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
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
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
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.
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