2020 has been a year of wild extremes. Your year-end financial resolutions might have taken a beating, or they might have found extremely radical success.
Resolved in 2020 to spend less? Quarantine and lockdown may have made your shopping and impulsive purchases harder to accomplish, and savings may have come naturally, just not the way you planned.
Resolved in 2020 to save more? Things went fine for a while, but then work slowdowns, medical hardships and a sudden influx of stay-at-home family members in need of telecommuting gear to accomplish their work and study remotely during a pandemic may have affected your emergency fund.
However you fared, the events of the last 12 months were certainly unprecedented, and the effect they will have on your finances might be felt for years to come.
So with the benefit of hindsight, why not take a look at a few, simple resolutions you can make this year in light of everything that has happened so far, and then seek to take advantage of this knowledge in tailoring your fiscal priorities for the future. The promise of reward inherent in 2021 has only just begun, and the next 12 months could very well depend on the steps you take today.
Five Financial Planning Resolutions for 2021
1. Resolve in 2021 to Follow Spending Plans
When you make a monthly budget, you take into account your fixed income and your necessities first. For most earners, that includes mortgage or rent, utilities, groceries and a savings fund, and the simple rule is that you cannot spend any more. You just subtract necessities from income and forbid yourself to overspend the remainder. Seen through a contrarian lens, a budget is a set of financial rules you impose on yourself to prevent future hardship.
A spending plan turns all this around, effectively separating your income into “buckets” and then allowing you to spend as you see fit. And “buckets” sound a lot less punitive than rules.
Into the “necessity bucket” fall all the unavoidable expenses: housing, bills, insurance, and savings. The other spending buckets you create become swirling pools of liquidity; cash you can choose to spend any way you need.
However, the creation of a spending plan is not a license to splurge and avoid consequences. Instead, dividing your money into spending buckets helps you budget without restrictive rules. It is a great strategy for savers who don’t like being told what to do, even when they know it’s good for them.
2. Resolve in 2021 to Start an Emergency Fund
You were one of the lucky ones if you did not have to dip into your emergency fund last year. But if you did not have an emergency fund, you weren’t alone.
A survey by Bankrate.com in June showed that while 20 percent of Americans had no idea what their top regret was, financially speaking, amid the Coronavirus Crisis, one in four certainly regretted not having enough emergency savings to deal with all the unpredictability.
So how do you create an emergency fund? In general, experts recommend putting away three to six months of living expenses in a dedicated high-yield savings account. But after the tumult of 2020, perhaps the collective thinking on emergency savings will expand to nine months of funds instead.
In any case, the priorities in an emergency fund generally remain the same:
- Evaluate your spending and look for areas where you can save.
- Set a savings goal.
- Set up automatic contributions.
- Try to increase your contributions over time.
3. Resolve in 2021 to Refinance Your Mortgage or Pay Off Student Loans
The general rule of thumb used by mortgage loan specialists who advise their clients on whether to take the plunge is that if the current interest rate is at least 1% lower than your existing mortgage, it might profit you to look at refinancing to the lower rate.
If your current mortgage meets these criteria, there are a couple more things to look at first to calculate whether refinancing will in fact save you money in the long term.
- Refinancing costs 2% to 5% of a loan’s principal. To recoup that cost with the savings generated by a lower interest rate or a shorter term will take years.
- Refinancing only makes sense if it lowers your monthly payments by replacing a high-interest rate with a lower one.
You’ll be able to calculate plenty of options in our Online Mortgage Loan Center.
The fiscal advantages of paying off student loans right now are less a matter of low-interest rates and more about provisions in the US Government’s CARES Act. It temporarily set interest rates at zero and then suspended payments on all federal student loans.
More than 28 million borrowers are currently taking advantage of the temporary stop, while another 4.6 million have continued to make their regularly scheduled payments.
So if you have any of the four available federal student loans in your portfolio, your 2020 payments were suspended by an Executive Order, which was extended twice and is now set to expire on January 31st. If you continued to make payments, then your money went straight to paying down the loan principal, as there was no overall debt increase once interest rates were zeroed out.
However, private student loans enjoy no such payment suspension. If you still hold this kind of college debt in 2021, maybe your best option for relief is to consolidate into new, low-interest loans. DECU offers best-in-market rates and offers personal signature loans for members. Best of all, you can apply and make consultations entirely online.
4. Resolve in 2021 to Pay Down Credit Card Debt
Outstanding credit card debt in the United States fell in 2020 for the first time in eight years to $756 billion. So it seems quite a few people have already started to exercise the benefits of this particular resolution.
In normal times a credit card works as a high-interest loan for consumer purchases that only begins to charge a fee once a full repayment window is exceeded. If you pay off your jet ski or your groceries at the end of the month, then all you pay for is the cost of the item itself.
But data from Experian, who reported their industry-wide survey of consumer credit data in late November, show that in a time of extreme economic uncertainty, credit card utilization levels were lower in 2020 than a decade ago. In fact, delinquencies had dropped by a third, and average balances were 14 percent lower than in 2019 across the board.
And as these times are far from normal, then perhaps now is the time to consider a debt consolidation loan at DECU that helps you streamline your credit card payments and manage your installments. Check our Debt Consolidation Calculator here to see what works for you.
5. Resolve in 2021 to Get Educated
Financial education is a lifelong process. From your first piggy bank to your retirement planning, every time you set aside some money, you are making plans for the future and counting on things to work out in your favor.
Smart money planning can improve your odds at success every step of the way, and DECU has just the thing to get you to the front and keep you there.
For our members, we offer free online financial wellness education modules, each created and published in short, instructional videos in the following categories:
- Building Financial Capability
- Financial Foundations
- Investing in Your Future
- Owning a Home
- Preparing for Your Retirement
In DECU’s Financial Wellness modules, members learn how their financial choices and behaviors can influence income and employment, budgeting, consumer skills, managing credit and debt, and financing higher education and insurance.
It is all part of DECU’s commitment to our members and their families’ financial wellbeing. In 2021 we are here to make sure you don’t fall through the cracks on the way to 2022.