Time for a tune-up: 5 financial lessons from 'the bad year' to use in 2021
As Kiplinger summarized it, “the past year delivered multiple gut punches." But the lessons learned can be used in 2021.
If nothing else, 2020 served as a stress test for personal finances. As Kiplinger colorfully summarized it, “the past year delivered multiple gut punches: a pandemic, an economic downturn, a volatile stock market and a vituperative election.”
However, Kiplinger also identified several valuable lessons that can serve as a financial tune-up for 2021
Have an emergency fund. The standard rule of thumb is to save enough to cover basic living expenses for three to six months, but that may no longer be sufficient, said Liz Windisch, a certified financial planner with Aspen Wealth Management in Denver. “When entire industries disappear overnight, it can take much longer than that to find new work or train for a new career,” she said.
The amount you need to save will depend on your personal circumstances. Three to six months of expenses may be enough if you’re in a dual-income household. If you are the sole wage earner, you may need to save up to 12 months of expenses, or more.
Have a Plan B. The best-laid plans can be derailed by events beyond your control. Andrew Marshall, a CFP in Carlsbad, Calif., said he has heard from several people who are close to retirement age who fear that they’ll be laid off and won’t ever be able to find another job that pays what they’re earning now.
“The lesson from these situations is that you should be prepared for alternative scenarios in case you are not able to work right up until your desired retirement date,” Marshall said.
Protect your loved ones — and yourself. The pandemic is a painful reminder that even healthy people get sick and sometimes die. Make sure you have enough life insurance to cover your dependents in the event that something happens to you, and that your estate plan is up to date. If you’re the sole provider, you also may want to explore disability insurance.
Take advantage of opportunities. Even in dark times, there are glimmers of light. With interest rates at record lows, you may be able to refinance your mortgage or private student loans and lower your monthly payments.
This also is a good time to review your budget. If the pandemic has forced you to cut back on spending, consider whether you really need things you previously considered must-haves, said Jason Williams, a CFP in McLean, Va.
“If you can continue without them, you may have an opportunity for more savings and, ultimately, financial flexibility going forward,” he said.
Gauge your investing tolerance. If the stock market’s wild swings in 2020 caused you to make investment decisions you later regretted, it’s time to take a hard look at your portfolio. “If it was completely overwhelming for you or you lost sleep at night because of it, it may be time to consider making your investments more conservative,” said Haley Tolitsky, a CFP in Carolina Beach, N.C.
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