As 2020 makes its way into the record books, we have a lot to reflect on as we move forward. And as we turn the corner on all of the challenges the global pandemic presented, we can take what we have learned from the lessons of the past year to guide us through 2021.
We learned about proper hand-washing, social distancing and the importance of wearing a mask. But we were also taught why being financially prepared is so important and the beginning of the new year is a perfect time to set yourself up for a financially bright and healthy future!
For many of us, financial preparedness is all about setting goals. But how often do we set goals that are never reached? Goal setting is a key part of the process, but any goal without a plan to achieve it amounts to nothing more than a wish.
Begin with Budgeting
The first step in developing an effective financial plan is to have a firm understanding of your budget. Developing the right budget and sticking to it can make all the difference in your overall success of reaching your financial goals. After looking closely at your household income and expenses, you can start to formulate a budget that fits your cash flow and lifestyle expectations.
Here are just a few tips to make sure that your budgeting efforts are ambitious, yet realistic:
- Identify your monthly income
- List monthly expenses – include everything you need to pay for such as housing, transportation, groceries, utilities, loans, credit card bills, etc.
- Track how you spend money for at least one month, preferably three months to have a complete picture of where your money goes
- Closely monitor unplanned expenses and your discretionary spending (ie – dinging out, entertainment, gym membership)
- Use digital banking services to securely access your accounts 24/7 through online and mobile banking. It’s a great way to track account balances, pay bills and monitor your spending.
- Set up direct deposit with your employer to have your paychecks automatically deposited to your account.
- Pay yourself first – when you list your expenses, start with a payment to your savings account. This is a great method to start and build your savings!
- Ensure you have an emergency savings fund for those unexpected costs. Typically, having three-six months of expenses set aside is a good start, but it’s a good idea to boost that to nine to 12 months. If you don’t have an emergency fund set up yet, start small and contribute whatever you can and whenever you receive some unexpected cash, put it into the fund so its builds up faster.
- Schedule regular budget check-ups. As time goes on, things change and your budget may need some tweaks. Review your bank and credit card statements to track the trends in your spending to confirm they are in-line with your financial goals. If not, you will discover areas where you may be overspending and can quickly make adjustments.
Set Ambitious Yet Attainable Goals
Once you have a solid budget in place, you can begin setting reasonable goals for 2021 and beyond. The SMART method is a helpful tool that that many people like to use to help them set goals. While identifying your goals, keep the following in mind:
- It is vitally important to ensure that your goals are attainable and appropriate for your budget. Remember no goal will be truly effective or satisfying if you don’t have to work to reach it, but you don’t want to be defeated because your goal is not realistic.
- Start small! Don’t overwhelm yourself by trying to achieve massive goals right away. Instead, set a series of smaller goals that can serve as milestones on the way toward much larger goals.
Here are some ideas for new goals that you can set for 2021:
- Grow your Savings – one of the most important lessons 2020 has taught us is how necessary it is to have a financial cushion. One rule of thumb to follow is the 50-30-20 rule when dividing up your take-home pay. You put 50% towards living expenses like rent and groceries, 30% for entertainment and 20% into your savings. If 20% of your take-home pay sounds a little too intimidating, start with 10 or 15%! Small deposits to your savings account over a long period of time can yield huge results. Try this calculator to see how much you should save to reach one of your goals.
- Monitor your Credit Score – you can obtain one free copy of your credit report annually from each of the credit reporting companies to check your credit score. It’s good practice to review your credit report at least once a year to check for accuracy, correct any errors and spot any suspicious activity that might indicate your information has been hacked. Credit Sense is a free resource to instantly access your credit score, full credit report and tips to improve or maintain a great credit score.
- Start or build your emergency fund – remember pay yourself first! Add this to your expense column in your budget and make a regular payment to it each month. Start with just $10 or $20 a month and give it a boost whenever you have some extra money that you didn’t expect to have – hint: tax refund, a bonus or cash for your birthday.
- Pay off one of your credit card balances – make it a goal to pay off your credit card balance by the middle or end of this year. Get started by paying more than the minimum balance, reviewing what you use the credit card for and finding ways to cut back on spending.
- Save for Retirement – If you haven’t already, start saving today! No matter how distant retirement may seem, the sooner you start the better, since retirement plans utilize the advantages of time to grow your future wealth. Review your employer’s retirement plan options to make sure you’re receiving the best matching contribution and use this calculator to see how you can maximize your employer’s 401K match. Or if you are self-employed, start your own individual retirement account (IRA).
Make Changes as Necessary
Just like a budget, goals should meet both your needs and your means. And both should be frequently reviewed, then optimized and amended so you can manage your budget successfully and reach your goals. Over time, you may need to consider making a broad spectrum of lifestyle changes to help you stick to your long-term financial plan. Consider how your financial plan might benefit from any of the following:
Improved Health and Well-Being
Your financial and medical health often go hand in hand. Consider cooking at home rather than eating out. Try to get at least 30 minutes of exercise a few days a week to help be your healthiest and happiest! Read our other blog for tips to enhance your lifestyle while sticking to your budget.
Decluttering Your Home
Follow the advice of organization experts such as Marie Kondo and make the decision to own only things that you truly need or that truly bring you happiness. Donate items that you no longer use or need to local charities.
Cleaning Out Subscriptions
You’ll be amazed to discover how much you can save by simply getting rid of monthly memberships or subscription services that you don’t even use.
As the side gig economy continues to boom, ask yourself if you can leverage any of your skills for financial gain as a freelancer. Every little bit helps when it comes to incoming cash flow!
No matter what 2020 threw at you, start this year with a plan to lead a better and more financially secure life. It may take practice, but when you combine effective budgeting skills and setting goals that are attainable, you’ll be amazed how much you can achieve. We’re here to help, too! Lakeland Bank offers information on personal banking and financial planning. Reach out to us today or find a local branch near you – we’re happy to assist you in any way we can.