A new year offers everyone the opportunity to review 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 core principles that form the basis. The list should be short but effective. The hope is that it will remain relevant regardless of how the market performs in 2021. Below you will find five key aspects of your 2021 financial plan.
1. Commit to low – or no – fees
It’s 2021 – access to financial markets has never been so easy or convenient. As a result, investing is now free or very close to it. It is difficult to think of many valid reasons to keep funds with a high expense ratio or to pay commissions to a broker if there are free alternatives. Try building a portfolio of high quality stocks at no cost by using a discount broker, or consider the time-saving approach of owning only broad market index funds.
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2. Open a Roth IRA
With an Roth IRA – assuming you are within the income limits to contribute – you can invest up to $ 6,000 ($ 7,000 if you are over 50) money after tax each year and invest it tax free forever. You will not pay tax on any dividends or growth going forward, even if you eventually withdraw the money with your retirement. If you are above the income limit to contribute directly to a Roth IRA – a good problem – you can investigate a Roth IRA contribution from behind the door.
Given the dangers facing social security and the uncertain future existence of defined benefit pension plans, you must take full responsibility for the cost of retirement. The Roth IRA is the core of such responsibility. It is also important to mention that tax rates are unlikely to remain as low in the future as they are now, which provides further reason to pay taxes today and allow money to grow tax-free in the future.
Adequate insurance
Whoever has the potential to go wrong will do so sooner or later. The beginning of the year is an ideal time to visit all your insurance cover – including health, car, home and pet – and determine if you are getting the right cover at the right value. Generally, you have an insurance policy to protect against disasters. This means that relatively small amounts out of pocket are acceptable if you have high deductible insurance coverage. Just make sure you will be covered for events in the worst case.
4. An asset allocation
In the most basic terms, an asset allocation is another way of saying ‘asset allocation’. For example, a 90/10 asset allocation usually refers to a portfolio that contains 90% equities and 10% bonds. Your asset allocation is a guideline that helps you manage financial risks. For example, an 80/20 portfolio will have a greater risk than a 30/70 portfolio. Finding the appropriate ratio between stocks and bonds (and / or other assets such as real estate) is one of the keys to drawing up a sound financial plan, but it can understandably take some time to refine.
5. A general understanding of your tax situation
Without spending January with your head in federal income tax books, it is at least helpful to know the basics of your tax situation. Do you know approximately what bracket you will be in when the year is over? Do you know if you use the standard deduction or item? Knowing the answers to these questions, among other things, is undoubtedly helpful in interpreting your broader financial picture. Furthermore, your actions within your investment portfolio will affect your tax return next year, so it is helpful to know and understand the consequences of your investment actions before doing so.
Know the basics
It goes without saying that those who will lead financially successful lives in 2021 do not need to know the last detail of financial planning. But they shall know the basics and get it mostly right. This means that you need to have a written plan that covers the above steps and mostly sticks to them – perfection is not the point here. Financial planning is also just as much an art as science, and it’s good to be a little wrong. At the same time, it will be a great way to make your financial life successful if you have a little direction and know the basics.