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 fundamentals that form its 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 are five must-haves in your 2021 financial plan.
1. Commit to low or no fees
It’s 2021 – accessing financial markets has never been easier and more convenient. As a result, the investment is now free or very close. It’s hard to think of many good reasons to hold high expense ratio funds or pay commissions to a broker when there are free alternatives. Try building a high-quality stock portfolio at zero cost by using a discount broker, or consider the time-saving approach of holding only broad index funds.
2. Open a Roth IRA
A Roth IRA—assuming you meet income limits for contributing—allows you to deposit up to $6,000 ($7,000 if you’re over 50) of after-tax money each year and invest it tax-free, forever. You won’t pay any dividend or growth tax in the future, even when you eventually withdraw the money in retirement. If you’re above the income limits to contribute directly to a Roth IRA—a good problem to have—you can investigate a stolen Roth IRA contribution.
Given the perils facing Social Security and the uncertain future existence of defined benefit pension plans, you should plan to take full responsibility for the cost of retirement. The Roth IRA is at the heart of this accountability. It’s also worth mentioning that tax rates in the future are unlikely to stay as low as they are now, which provides yet another reason to pay taxes today and allow the money to flow. grow tax-free in the future.
3. Adequate insurance
What has the potential to go wrong almost certainly will, sooner or later. The start of the year is a great time to review all of your insurance coverage — health, auto, home, and pets, among others — and determine if you’re receiving the right amount of coverage at the appropriate value. Generally speaking, you have insurance to protect you against disasters. This means that relatively low payouts are acceptable if you have high deductible insurance coverage. Just make sure you’ll be covered in the worst case scenario.
4. Asset allocation
In the most basic terms, an asset allocation is another way of saying “asset split”. For example, a 90/10 asset allocation generally refers to a portfolio containing 90% stocks and 10% bonds. Your asset allocation is a benchmark that helps you manage financial risk. An 80/20 portfolio, for example, will be riskier 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 it’s understandable that it takes some time to refine it.
5. A general idea of your tax situation
Without spending January with your head buried in the federal income tax books, it’s at least helpful to know some of the basics of your tax situation. Do you know approximately what bracket you will be in once the year is over? Do you know if you use the standard deduction or detail? Knowing the answers to these and other questions is undoubtedly helpful in interpreting your broader financial situation. Additionally, your actions within your investment portfolio will ultimately affect your tax return the following year, so it is useful to know and understand the consequences of your investment actions before taking them.
Know the basics
Of course, those who will lead a financially successful life in 2021 do not need to know all the details of financial planning. But they will be know the basics and master them for the most part. This means having a written plan covering the above steps and mostly sticking to it – perfection is not the goal here. Financial planning is as much an art as it is a science, and getting a little wrong is fine. At the same time, having some direction and knowing the fundamentals will go a long way in making your financial life a success.