What Personal Financial Planning Looks Like for 2021
If there's one lesson 2020 drove home, it's that personal financial planning is more important than ever. The pandemic shook the country from a public health perspective, but it also provided a crash course in economic volatility. As the unemployment rate skyrocketed and people worried that their savings and investments were going to plummet, the value of knowing how to make a financial plan became crystal clear.
As the new year begins, it's a great time to consider what ups and downs may still lie ahead and how you can prepare for them.
What to expect in 2021
News of a potential vaccine hints at life returning to normal at some point in 2021. But a vaccine likely won't be available broadly until at least the second half of the year, which means that continued surges could spell continued economic volatility. With unemployment rates up and uncertainty surrounding future stay-at-home orders, you can expect the economic recovery to remain slow through the winter months.
All of the uncertainty can be frustrating, and even frightening. Fortunately, there are things you can do to take control of your finances regardless of what's happening in the broader economy. Being proactive about your personal financial planning goals will help you maintain stability even if there is another downturn.
How to prepare for the new year
When thinking about how to make a financial plan for 2021, it's a good idea to prioritize conservative spending. In a time of uncertainty, you want to plan for upheaval even as you hope for the best. Think about what you'd need in any given worst-case scenario. For instance, what expenses still have to be paid? What events are coming up, and how much do you need to save for them? Thinking about your key goals and needs can keep you motivated to stick with your plan. Here are three strategies that can help in that effort.
1 Build an emergency fund
Ideally, you'll always have 3 to 6 months' worth of expenses in a savings account in case you lose your job or cannot work for an extended period of time. If you don't already have an emergency savings fund, there's no better time to start. Don't worry if you can't fully fund it overnight. Set aside what you can, and make a plan to contribute to the account each month or each time you get paid. Any amount you save will help if there's another downturn.
2 Tighten your budget
The end of the year is a great opportunity to review your expenses and spending habits. Make a list of your monthly bills and essential spending, such as groceries and utilities. Next, add on the nice-to-have items, like take-out food, streaming services and entertainment. See if you can remove a few items from your budget or at least cap the amount you spend on non-essentials. Then, you can put the money you save into your emergency fund, and you'll have it to draw on if your income is temporarily reduced.
3 Plan for work expenses
Many companies will continue to have employees work from home in 2021. If your home now doubles as your office, don't forget to budget for work essentials, such as a webcam or a comfortable chair. You may also want to increase your internet service plan to accommodate your additional bandwidth needs. It's important to build those expenses into the budget so you can continue working seamlessly despite the pandemic.
Maintaining a cautious mindset
After so many months spent social distancing, the new year may feel like a good time to splurge a bit, especially if you're already saving regularly. But the money you put into hosting a socially distant birthday party or planning a getaway may serve you better in a savings or investment account.
With all this in mind, you'll want to consult with a trusted advisor before making any investment decisions. It's important to understand your risk tolerance and continue building toward your long-term goals if you can.
Now may not be the right time for you to be aggressive in your saving and investment strategies, depending on your income and job circumstances. But taking small steps toward your big-picture goals will keep you moving in the right direction, even amid a pandemic.
A few financial insights for your life
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.