Financial Resolutions For The New Year

“There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is a miracle.”

Albert Einstein

This year has been extraordinary and challenging. The coronavirus has been a cloud over our heads virtually all of 2020. Reshaping our lives has been necessary as we are socially distanced from friends and family, worked remotely, and learned online.

Historically high unemployment has negatively impacted our economy. The Fed has acted aggressively by lowering rates and expanding the money supply to provide liquidity to financial markets.

Early in the crisis, Congress passed The CARES Act with generous financial support for small businesses, hiking unemployment benefits, issuing stimulus checks, enacting pauses in student loan repayments, and other services. President Trump signed the COVID relief bill for $900 billion. However, there is still a significant need to provide more support.

Be Optimistic For The Future

On the positive side, the distribution of approved miracle COVID vaccines is happening. However, as we approach 2021, cases are still rising, so we are not out of the woods. Vigilance remains as the virus is still among us.

Yet there are reasons to be optimistic in 2021. Besides the vaccine rollout, I believe there is a wider consensus that the wealth gap needs to narrow significantly, improved growth as the economy opens up, and the resilient stock market will remain so. The silver lining of the pandemic brought a greater appreciation of science and digital technologies.

Adapt some financial lessons we learned the hard way in 2020 for a better plan in 2021.

Financial  Resolutions For 2021

 

1. Set Financial Goals

Realizing your financial goals in 2020 may have been impossible to achieve. Vacations shelved, unexpected loss of a job, buying or selling your home. On the other hand, you may feel more determined to revisit your goals for the coming year. Set reasonable financial goals for 2021. The pandemic crisis may impede us in the first few months.

We can learn from our experiences that may have highlighted some of our mistakes, such as not saving enough for unexpected emergencies such as a pandemic. There isn’t a crystal ball to prepare for such events, but you should realize that things can happen to us.

2. Build An Emergency Fund

Having savings on hand for emergencies should be a top financial goal. Establish an ample emergency fund to cover your necessary and urgent living expenses for up to a year. In regular times, 3-6 months may seem plentiful, but in reality, saving for an extended period may have proved necessary in 2020. This money is a cushion for you to feel more financially secure should you lose a job, have a medical emergency for you or your pets, or a flood in your basement.

Invest these funds in liquid investments with easy access. With the low-interest-rate environment, you won’t be earning much income from current yields, but liquidity–the ability to quickly have cash without much loss of value– matters. Think of this as savings, so you don’t have to borrow on your credit card that will make it hard to pay off high-cost debt.

Your fund should be a big enough cushion to pay your monthly bills and costs such as food, rent or mortgage, utility, health care, car, property taxes, and pet care. Ample savings will allow you to sleep better at night. You can read more about the emergency fund and how to invest it here.

3. Have A Budget To Keep You On Plan

To be financially disciplined, you need to understand your monthly budget. Our combined income sources, less total expenses (fixed and variable expenses) equals our bottom line. Many people had significant challenges if they lost a job, had emergency medical costs, or both. When your income, fortunately, exceeds your expenses, you have money to save. This money can be added to your emergency fund, pay down debt, or invest in the future.

On the other hand, if your costs exceed your income, you will need to earn more income, borrow to pay expenses, reduce spending, or a combination of these. Bring down whatever costs you can. Borrowing on your credit cards will put you in a terrible financial bind. The interest costs of credit card debt, averaging 16%, are destructive.

Plan to review the budget monthly.  Some people use spreadsheets; others use apps. Whatever way works for you to plug in your monthly pretax income less fixed costs, mostly your living costs such as rent, utilities, monthly car payments, insurance, typical food/grocery,  and other debt. 

Your variable costs are often discretionary and include dining out, entertainment, travel, and potential costs. Another way to budget is to track your monthly expenses by reviewing your bills regularly. You may be motivated to save once you see how much you spend on things you didn’t need.

4. Spend Less Than You Earn

Manage your spending. Invest your leftover savings. During the pandemic, we had fewer opportunities to spend as we hunkered down in our homes. We didn’t go on vacation, dine out much, and commuted less. On the other hand, we spent more on groceries, subscriptions, and gaming platforms this past year. An October 2020 survey showed that consumers are now paying for seven video streaming services on average. Spending on gaming platforms (e.g., Xbox, PlayStation) rose by 37% in 2020.

One surprise was the amount of saving we were making in the first half of 2020. US personal savings rose to unsustainable rates of 33.7% in April, but remain at reasonably good levels.

People are tired of social distancing and craving to go back to their regular lives. We all want to enjoy living, but we need to be careful about temptations to overspend after a year of deprivation.

There are reasons why we justify spending more than we should. We often prefer instant gratification, living today but not focusing on our future. To be in good financial health, we should be doing both. Our emotional biases impact our purchases, and marketers leverage those tendencies. Our lifestyles and personalities play a significant role in overspending, especially when we want to impress people with our success.

5. How To Spend Less and Save More

When overspending habitually, we need to motivate ourselves to change our ways. When we diet, we often take a break and eat something we know we shouldn’t. If we correct that error, usually no sustainable damage has been done. On the other hand, sometimes falling off a diet means we have given up. The best thing is to dust yourself and get back on to your diet.

If you realize your overspending is harming your finances, you may need some motivation to reduce spending. When your overspending and debt accumulation is severe, you may want to consider therapy or meeting with a financial counselor to help you.

Motivate Yourself To Spend Less:

• Focus on your financial future.
• Understand your household budget.
• Track and review your spending on items you may not need.
• Be more conscious of how you shop and biases that interfere with your decisions.
• Negotiate any agreements you have if you are facing challenges.
• Cancel subscriptions you no longer need.
• Invest, pay off debt, or add to the emergency cushion with extra savings.

 

6.  Be Disciplined When Using Credit Cards

Having too much debt will make it difficult for you to achieve financial security and wealth. Make trade-offs that minimize debt accumulation. When credit card issuers charge 15% or higher on your balances, resolve yourself to spending less.

Pay your bills on time each month and aim to pay them in full.  It may mean making trade-offs between buying something you don’t need and may not even want very much. Carrying significant credit card balances is a substantial financial anchor and is a habit hard to break.

Instead, try to reduce your credit card balances to zero, so you never have to pay the issuer any interest owed. I consider credit card debt to be among the most toxic. Use more cash, which often limits your spending, or just buy less until you have more control over this debt.

7. Manage Your Debt Wisely

Like paying taxes, there is a certainty you will accumulate debt in your lifetime: mortgage, cars, student loans, smartphones, and credit cards. But you need to be prudent when you borrow money so that it doesn’t interfere with your wealth accumulation. Where possible, pay down debt, particularly your credit card balances, which can be financial weapons of destruction.

The trade-off for extra savings should go to your emergency funds, high-cost debt, and investing your money.

Find SavingsTo Pay Down Debt From: 

• Annual tax refunds.
• Passive Income.
• Your annual bonus or a raise.
• Extra savings can help.

Some debt accumulation is associated with borrowing that is more like investing. Borrowing is not always a bad thing especially for good reasons like your college education, furthering your career, or buying your home. As we mentioned earlier, credit cards are incredibly toxic.

 Refinance Your Mortgage

Consider refinancing your mortgage loan, which is at record low rates.  According to Bankrate’s weekly survey, the average 30 year fixed rate mortgage dipped to 2.95%. It doesn’t necessarily mean you will automatically get the lowest rate as lenders will look at your credit background and the property.

Several factors influence mortgage rates: the Fed’s actions, which brought down interest rates, economic indicators, and inflation. Besides, a higher credit score and a lower loan-to-home-value will contribute to more attractive mortgage rates.

Get The Right Mortgage And Car Loans

Make sure you are getting the right loan. If you handle shorter terms for your cars and home, you will benefit by paying less debt. When buying a home, consider the 15 years fixed mortgage vs. the 30 years fixed mortgage. True, the shorter mortgage term will cost more per month but your total cost, when factoring in the interest payments for your home will be lower.

The same goes for a car loan. According to Credit Karma, the average new car loan was 72 months but more people are opting for longer loan terms. Surprisingly and perhaps ridiculously, exotic car financing is more extended, averaging 144 months (Lending Tree). The longer loans stretch out your interest payments and make them more manageable. However, you are paying more for your car when adding in the higher interest, and unless it is deductible for a business’s car, it is not worth it.

Buy what you can afford in a home and car, not for pleasing or impressing others. Drive your car longer and consider buying with more cash as a down payment or in its entirety.

8. Review And Fix Your Credit Report

As part of this new year’s resolutions, make sure to review your credit reports periodically. You can do so for free through AnnualCreditReport.com. You can rotate among the 3 credit bureaus to examine your report every few months.

Lenders rely on our creditworthiness to see our borrowing rates. The higher the score on a 300-850 score, the lower the annual percentage rate (APR) we are charged on car, mortgage, or private student loans. Check for errors you can fix quickly on your report and follow-up with vendors when you spot those issues. These errors can hurt your credit.

9. Raise Your Credit Score

There are few parties–landlords, employers–  that have stakes in our credit scores besides lenders. Improving your credit score can meaningfully help you reduce the total size of your debt (mortgage, car, and other loans) and provide financial security. Have a better understanding of how your credit scores are determined and how to raise them here.

A Better Score Means Lower Interest Payments

A good credit score ranges between 700 and 750.  The difference in the APR based on credit scores are meaningful. The borrower with a 650 score would pay a 5.40 % APR  on a $250,000 30 year fixed mortgage loan. This score would require a monthly payment of $1,404 or $255,440 in total interest paid over the loan’s lifetime. A borrower with a better credit score of 700 would have a lower APR of 4.58% or $1,279 for the same property and pay far lower in lifetime interest payments of $210,440. 

10. Save For Retirement – Max Out Your 2021 Contribution Limits

Your situation at your job may have been more challenging as a result of the pandemic.  What happens to your 401K employer-sponsored plan? If you lost your job, you probably can leave your 401K with your former company to manage it as is. However, you can’t make new contributions or receive employer matching programs. But it is a good place to keep your plan for the time being.

If you changed jobs, and your new employer offers a 401K plan, you can roll it over. If you are not working, you can rollover this money to your IRA to avoid penalties if you are younger than  59.5 years.

If you remain at your job, be grateful. It has been a demanding environment for many people. You may find that if you are working at home, you have extra savings that can be applied to your retirement or investment accounts. If you started a new job, save as early as possible.

A Company Match Is Valuable

For example, your company offers a 50% match of your contributions up to 6% of your salary. Suppose you contribute 6% of your $55,000 annual salary, or  $3,300. Your employer will match 50% for their contribution of $1,650. The employer’s contribution is like getting free money.

As soon as you start working, you should enroll in your firm’s 401 employer-sponsored plan. Automate a specific amount or percentage of the money you receive from your paycheck to be deposited into your retirement, investment, or any savings account.  It’s an easy way to save consistently for your retirement to build this account through compounding.

Save as early as you can to leverage compounding benefits and for maximum contributions.

2021 Contribution Limits -Some Changes

For 2021, there are some changes in contribution limits for retirement accounts from last year.

The 401K contribution limits are the same at $19,500  and the catch-up contribution for plan participants age 50 or older remains at $6,500. Employers can make matching and nonmatching contributions for their employees even if they have already maxed out the account. As such, the overall contribution limit (i.e., employer and employee deposits) is 100% of contribution or $58,000 (up from $57,000), whichever is less. For plan participants age 50 or older, the overall contribution, including the catch-up portion, is  $64,500( up from $63,500).

The IRA limits remain at $6,000 in 2021, with the catch-up provision remaining at $1,000 for individuals age 50 and older or $7,000 in total. The IRS did increase income ranges for the traditional IRA and Roth IRA contributions.

11. Essential Investing Lessons 

It was an unusual year for investors.  Market volatility in 2020 was unprecedented. At the beginning of 2020, we had low unemployment, economic growth, and low inflation. These favorable conditions supported a long bull market which peaked on February 19th. From its market peak to its bottom, the S&P dropped 33.9% spooked by rising coronavirus cases, and we entered a bear market.

However, aggressive Fed actions and Congress’s moves to provide financial support quickly steadied the financial markets. As a result, the bear market was short-lived as S&P 500 resumed its climb despite continued high unemployment pressuring the economy. With the year virtually over, the S&P 500 rose 14.6% year-to-date.

A Few Lessons Learned In 2020

• Stay the course, don’t bale when the market becomes volatile, looking at the long term horizon.
• Use extra savings to invest in a down market opportunistically.
• New winners–stay-at-home stocks, replaced stocks hurt by social distancing.
• New retail day traders and investors emerged using apps from Robinhood, Charles Schwab, and TD Ameritrade, spending up 65% on average.

These new investors have only seen an upmarket and may be using riskier strategies (eg. options, margin buying, short selling).

We advocate Buy/Hold strategies, rather than short-term trading. We recognize the excitement of day trading and swing trading long term (which are different schemes) discussed here. On the other hand, ‘boring” long investment strategies take advantage of compounding your returns, lower capital gain tax rates if you hold stocks more than a year, and allow you to ride out market volatility.

There are some investing rules we believe you need to know to achieve success such as diversifying and rebalancing your portfolio. The recent rise in the stock market may have resulted in your portfolio being overweight in stocks. That said, with interest rates at historical lows, it may be difficult to find much income in money markets and bond securities at this time. We believe that you should have a mix of high-quality dividend growth stocks and corporate bonds.

12.  Update Your Designated Beneficiaries

Chances are, if you are working, you have some assets. You likely received forms to complete at work, the bank, or online to designate beneficiaries. Beneficiary designations identify who your intended heirs are for most of your assets. These assets represent the non-probate property.  These assets can be efficiently and effectively transferred outside of your last will,  overriding your estate planning documents.

The mistake many people make when designating their loved ones is that their designations may out-of-date or unreasonable. You thought it was cute that your boyfriend selected you (or so he said), so you reciprocated by naming him.

If you don’t review your appointed beneficiaries periodically and at the same firm, you may still have your parents, siblings, and ex-spouse indicated as recipients. Review these forms regularly. You should review your documents after significant life events such as loved ones’ passing, marriage, divorce, and births. Updating your records can usually be done online. We explain more about designated beneficiaries here.

13. Update Your Estate Plans

The pandemic has been a disaster for so many families who lost loved ones. Earlier in 2020, there was an urgency to do your will for the first time or review estate plans. That would be sound advice if you didn’t do so. As mentioned, the distribution of most assets can be for the average person by designating beneficiaries. However, distributed probate assets need to be through a will or a trust.  Probate assets are real estate, cars, and personal possessions such as jewelry, art, antiques, and collections.

Create your estate plan to have control over your asset distribution to your loved ones during your lifetime. Your plan should be as litigation-free as possible, so your loved ones can avoid the often painful and lengthy probate court procedures.

14. Charitable Giving

“We’re in the same storm but not the same boat.”

Unknown Author

Originating from a tweet, This statement was everywhere this year and should not be forgotten. It may have derived from a Damian Barr tweet but it seemed to have disappeared. This year may prove to be significant for charitable giving. The pandemic and protests highlighted the divide between the wealthy or those less fortunate. Those who are lucky should give more this year and any year.

Whatever the cause, charitable giving is a necessity. Others depend on us. As Winston Churchill said, “We make a living by what we get, but we make a life by what we give.”  

15. Be Grateful

Having a grateful attitude is always healthy, especially this year. We became more sensitized to those essential workers who were in harm’s way and grateful to them. The NYC beating of pots and pans became a habitual sign of giving thanks.

Let’s take time to be grateful for our loved ones, friends, colleagues, and those who would appreciate our recognition.  We made it to another year, not an ordinary year. It has been a time when we all shed tears.

Final Thoughts

I will not be unhappy to see this year-end. A dark year will make way for light and optimism in 2021. As my mother often urged us, step with the right foot to have a better time. I told my daughter Alex when she was still a baby that her grandma always said that and was always right. Alex even steps with her right foot (sometimes clumsily) now. Start the year off on the right foot, with financial resolutions to achieve your financial goals.

A happy and healthy New Year’s to you and your family! Thank you for reading!  If you find this of value, do you mind sharing with others as we grow The Cents of Money community? Have a healthy 2021!