Build a Better Financial Plan in 2021

By Marc Wagner

The start of a new year can be a great time to focus on what’s going on with your money and to make improvements where needed. With a solid plan—one with steps you’ll stick to—you can get your financial house in order. Here are four resolutions to help you set and reach your goals now and in the future.

Resolution #1: Create a Spending and Savings Plan You Can Live With

No matter what your financial goals might be—paying down debt, saving for retirement, or just getting a grip on your spending—a sound budget strategy could help get you there. Here are some ways to get started:

  • Track your spending. Even if you’re staying within predetermined limits on the big stuff in your budget, smaller expenses may be slipping through the cracks. To get an accurate picture of where your money is going, consider tracking how much you’re spending every day for a month with a spread sheet or budgeting app.
  • Calculate your cash flow. Once you’re clear on the money that’s going out every month, add up how much is coming in after taxes—from your salary to any side gigs or rental income, bonuses, etc. If you’re spending more than you’re making, or cutting it closer than you’d like, something may have to go.
  • Create your budget. Start with the necessary monthly expenses (housing, transportation, utilities, food) and work your way down from there. The goal is to make sure all the bills are getting paid and you’re still able to put money away.
  • Don’t forget your savings! If your goal is to build an emergency fund, most wealth advisors suggest having enough set aside to cover three to six months’ worth of living expenses. If you’re saving for a big-ticket item like a home renovation, you may want to look at relatively liquid and safe investments, such as a high-yield savings account, short-term CDs or some other investment/savings tool that works with your timeline. And consider making retirement a priority by automatically saving as much as possible each month. (A good rule of thumb is to invest at least 10% of your pre-tax income—and even more if you’re a late-starter.)
  • Already retired? You still need a plan. A wealth advisor who is a retirement planning specialist can help you design a balanced portfolio to cover your income and spending needs now and through what could be decades in retirement.

Resolution #2: Deal with Debt

Debt can be a useful tool for reaching life’s big goals. It may be necessary, for example, to take out student loans to get the education you need for advancement in your career. And few people could afford to buy a home without a mortgage. But it’s important to be deliberate when taking on any debt. Here are some things to consider:

  • Keep your total debt load under control. Just because you qualify for a large home or car loan, or for a slew of credit cards, doesn’t mean you should take your borrowing to the limit. Use your budget to help determine what you can really afford.
  • Try to avoid expensive debt. High-interest credit card debt can become a trap if you consistently carry forward a balance. Always make at least the minimum payment to avoid penalties and fees. If you’re feeling overwhelmed, consider paying a little more each month toward the card with the highest interest rate, knocking down the debt a little at a time until you have all your balances under control. Or you may want to look at using a low-interest loan to consolidate your debt into one more manageable monthly payment.

Resolution #3: Maximize Your Portfolio

Having a 401(k) plan at work can be a useful way to save for retirement—but it isn’t the same as having a comprehensive portfolio plan that can help you:

  • Pay attention to your overall investment mix. Few wealth advisors would suggest checking on your investments every day. But it makes sense to know what you have in your portfolio—stocks, bonds, cash, etc.—and why you have it. A wealth advisor can help you make diversified choices based on your goals, risk preference, and time horizon. You should evaluate your portfolio with your advisor at least once a year to be sure you’re still on target.
  • Stay mindful of tax consequences. 401(k)s and similar plans use tax breaks and employer contributions to incentivize saving. And that’s a good thing. But savers often forget that when they withdraw the money, it’s taxed as ordinary income. (And if they need the money before age 59½, they’ll likely pay an early withdrawal penalty as well.) Before going all in on a tax-deferred plan, you may want to look at the best ways to use investments in both tax-advantaged and taxable accounts.

Resolution #4: Always Be Prepared

Whether you’re just starting out on your own or enjoying your retirement, it’s important to protect what you have—and those you love. Here are two important steps you can take:

  • Consider what types of insurance you might need to protect yourself, your family and your assets. It can be tempting to forgo some types of insurance and hope for the best. But hope isn’t a sound financial strategy. If you become seriously ill or you’re injured, and you don’t have health insurance, the costs could be devastating. The same goes for insuring your life, your car, your home or your business. Why not take time this year to review all your policies to make sure they still fit your needs? It’s usually best to consult with a professional to get more specific advice on how much and what type of coverage to consider.
  • Protect your estate. The new year is a good time to update your beneficiary designations to make sure your life insurance and other assets transfer to those you love quickly, smoothly, and with minimum taxes. Make sure a trusted friend or family member knows where your important documents are located. And even if your estate is fairly straightforward, consider making—or updating—your will. If your estate is more complex, ask a qualified wealth advisor about the best strategies for preserving your legacy.

Purposeful planning can help you take care of your current financial needs and prepare for financial stability in the future. Ready to get your financial house in order this new year? We can help. Talk with an Octavia wealth advisor today.