For many people, this year has been quite a roller coaster ride. With the global pandemic, economic uncertainty, furloughs, and layoffs, you may have been met with unprecedented uncertainty about your financial future. Fortunately, there are a couple of months left in the year to evaluate, assess, and prepare to rebuild your financial foundation for 2021.
#1. Crunch the numbers
First, take the time to evaluate where 2020 landed you. Call it a year-end financial checklist, if you will. Revisit your 2020 budget. Did you stick to it? Unpredictable events in 2020 may have impacted your ability to follow a budget. Ask yourself these important questions to get started:
- Savings Rate - How much did you plan to save? How much did you actually save?
- Debt - Has your debt increased or decreased since the beginning of the year?
- Big Expenses - Did you make any big purchases or investments in the past year that need to be accounted for when building your financial plan for 2021?
- Credit Score – do you know your credit score number? Keep tabs on your score and learn how to improve your credit score for better financial health.
The goal is to have a good financial balance between assets and debts and identifying the answers above will set you up to successfully manage your money.
#2. Check-in on your retirement contributions
The next step is to set yourself up for success down the road by maxing out your retirement contributions for 2020. If contributions to a 401(k) are made with before-tax income, you will pay less federal and state taxes now, but will pay taxes when you withdraw those funds in retirement. Depending on your financial planning goals, it may be to your advantage to make after-tax contributions to your retirement fund. Either way, the retirement funds you save now will have more time to compound and grow.
If you're unsure if your current contributions are working for you, get help with your financial planning or seek advice from your accountant. You should also try using one of our retirement calculators to see if your retirement savings are sufficient. Once you have a clear picture about your 2020 contributions, you can get a jump start on a strategy for maximizing your contributions in 2021.
#3. Review your taxes
Receiving a tax refund from the IRS may feel like winning the lottery, but it's important to understand that you essentially provided the government with an interest-free loan. On the flip side, maybe you had to send the government a payment when you filed your taxes last year and have decided that wasn’t fun.
In either case, it's important to review and modify your tax withholdings if this is something you want to change. Take a look at tax rates for the next year, expected income and credits, any planned deductions and make the necessary adjustments. This will put you in control of managing your money to make it work harder for you.
You may also want to take the time to maximize your deductions which can help decrease your taxable income for the year. Review the following types of deductions to make necessary adjustments:
- Selling investments at a loss
- Deferring end-of-year income
- Increasing business expenses
- Prepaying tuition
- Medical expenses
#4. Enroll in Medicare
Unless you are 65 or older, this money move may not apply to you! The open enrollment period for Medicare coverage for 2020 has ended, but has recently begun for 2021. The open enrollment period runs from October 15, 2020 to December 7, 2020 for coverage effective January 1, 2021. However, if you're nearing 65 years of age, you have a seven-month window around the month you turn 65 to sign up for a Medicare plan. It’s important to understand the enrollment process to avoid delayed coverage or paying a penalty for not signing up in time. Visit the official U.S. government site for Medicare at Medicare.gov to learn more.
Now you can plan for 2021
What did you discover from your year-end financial evaluation? Maybe you needed to cut costs or had to adjust future planned expenses. It could be that you are paying high interest on some loans and that it might be worthwhile to refinance your mortgage to a lower rate. Or perhaps you discovered your credit score may need some improvement, but that you are on target with saving for your retirement. The goal of this exercise was to set you up to build a strong financial plan for 2021. Take what you've learned in this last year and use it as fuel to push you forward.
Financial Tip: A life insurance plan should be an essential part of your financial plan. Find out What You Need to Know About Life Insurance in this blog and learn why it is important to have a life insurance policy.