One of the most tumultuous years in recent memory has come to a close, ushering in another New Year. While many of us are still reflecting on what the past year held, with a new year comes time to set goals and plan for the future – including how to best manage our money.
As you consider your resolutions for 2021, keep in mind these recommendations for starting the year off on the right financial foot.
Reflect on – and revise – your budget
Before embarking on a new year of saving, spending and investing, take time to review one of the backbones of a strong financial plan – your budget. While 2020 may represent an atypical year of financial decision-making for many of us, taking a look at where your money went will support the creation of a more informed, strategic budget moving into 2021.
Consider breaking the past year’s spending into categories (like groceries, household items and entertainment) to see how much money you spent on expenses, both necessary and unnecessary. With this exercise, you may find there are opportunities to either cut back on or redirect your spending.
If you do find you’ve minimized costs over the past year, perhaps due to reduced spending on travel, entertainment, gas, etc., this is also a good time to evaluate whether this money can be dedicated to building up your emergency fund, paying off debt or investing.
Strategize your debt repayment
It’s not uncommon for people to identify overcoming debt as a financial resolution in the new year. And if this is top of mind for you, you’ll want to find the right strategy.
Debt avalanche and debt snowball are two standard approaches for minimizing debt. With the former, you’ll focus on paying off debt with the highest interest rates first. With the latter, you’ll start by paying off debt with the smallest balances. While both strategies have pros and cons, evaluate which fits best within your current financial picture as well as with your short- and long-term goals.
Identify opportunities for growth
If retirement planning and long-term financial growth are priorities coming into the new year, there are a few ways to help kick-start this. The first is reviewing your investments to ensure your portfolio is properly allocated, with an investment mix that reflects and complements your financial goals.
As part of this, take a look at your current 401(k) or Roth IRA contributions. If your income has remained stable – or even increased – throughout the past year, consider increasing your contributions, even by one percent. This seemingly small uptick can make a big difference over time through compound interest.
Update your financial plan with clear goals
You want your plan to reflect where you are today, to set you on the right course toward where you want to be in the future. And if you’re among the 20% of Americans who are revisiting their financial plans to make significant adjustments as a result of the pandemic, goal-setting is a good place to start.
Have plans to purchase a home this year? Thinking of expanding your business? Planning to grow your family? These types of life-altering goals are important to integrate into your updated plan, alongside any necessary adjustments based on any life changes or milestones from the past year.
If you’re struggling with where to begin when looking ahead, a financial advisor can guide you through the processes above so you can step into 2021 with financial confidence toward whatever the new year may bring.
Mark Wise is president and CEO of Wise Financial, a Northwestern Mutual office based in Indianapolis.