17 January 2021

As Painful 2020 Ends, It's Time to Set Yourself up for Financial Success in 2021

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If you're excited to see the end of 2020, you're not alone. But don't be in too much of a hurry, because these last few weeks offer a great opportunity to set your financial life on the right path as 2021 begins.

In many respects, the last 12 months have been financially painful for tens of millions of Americans. But as the economy begins to recover, it's vital to resist the urge to let the pain linger and paralyze you from restrengthening your own position. It's important you begin to map out next year and consider its overall impact on your financial future.

Always start with topping-off tax-advantaged accounts for the current tax year (2020).

This means stuffing some additional funds in employer-sponsored retirement plan, individual retirement accounts (whether traditional or Roth), 529 college savings plans (which could have state tax benefits depending on what state you live in), and health savings accounts.

Boost 401(k)s, lower taxes 

Your 2021 becomes instantly better when you owe less in taxes for 2020 than you thought. This will result in either a lower tax payment come April, or a more substantial tax refund. Talk about an instant boost in cash. If you play your cards right, your end-of-the-year tax strategy should always provide dual victories (increased long-term savings and decreased tax obligations).

Depending on the benefits elections you likely made in late fall, your January net pay could look much different than it did this month. Simply put, your monthly health insurance premium increase, assuming your premiums went up, will impact your take-home pay. And whether you have a pay increase in the new year, you should take advantage of your net pay change to further your financial stability even more. In other words, if you're going to be forced to reconfigure your budget, go ahead and increase your retirement plan contribution by a percent or two while you're at it. You'll hardly notice the difference.

For example, let's say you earn $50,000 annually and you want to increase your retirement plan contribution by 1%. If you get paid bi-weekly, increasing your contribution would decrease your gross pay by only $19 per pay period, and the net decrease would be even less than that, depending on your tax rate. If this doesn't scare you, increase your contribution by 2%. Again, not only will this help create more long-term stability, but it will decrease your tax liabilities as well (if you're making pre-tax contributions).

You don't have to make New Year's resolutions to make the beginning of a new year matter.

I don't quite believe in resolutions, but if you feel like they give you that fresh-start feeling, then do it. However, the real goal is to create sustainable, positive momentum.

The problem with 2020 was that many people had a devastating March, and then they scrambled deep into the fall to regain their financial footing. If that footing has returned, you should absolutely be intentional about swinging the momentum back the other way.

Both good fortune and bad fortune can happen to you randomly, but good financial planning can ensure your path forward is more positive than negative.

Invest the time here in the final weeks of 2020, and you'll reap the rewards for years to come.

Click here for the original article.

 

 

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