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Did you make a resolution to do a better job with your finances this year? If, so we have good news. It’s possible we’ll see cuts in our income taxes this year, and the labor, housing, and banking markets are expected to remain stable. Plus, there are some smart financial things you could do that could improve your 2020.
What all this means is that now would be a great time to improve your personal finances and get prepared for the long run.
So, what should you be doing? Here are six steps you should absolutely implement this year.
1. Make a budget and a game plan you’ll actually follow
You gain nothing from making a budget if you never follow it. Your budget needs to be specific, and you should be allocating your money (on paper) even before you get paid. This will help you prioritize your saving, even if you’re paying off debt. For many people, what works best is the “pay yourself first” method. This is where they have money automatically withdrawn from their paychecks, and deposited in their savings accounts, so they never see the money.
2. Create an emergency fund
You will never know when you’ll have a financial emergency, but one thing’s for sure – you are bound to have one at some point in your lifetime. Your car might break down, you could have a serious medical emergency, or you could lose your job. If you don’t have an emergency fund, your only option will be credit cards, which will mean piling on new debt.
According to CNBC, nearly 30% of Americans have less than $1000 in savings. If you fall into this category, your goal should be to save the equivalent of three to six months of your living expenses. You may have to start small, like saving just $25 or $50 per paycheck, but the important thing is to get started and then stay with the program.
3. Understand that it will cost you more to retire than you think
The harsh reality is that retirement will cost more than you think. According to the most recent USA Today, retired households spend an average of $45,756 and that’s in today’s dollars!
Are you maximizing your contributions to a 401(k), IRA, or a Roth IRA? If not, you need to do this – regardless of how old you are. There’s the old rule that you’ll need 70% to 80% of your income today for a decent retirement, however, this ignores unexpected emergencies that can eat into your savings.
4. Switch bad debt for good debt
What is bad debt? It’s any debt that’s not helping you increase your net worth like using credit cards to buy furniture, clothes, vacations, or dining out.
The fourth of the smart financial things to do is avoid wasteful spending, and also be strategic with your interest rates. Today’s average annual percentage rate (APR) is 15%. If you check the credit cards in your billfold, you may find one that charges a lot less. Are you carrying a lot of high-interest debt? Then, you should consider consolidating it.
Do you have a life insurance policy – either whole or universal? Then, a second option would be to borrow against it. This kind of life insurance policy increases in cash value over time, and you can borrow against it tax-free. A second advantage is that you’re not required to pay back the money unless you want to.
5. Set up a 529 plan to crowdsource your children’s’ education
One of the smart financial things to do is finance your kids’ education is with a 529 college savings plan. Once you establish one, you could ask family members and friends to contribute money. There’s a survey showing that the majority of grandparents will contribute to a 529 plan if you just ask. Also, once your child is enrolled in school, don’t stop contributing. If you continue to pay his or her tuition through the 529, you will keep the tax break.
Following is a video with details about 529 plans and helpful information and the two types available.
6. Hire a trustworthy accountant
The IRS is cracking down on dishonest tax preparers. If you hire the wrong preparer, you could end up in a world of trouble. You could be audited; you’d have to pay to have your tax statements revised and you could have other headaches. As Kay Bell, the author of The Truth About Paying Fewer Taxes, has noted, the key here is the person’s credentials. The tax code is enormous. The person you need is someone who stays on top of all the changes in the tax law. One of the most important of the six smart financial things is if you don’t currently have a tax preparer, ask for recommendations from friends and family members that are in similar situations.
Preparing your finances for the new year can be tough but don’t stress. Follow this easy checklist and 2020 will be your best financial year yet!