The end of the year is a good occasion for reflection. The past 12 months have brought many opportunities to make financial progress – and many potholes and challenges.
Many Americans have had money problems, but others have thrived. Whether your final book for 2021 puts you in the plus or minus column, these practices and behaviors can help move forward, especially if the resumption of pandemic pressures poses new financial hurdles in the new year.
1. Set up this emergency fund
It’s a fairly straightforward piece of advice, but many Americans still haven’t achieved it: build up enough reserve money to deal with an unexpected job or other financial demands.
In one recent survey from the Transamerica Center for Retirement Studies, 43% of those surveyed said they had experienced one or more negative job shakes such as job loss, time off, reduced hours, lower pay or unexpected early retirement. It all adds up to non-work financial strains, ranging from an air conditioner failure or unexpected hospitalization to someone stealing your car’s catalytic converter.
The consequences of not having emergency funds can include the use of expensive, short-term check-cashing services or the need to make premature withdrawals from retirement accounts.
If you’ve ever struggled with saving, you might be better off focusing on getting started and not worrying about how much you’ll end up having to raise. As a 1,000 mile trip starting with this first step, the initial goal here is to start with the first dollar, $ 50, or $ 100 – and keep building it up over time.
Ultimately, you’ll want to muster enough cash to cover at least three months of running expenses, although a six-month reserve would put you on a more solid footing. Your reserve should be placed in a liquid vehicle such as a bank savings account or monetary mutual fund, not an investment account which could trigger transaction fees or taxable gains if you were to access it frequently. .
2. Stay Ahead On Student Loan Debt
The deferral period for federal student loans was supposed to end on January 31, but was recently extended to May 1. Whenever it ends, many borrowers may need to take steps to avoid financial trouble. In one new report from Bankrate.com and BestColleges.com, 69% of borrowers expected to need to take action to pay the monthly payment. Additionally, 75% said resuming payments in February would negatively affect their finances.
Steps borrowers said they need to take include cutting spending (cited by 32%), finding a higher paying primary job (26%), hiring a second job or doing a side job (25%). ), selling personal effects (19%), finding cheaper accommodation (15%) and borrowing elsewhere, for example from family or friends (13%).
The consequences could include having less money to save or less money to spend, as well as an increased difficulty in paying other debts. Only 36% of respondents said they continued to pay off their student loan debts during the deferral period, and many of those people said they paid less than normal.
3. Take advantage of tax incentives
It goes without saying that everyone wants to minimize taxes. But are investors profiting as much as possible from tax-sheltered strategies and vehicles? No.
For reasons ranging from a lack of funds to a lack of knowledge, many people do not use the incentives available. For example, most workers do not cap their contributions to 401 (k) plans in the workplace, and many do not even contribute enough to receive full matches from the employer. When it comes to individual retirement accounts, only about 1 in 10 account holders contribute money in any given year, although many more qualify.
Another example is health savings accounts, typically offered as a workplace benefit. These accounts potentially offer three tax advantages. Contributions are made tax-free, account income grows tax-sheltered, and the money comes out tax-free if used to pay a multitude of qualifying medical expenses.
To use an HSA optimally, account holders should maximize their contributions, invest in equity funds or other growth investments rather than cash, and avoid withdrawing prematurely as much as possible, according to Employee Benefit Research. Institute. But the group maintains that relatively few people follow all three suggestions. He called on employers to more effectively explain the benefits of the HSA so that workers can better enjoy them.
4. Keep things in balance
The past two years have been anything but routine. For equity investors, the start of 2020 was marked by one of the steepest but shortest declines on record, followed by a steady and powerful rebound. Today the market is in trouble again. Now is a good time to focus on sticking to a long-term investment plan, and rebalancing can help.
It’s the idea of making incremental adjustments to keep a wallet roughly in line with how you set it up and want it to stay. Suppose your long term goal is to hold 60% of your assets in stocks / equity funds and the rest in bonds / cash. Now, after a string of mostly strong gains in equities and sluggish results in fixed income, let’s assume the combination is 70-30%.
If so, you can rebalance your positions in stocks and invest the proceeds in bonds or cash to get back to a 60-40% mix. You can also make other rebalancing changes such as the diversion of certain US stocks to foreign markets.
Rebalancing can help prevent your portfolio from becoming too risky after long rallies, and it forces you to buy back after the dips. So it’s a way to buy low and sell high.
There is no set formula for rebalancing – you can do it once a year or after your portfolio composition has misaligned by about five percentage points. This is easier to do in tax-sheltered vehicles such as 401 (k) worktops. In unprotected accounts, rebalancing can trigger taxable gains or losses.
While rebalancing makes sense, many investors are reluctant to do so. When stocks or other assets soar, greed sets in and a lot of people don’t like to take profits. When stocks fall, investors fear committing more money. But since it’s hard to predict market turns, especially with emotions, rebalancing is a discipline that can keep you on track.
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