2020 has been an unpredictable year. Major corporations have filed for Chapter 11 bankruptcy protection. Millions of people throughout the United States have lost their jobs.
If this past year has taught us anything, it is we need to prepare for the unexpected in our finances. Life can change instantly. When it does, we must be ready to face new realities.
One way to prepare for 2021 and beyond is to take stock of your finances. This includes your spending habits, debts and personal estate plan. After all, you won’t be able to improve your finances until you know where you stand.
It’s a new year. That’s why it has never been a better time to make different financial decisions. Not sure where to start? Here are 5 ways you can finally improve your finances in 2021.
1. Ignore the Joneses
The phrase ‘keeping up with the Joneses’ came from a popular comic strip more than 100 years ago. In this strip, the McGinnis family buys things they don’t need in order to compete with the fictitious Jones family.
A comic strip about spending money to impress others is funny. However, practicing this habit can ruin your finances for years to come.
Consequences of keeping up with the Joneses include:
- Depleted savings and investment accounts
- Constantly working to pay off debts
- Feeling like you don’t have enough
Want to know the best way to handle the Joneses? Ignore them. Use your money in ways that build your financial portfolio instead of tearing it down.
2. Pay Your Credit Cards in Full Every Month
Credit cards offer a quick and easy way to pay for dinners, vacations and clothing. If your debts accumulate, they can lower your credit score and cost hundreds of dollars a year in interest.
Depending on your FICO score, credit card APRs can range from 10% to 26%. If your credit card has a $1,000 balance with a 16% APR, expect to pay an extra $94 this year.
Paying credit card interest is like mortgaging your future for past expenses. That’s why you should pay your balances in full each month.
3. Build Up Your Emergency Fund
You are fortunate if you still have a job during the COVID-19 pandemic. Just because your job hasn’t been affected by these turbulent times doesn’t mean that it won’t be.
Use this opportunity to increase your emergency fund. Do you have 6 months of savings in the bank? Set a goal to save 12 months of expenses. If your savings account balance is small, make saving money a priority this year. Here’s how:
- Start a part-time business to earn additional income
- Automate your savings
- Cut back on excess spending
- Cancel unnecessary memberships and subscriptions
- Sell luxury items and electronics that you don’t use
- Create a personal budget
- Downsize your car and/or home
4. Don’t be a HENRY
Earning a high salary won’t prevent you from making financial mistakes that can disrupt your future. In fact, many people earn six-figure incomes and still live paycheck to paycheck. These people are called HENRYs (High Earners – Not Rich Yet).
Typically, HENRYs earn between $100,000 and $250,000 per year. They purchase luxury goods, drive expensive cars and travel extensively. Due to their extravagant lifestyles, they don’t have much money left over to build wealth or an emergency fund.
5. Increase Your Financial Literacy
In the United States, many people know how to earn money. But they aren’t sure how to maximize their money once they get it. Consider the following household statistics for 2020:
- Consumer debt – $13.86 trillion
- Auto debt – $1.3 trillion
- Student loan debt – $1.54 trillion
- 45% of American adults don’t have an investment portfolio
- 18% of workers who earn over $100,000 live paycheck to paycheck
- 28% of adults don’t have money in a savings account
If you’re like most people, your school didn’t offer financial literacy courses. Fortunately, you can learn everything you need to know about personal finances from books or online courses.
Improving Your Finances Requires a Long-Term Strategy
Getting your finances together can take 6 months or longer. At first, it may seem as if your actions aren’t improving your finances. You must be patient. By applying these money tips in 2021, you will reap the rewards of a strong financial portfolio for years to come.
Ready to implement a new financial strategy this year? Explore these books for additional financial tips in 2021.
- Money Sense for Young Professionals by William Stanley
- Don’t Go Broke in Retirement: A Simple Plan to Build Lifetime Retirement Income by Steve Vernon
- How to Avoid H.E.N.R.Y (High Earner Not Yet Rich) Syndrome – Financial Strategies to Own Your Future by Gideon Drucker
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