Main BOS Logo

A new year often begins with a handful of resolutions for increased exercise, eating better, sleeping more, and improving other personal habits. While there may be a great deal of focus on your physical health, what about your financial health? The start of a new year is also a great time to review your finances, make necessary updates to important documents, and reset financial goals. These 10 relatively simple steps will give you a fresh start on your finances for 2021 and beyond.

Close up of businessman or accountant hand holding pencil working on calculator to calculate financial data report, accountancy document and laptop computer at office

1. Review your spending and create a budget.

As laborious as it might sound, creating a budget is one of the best things you can do for your financial health. Budgeting not only gives you conscious control over your money but also helps you articulate your priorities, whether it be buying a home, paying off high-interest loans and credit cards, starting a business, or planning for retirement. Creating a budget also helps you discover expenses for things you don’t actually use or need such as gym memberships, multiple streaming services, insurance for a vehicle you don’t drive, or a storage locker that doesn’t contain anything of value.

Start your 2021 budget by reviewing how you spent your money the previous year. Consider day-to-day expenses like groceries, gasoline, and meals out but also items you pay for only once or twice a year such as car insurance, charitable donations, or gifts. It’s also important to factor in unexpected items such as house or car repairs or an expensive veterinarian or medical bill. Inevitably, budgeting organizes and streamlines your expenses while putting you on track to reach your goals faster.

2. Request your credit report.

Managing your credit is an essential part of your financial well-being, as neglecting your credit profile can potentially limit your ability to get credit to start a business or buy a vacation home. One way to know your current credit position is to check your credit history and credit score at least annually. It helps you understand what your lenders may see (which could impact any major loan application), detect inaccurate information, and prevent against fraud and identity theft. Every consumer is allowed to request one free report each year from each of the three major credit bureaus: Experian, TransUnion, and Equifax. If you really want to stay on top of your credit, you might request a report from one credit agency every four months.

3. Eliminate unnecessary credit cards.

Another benefit of reviewing your credit report is it shows you exactly what credit cards you have and how much credit you have available. It’s easy to stockpile credit cards and forget you have them, especially if you only used them once or twice to obtain discounts or collect points. Review all your cards and determine whether you need them or not. Close the ones you don’t use or the ones with high interest rates. Of course, keep in mind that it’s beneficial to hold onto the cards with the longest history that show you’ve paid off balances over time — and on time. Being strategic about which cards you use and which cards you close can improve your credit score.

4. Consider refinancing your mortgage.

With interest rates near all-time lows, it might make sense to refinance your mortgage to take advantage of the historically low rates. Reducing the interest rate on your loan not only helps you to save money on interest but also can decrease the size of your monthly payment while increasing the rate at which equity is built. How do you know whether it’s a wise financial decision to refinance? Many lenders say it’s worth considering if you can reduce your current rate by 1%­–2% — but it’s important to take into account the cost of refinancing, along with the fees for an appraisal, title search, and filing an application.

5. Review your insurance policies.

Do your property and casualty insurance policies provide you with the appropriate coverage? Review your insurance policies annually as asset values and liability exposure can change significantly from year to year. For example, let’s say you completed a major renovation on your home, substantially increasing its value. It’s likely you’ll need to adjust your home coverage to reflect the added value. Marriage, divorce, launching a new business, paying off a mortgage, starting a family, and death of an immediate family member can all impact your coverage needs and annual premiums. Taking time to review your policies annually can also alert you to where you might have gaps in coverage and where you might want to consider supplemental coverage.

6. Maximize your retirement plan contributions.

Are you saving for retirement through an employer-sponsored 401(k) plan? If so, are you maximizing your contributions? Contribution limits for 2021 are $19,500 for individuals younger than age 50. Those 50 and older can contribute an additional $6,500 per year in catch-up contributions for a total of $26,000. If you can afford it, maxing out your annual contribution is a tax-friendly way to build up your retirement assets. Additionally, if your employer offers a matching program, be sure to contribute at least up to the limit to take advantage of the free money.

If you’re a high earner who has additional money to contribute to retirement savings, you might also consider a mega backdoor Roth conversion — if your employer plan allows for it. In this scenario, additional after-tax contributions of up to $38,500 can be made to your 401(k) and then converted to a Roth 401(k) where the money will grow tax-free. This is a good option for people whose incomes exceed the limits to contribute to a standard Roth IRA but who want to save after-tax dollars toward retirement.

7. Build the value of your health savings account.

Healthcare in the U.S. is expensive, and costs continue to rise every year. Even if you’re insured, health insurance plans don’t always cover long-term costs. To save money, consider opening a health savings account (HSA), which allows you to contribute tax-free dollars for future healthcare expenses. The money in the account can be invested in mutual funds and grow tax-deferred, and you don’t have to pay taxes on any distributions used to pay for eligible medical expenses. If you already have an HSA, consider maximizing your contributions to build value.

In 2021, the allowed maximum annual contribution to an HSA increased to $3,600 for individuals and $7,200 for families. Plus, if you’re 55 or older, you’re allowed to contribute an additional $1,000 per year. If your finances allow, consider paying current medical bills out of pocket so you can continue to invest in the HSA and accumulate savings for future medical expenses, including Medicare payments.

8. Understand your employer’s equity compensation.

Do you have any equity compensation such as stock options or restricted stock units that is scheduled to vest in 2021? Vested equity can significantly impact your finances and tax obligations throughout the year, though it varies depending on the type of equity award and how it is structured. Additionally, substantial equity awards can suddenly put you in a position of concentrated wealth.

Talk to your wealth advisor about strategies for reducing your tax burden and how to best diversify your portfolio to reduce any concentration risk. You might consider using your new wealth to max out your 401(k) since contributions are tax-free until withdrawal and assets grow tax-deferred or holding your equity award for at least one year to take advantage of lower long-term capital gains tax rates.

9. Make sure your estate planning documents are in order.

Are your healthcare directives and estate planning documents up to date? The uncertainty of last year highlights the importance of knowing exactly how you want your assets to be distributed in the event of your death. Often our wishes change as life changes so review whether you have the appropriate documents in place. For example, consider whether you need a financial power of attorney, which grants a trusted agent the authority to act on your behalf in all financial matters. Or, if you have children under the age of 18, establish legal guardianship for your children in the event you are unable to care for them or you die unexpectedly. Not only does estate planning articulate your wishes it can also help reduce taxes on inherited property as well as minimize the potential for family strife or legal battles over your assets.

10. Schedule time to talk to your wealth advisor.

Many people experienced major transitions in 2020 due to the pandemic, whether it was losing or changing jobs or selling or purchasing a new home. Changes in your financial situation may require you to shift your financial objectives. Your wealth manager is an important ally in managing your financial well-being and ensuring you’re on target for achieving your long-term financial goals. They help you assess your current situation, prepare for potential changes in gift and estate tax laws, understand your equity awards, rebalance your portfolio, and update your tax strategy. Schedule time to connect with your wealth advisor and create a plan for the best way to move forward in 2021.

Filed under: Financial Planning

Share:
back to all posts
SUBSCRIBE TO OUR NEWSLETTER

Get B|O|S Perspectives
in Your Inbox