2020 was a year most of us would rather forget. When we rang in the new year, no one expected natural disasters of historic proportion, the COVID-19 pandemic or the residual economic hardships that followed. Thankfully, the first year of the new decade is officially behind us. How can you better prepare your finances for whatever surprises 2021 might bring? Our six suggestions are below.
#1: Establish an Emergency Fund
If you look at the bright side, 2020 taught us a very important lesson; prepare for the unexpected. Establishing an emergency fund is essential to ensure you will be financially ready for medical emergencies, house repairs, car maintenance, etc.
The point of an emergency fund is to have money on hand to help cover the costs that are not part of your normal monthly expenses. If you don’t have an emergency fund, any unexpected event could cause a significant setback. It’s important to put aside what you can every month. The amount won’t always be the same, but every little bit helps.
The Consumer Finance Protection Bureau recommends a few simple strategies for establishing and adding to your emergency fund:1
- Create a savings habit
- Manage your cash flow
- Take advantage of any additional money coming in
- Automate your savings
Create a Savings Habit
Try to be consistent when putting away money. It’s easy to find an excuse to not save, but making consistent deposits will soon turn saving into a habit. To turn your ability to save money into a regular habit, you could try:
- Setting a specific goal for yourself and your savings
- Creating a system for making consistent contributions
- Monitoring your progress
- Rewarding yourself for meeting your goals (within reason) before setting new ones
Manage your Cash Flow
Keep track of how and when money is coming in, as well as how much is going out. This will help you stay in control and keep yourself accountable.
Take Advantage of Additional Money Coming In
If you get a bonus at work or receive a monetary gift, consider putting that extra cash towards your emergency savings. This is a great time to either get ahead or catch up if you were not able to contribute as much as you would have liked another month. While it may feel good to buy yourself something nice, it won’t feel better than the security of having funds available during an emergency.
Automate Your Savings
Set up automatic transfers through your bank, which will put money into your savings account automatically each month. Choose a reasonable amount, pick a date each month and adjust as you need throughout the year.
#2: Save More Money
All your life you’ve heard the phrase, “Every little bit counts,” - but it couldn’t be more true. If you enjoy grabbing a coffee before work, start making a pot at home. If you go out to eat twice a week, cut down to once a week or every other week. Many of us are continuing to work from home, which cuts down on the need to buy as many clothes for work, which is another way to save. Make a game of it and challenge yourself to come up with creative ways to save a little bit here and there.
While it’s an adjustment, these small “sacrifices” can yield significant results over time. Say you skip eating out one day a week, saving you around $20 on average. In the span of a year, that $20 becomes $1,040.
#3: Set Some Goals
What do you want to accomplish in the upcoming months? Is there a specific amount you’d like to have tucked away in your savings account? Maybe you’re focused on getting a big promotion at work? Whatever it may be, set a specific (and attainable) goal that you can focus on working toward in 2021. Sometimes just spending a few minutes to really think about it will feel to achieve the goal is all the push we need to get started.
In a world where we’re all recovering from economic and environmental hurdles, progress is worth celebrating - and definitely worth pursuing.
#4: Start Automating
Automation is a very effective tool when it comes to working toward and achieving your financial goals. It also takes tedious tasks off your plate so you can focus on other things.
Some things to consider automating include:
- Bill paying
- Loans (Your mortgage, student loans, car payments, etc.)
Automating as much of your financial life as you can takes the human connection and decision-making out of the picture. It cuts down on late payments, and it can make contributing to your savings account hassle-free.
#5: Remember Your Retirement Savings
In terms of saving, 2020 had a different impact for everyone. Many lost their jobs, which disrupted their ability to grow their retirement savings. For others, 2020 was an opportunity to cut costs, since big expenses like vacations, concerts, weekend trips, etc. were all canceled.
Once you have enough stashed away in your emergency fund, 2021 may be the year to focus on padding your savings for retirement. If you have a 401(k), 403(b) or IRA, ask your financial advisor if you’re contributing enough or if you should be increasing your monthly contribution. If you haven’t reached your contribution limits by December, think about making additional contributions - maybe from an end-of-year bonus or other additional income.
#6: Watch Out For Identity Theft
There has been a rise in identity theft during the coronavirus pandemic, meaning you need to remain vigilant in protecting your finances throughout 2021.
Some ways to avoid being a victim of fraud include:
- Asking questions before sharing personal information with others
- Creating complex passwords and changing them often
- Keeping track of your mail
- Reviewing all bank and credit card statements regularly
- Monitoring your credit reports
We all are hoping 2021 is a better year, however, it’s always best to be prepared especially when it comes to your finances. These six tips should help with the transition into a new year - hopefully, all of us can breathe a little easier, save for the future and have some fun.