Like most other aspects of life, the financial landscape has been anything but typical over the past year. In light of the rocky ride we’ve all endured, it’s an opportune time to take a step back, take a deep breath, and take a good look at some of the elements essential to building your firm financial foundation.
Review your 401(k) contribution
At least once a year, take some time to review your 401(k) contribution percentage. At a minimum, ensure you’re taking advantage of your employer match (i.e., if your employer matches 50% on the 6%, try to contribute at least 6%). This is essentially free money that you leave on the table if you don’t take full advantage of your employer’s match. If you’re already taking full advantage, try to increase your contribution rate by 1-2% every year, or work your way to maxing out your retirement plan contribution, which is $19,500 for 2021. One caveat: this is long-term money that you cannot touch without a penalty until you are 59½.
Build up your emergency savings
As we saw in 2020, we never know what life might bring our way. What a great reminder that it is essential to have an emergency savings bucket. Pay yourself first and try to automate as much as possible. You are likely to save more if you set up an automatic contribution into a savings or investment account rather than waiting to invest what’s “leftover” at the end of the month. That said, before investing in the stock market, ensure that you have three to six months of living expenses in savings. These savings leave you with breathing room in the event of an unexpected cost or emergency.
Make sure your portfolio appropriately matches your risk tolerance. Some companies had substantial gains in their stock price in 2020, so it’s a good time to review your portfolio and determine whether you may need to rebalance. Rebalancing is especially important if you have a big purchase (home, car, wedding, etc.) planned soon.
Review and refresh
Don’t forget to review your beneficiaries, particularly if you had a life change. If you are recently engaged, married, divorced, or had a child, make sure to update your beneficiaries on your 401(k), IRA, life insurance, and wills.
Ask the experts
Life is complicated, and so are finances. Don’t be afraid to reach out to an advisor. There are financial professionals available to help you, no matter your asset size. Although many planners still charge by assets under management, some firms/planners have adopted a flat or hourly fee for clients. Look for the Certified Financial Planner® designation for added peace of mind, as CFPs are mandated to be a fiduciary and have your best interest in mind.