Wow, what a year it’s been! I’m glad to have 2020 in the rear-view mirror.
It’s hard to believe on Monday, March 9 the Dow Jones Industrial Average (DJIA) had the largest point drop in history. It was followed by two more record-setting point drops on March 12 and March 16.
Then somehow the markets ended the year at an all-time high and those history drawdowns seem like a distant memory, unless you panicked and sold during those scary few days in March.
But, now we’re facing another year and 2021 is already off to a volatile start – who would have guessed we would have a violent group of insurrectionist storm the capitol?
We have no idea what the rest of 2021 holds, but we can take proactive steps to prepare our finances for whatever the future holds.
Here are six suggestions to take control of your finances in the coming year and beyond:
- Evaluate Your Portfolio. If you have a well-diversified portfolio in place, guided by a relevant investment plan, your best move in hyperactive markets is to do nothing and possibly add to your portfolio if there are major market drawdowns. I like to keep some cash for new opportunities. In addition, you might consider talking to your financial advisor about adding in a few companies that will serve as the foundation of our changing economy. If your advisor insists on only investing in index funds, I might suggest you start looking for a new advisor.
- Prepare for a Tax Hike. Nobody knows what the future holds, but Federal income tax rates seem more likely to rise in the coming years.Even before the massive relief spending of the past few months, the TCJA’s reduced individual income tax rates were set to expire after 2025, reverting to their prior levels (read higher levels). So, you might want to take advantage of the current tax rate. As a prime example, consider converting or contributing to a Roth IRA. You’ll pay income taxes today on the conversions or contributions, but then the assets grow tax-free, and remain tax-free when you withdraw them in retirement. The ROTH is such a great investment vehicle.
- Set up a Password Manager. Using a password manager to generate and secure strong passwords for your financial accounts is becoming more urgent with each new new data breach. Consider adding this important line of defense to your financial plan and use it to reset and strengthen all your financial account passwords.
- DO GOOD. The 2017 Tax Cuts and Jobs Act (TCJA) made charitable giving much less attractive, but the CARES Act partially gave back – at least for 2020. Under the TCJA, it became much harder to realize itemized tax deductions beyond what the increased standard deductions already allow. But this year, the CARES Act lets you donate up to $300 to a qualified charity, and deduct it “above the line.” In other words, even if you’re taking a standard deduction, you can give a little extra, and receive an extra tax break back, without having to itemize your deductions. So, keep track of any contributions you made in 2020. As of now, this hasn’t been extended to 2021.
- Leverage an HSA. Health Savings Accounts (HSAs) are an often-overlooked tax-planning tool. Instead of paying for a traditional lower-deductible/higher-cost healthcare plan, some may benefit from a higher-deductible/lower-cost plan plus an HSA. If a high-deductible plan/HSA combination is available to you, it may be worth considering – especially if you don’t typically use a lot of healthcare services. HSA assets receive generous “triple tax-free” treatment – going in pre-tax, growing tax-free, and coming out tax-free (if spent on qualified medical expenses). It gets even better: the funds can be invested and after age 65 whatever is left is treated like an IRA.
- Live a Little More. Your financial priorities should be driven by your life goals – not the other way around. Often the worst financial practice is hoarding money and failing to live your life on purpose. Savings rates are at an all-time high and many people had a banner year in the stock market. Use the next few months to begin think about life after COVID – it will help you through the next few months as we defeat this monster known that has taken so much from us.
When you … have everything you need materially, how do you honor that part of your DNA that will forever yearn for more? It seems to me that the challenge is to turn this pursuit of ‘more’ away from material consumption and toward a ‘more’ that fosters more family, more community, more connections, more art, more creativity, more beauty.
During this season of COVID fears and lockdowns, connections and community will take a bit more work and creativity (like Zoom Happy Hours), but it’s during these uncertain and isolating times that we realize exactly how important we are to each other.
In 2021 I hope you have a great financial year, but more importantly. I hope you’ll foster community, connection and creativity in spite of whatever life throws at us.
As always, if I can help you with anything, please don’t hesitate to reach out. You can schedule a call here.