This is the time when many people set goals for the upcoming year. Whether it’s to eat healthier, exercise more, lose weight or something else, the beginning of a new year is a great time to set new goals.
As you consider your goals for the new year, give some thought to your personal financial situation as well as your health and wellness. Here are five financial goals to consider setting for 2021.
1. Control your spending. This is the most important — and also one of the most difficult — financial goals for many people. The best way to achieve it is to create and follow a household budget.
Budgeting doesn’t have to be painful and living on a budget doesn’t mean you can’t have any fun. In fact, creating a household budget is probably easier than you might think. Start by determining your total monthly income and expenses, the latter of which can be divided into two main categories. Fixed expenses are the monthly costs you incur that stay roughly the same like your rent or mortgage, health and car insurance, car payment(s), childcare and utilities.
In contrast, variable expenses change from month to month. These are things like groceries, clothing, eating out and entertainment. Calculate an average of your variable expenses over six months or a full year and use this for budgeting purposes.
Now list all of your income on one side of a ledger and all your expenses on the other side. Add both sides and subtract your expenses from your income. If the bottom line is positive, you’re living within your means by spending less than you earn each month. But if the bottom line is negative, you need to get a better handle on your spending in order to bring your budget into balance.
2. Eliminate your debt. For some people, debt is like a financial millstone tied around their neck that keeps them from achieving their financial goals. This is especially true for high-interest consumer debt like credit cards.
If you’re carrying credit card balances or other kinds of high-interest debt, resolve to pay down as much of this debt as possible in 2021 — or even to eliminate it completely. Doing so might require strong financial discipline, especially if your balances are high. For example, you may need to cut back on discretionary spending (see #1 above) or perhaps work more hours or even take on a second job in order to generate more income.
Just as important, once you have paid off your debt, take steps to ensure that you don’t go into debt again. One of the best ways to do this is to pay your credit card balances in full each month, instead of just paying the minimum amount due. Even better, stop using credit cards altogether and pay for your purchases using cash or a debit card.
3. Max out your retirement plan contributions. This is a great time to set a goal of maxing out your retirement plan contributions because it’s easy to determine just how much money you need to save each month in order to do so.
For example, if you have an IRA, the annual contribution limit in 2021 is $6,000, or $7,000 if you’re 50 years of age or over. So you can max out your IRA for the year by contributing $500 per month, or $583 per month if you’re 50 years of age or over.
Meanwhile, the annual contribution limit in 2021 for 401(k)s is $19,500, or $26,000 if you’re 50 years of age or over. So you can max out your 401(k) for the year by contributing $1,625 per month, or $2,166 per month if you’re 50 years of age or over.
4. Establish a car savings fund. Many people just assume that having a car payment is a given. But with some advance planning, you might be able to eliminate car payments once and for all by paying cash for your next vehicle instead of financing it.
For example, let’s say you have a six-year car loan with a monthly payment of $400. If you set up a car savings fund and contribute $400 each month into the fund, you’ll have $28,800 (plus interest) saved up to buy your next car. Even if this isn’t enough to fully fund your next car, it can serve as a large down payment, which would lower your monthly car payments significantly.
5. Boost your personal financial literacy. Why not make 2021 the year that you learn more about finances and investing so you can take additional steps toward improving your personal financial situation? There are lots of ways you can do this.
The easiest way is probably to read books and listen to podcasts about personal finances and investing. Instead of buying new books, shop for used books or, better yet, check books out at the library. You might also subscribe to personal finance and investing magazines, newsletters and websites. The cost is usually nominal and could be money well spent.
If you want to take things a step further, consider enrolling in a personal finance or investing class at a local community college. This will obviously require a bigger commitment of time and money, but it could be worthwhile if it sets you on a new and better financial course for your life.