A new year offers everyone the opportunity to revisit their financial priorities and document them in a written financial plan. In an effort to keep your own financial life simple and manageable, it is advisable to have a list of basic principles that make up your foundation. The list should be short but effective – the hope is that it will remain relevant, regardless of the market’s performance in 2021. Below, you will find five essential items in your 2021 financial plan.
1. Commit to low – or none – fees
It’s 2021 – access to financial markets has never been easier and more convenient. As a result, the investment is now free or very close to that. It is difficult to think of many valid reasons for keeping funds at a high expense or paying commissions to a broker when free alternatives exist. Try to build a portfolio of high-quality stocks at zero cost using a discount broker, or consider the time-saving approach of maintaining only broad market index funds.
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2. Open a Roth IRA
A Roth IRA – assuming you are within the income limits to contribute – allows you to deposit up to $ 6,000 ($ 7,000 if you are over 50) of money after tax every year and invest without tax forever. You will not pay taxes on any dividends or growth going forward, even when you finally withdraw your money on retirement. If you are above the income limits to contribute directly to a Roth IRA – a good problem to have – you can investigate a secret Roth IRA contribution.
Given the dangers Social Security faces and the uncertain future of defined benefit pension plans, you should plan to take full responsibility for the cost of retirement. The Roth IRA is at the center of taking on that responsibility. It is also important to mention that tax rates in the future are unlikely to remain as low as they are now, providing more reason to pay taxes today and allow money to grow tax-free in the future.
3. Adequate insurance
What has the potential to go wrong will almost certainly go, sooner or later. The start of the year is an ideal time to review all of your insurance coverage – health, auto, home and pet, among others – and determine if you are getting the right amount of coverage at the appropriate amount. In general, you have insurance to protect against disasters. This means that relatively small direct amounts are acceptable if you have high deductible insurance coverage. Just make sure that you are covered in the worst case events.
4. An asset allocation
In more basic terms, an asset allocation is another way of saying “asset split”. For example, an asset allocation of 90/10 generally refers to a portfolio containing 90% shares and 10% bonds. Your asset allocation is a guiding reference that helps you manage financial risk. An 80/20 portfolio, for example, will have greater risk than a 30/70 portfolio. Finding the right ratio of stocks to bonds (and / or other assets, such as real estate) is one of the keys to creating a solid financial plan, but understandably it can take a little time to refine.
5. A general sense of your fiscal situation
Without spending the month of January with your head buried in the federal income tax books, it is at least useful to know some of the basic principles of your fiscal situation. Do you know roughly what track you will be on when the year is over? Do you know if you use the standard or specific deduction? Knowing the answers to these questions, among others, is undoubtedly useful for interpreting your broader financial picture. In addition, your shares in your investment portfolio will ultimately affect your tax return in the following year, so it is useful to know and understand the consequences of your investment shares before executing them.
Know the basics
It is logical that those who will have a financially successful life in 2021 do not need to know all the details about financial planning. But they go know the basics and get it right most of the time. This means having a written plan covering the steps above and, above all, adhering to them – perfection is not the point here. Financial planning is also both art and science, and being a little wrong is a good thing. At the same time, having some direction and knowing the fundamentals will help a lot in the success of your financial life.