Each year comes bearing new challenges to address, obstacles to overcome, and opportunities to seize. Understanding your financial plan puts you in a better position to navigate whatever the future has in store for you in 2021 and beyond.
Your financial goals, retirement plans, savings balances, and budget may feel overwhelming, but they don’t need to be. These are crucial pieces of setting yourself up for a financially stable future, so you shouldn’t kick the can down the road.
Challenge yourself to take a new look at your financial situation and let’s get your plans back on target in 2021. Take a look at the 7 Tips for Resetting Your Goals and Retirement Plans outlined below:
1) Create a Budget
Assemble your 2020 spending and credit card history in order to get a sense of where your money went last year. You may be shocked to discover that you spent far more than you thought on discretionary items such as takeout, clothing, online shopping, etc. Ask yourself if your spending properly reflects your priorities and values. By starting early, you have the ability to set maximum thresholds you wish to allocate funds towards discretionary purchases this year. Budgeting is about creating goals – challenge yourself to make goals and stick to them in 2021!
2) Give Yourself an Allowance
Rather than spending the entirety of your checking and savings account balances each month, consider giving yourself a monthly allowance. An allowance empowers you to proactively allocate your resources and stick to your budget. Capping your monthly spending can help you live within your means today, and encourages you to save and invest for future goals.
3) Adjust Workplace Retirement Plan Contributions
At a minimum, consider contributing the full employer matching contribution to your workplace retirement plan. If you aren’t sure what percentage your employer matches, you should ask as soon as possible. An employer match will contribute the same amount of funding as you, which means this is free money that shouldn't be left on the table. If your cash flow allows for it, consider max funding your workplace retirement plans. The 401k/403b contribution limit in 2021 is $19,500 (plus an additional $6,500 for those over age 50). If you happen to be covered by a different retirement plan (i.e. Simple IRA or SEP IRA), the contribution limits differ.
4) Invest in a Roth IRA
Roth IRAs serve as great retirement plans, especially for young investors. With a Roth IRA, you contribute after-tax money that grows tax-free. As long as you take your distributions more than 5-years after you established the account AND after age 59½, everything (including the growth portion) is eligible for tax-free withdrawal. In order to contribute, your Adjusted Gross Income needs to be less than $125,000 (single) or $198,000 (married filing joint). Check with your financial advisor or tax professional to determine whether or not you are eligible to make a contribution. You have until April 15th to make a contribution for the previous tax year.
5) Invest in a Brokerage Account
Funding a non-qualified account allows you to set aside money in a tax-efficient way, creating growth potential and access to liquidity for short, intermediate, and long-term goals. Diversification does not solely come in the form of asset allocation, but also comes from how investors allocate their funds between different types of accounts. Having access to taxable, tax-free, and tax-deferred investment accounts comprise an essential long-term planning consideration for all investors.
6) Contribute to a 529 College Savings Plan
If you have children or grandchildren, consider making contributions into 529 college savings plans. Distributions can be taken tax-free as long as the money is used for qualified higher education expenses. Young beneficiaries will reap the rewards of compound growth inside their 529 plan, so the earlier you start these accounts, the better.
7) Fund Your Health Savings AccouNt
If you have coverage under a high-deductible health savings plan, consider making contributions to your Health Savings Account (HSA). An HSA gives you the ability to cover sky-high medical costs by making pre-tax contributions that will lower your tax liability today. Withdrawals from an HSA are tax-free as long as you use the funds to pay for qualified medical expenses.
At Birchwood Financial Partners, we work with our clients to help them feel empowered and knowledgeable about the financial decisions they make each and every day and how those decisions affect their financial stability and future financial planning.