new highs, you may need to do the opposite."