2020 was filled with turmoil, but it also gave us plenty of opportunity to learn from the best teacher of all: experience. The COVID-19 pandemic forced many of us to rely on savings, unemployment insurance and stimulus money. Market volatility and economic uncertainty ruled our financial lives, as investments dropped to their lowest point in a decade then rebounded spectacularly.
Yet the ultimate lesson of 2020 might be that economic uncertainty is always a possibility, although most of us prefer not to dwell on that fact. “We are always facing the unknown—we just don’t acknowledge it,” says Liz Frazier, a New York-based financial planner, speaker and author. “Although 2020 was an incredibly difficult year, it showed us how vulnerable we are and provided valuable lessons in the importance of being financially protected and prepared.”
How can we be more prepared—and smarter—in our financial lives as the new year begins? If you’re looking for strategies to start the year off right, apply the lessons and insights of 2020 to take control of your finances in the future.
How Can I Prepare for the Unforeseen?
We all experienced some level of money stress last year—but stress can be helpful, pointing to places where we need to strengthen our financial foundation. The cornerstone of that foundation is savings. “Call it an emergency fund or a cushion, but 2020 has taught everyone the importance of having savings,” says Frazier.
Your savings goals might need to be reevaluated in light of the uncertainties we saw in 2020. “For people who were unprepared for emergencies in 2020, it’s a good time to rethink your emergency fund target,” says Chloé A. Moore, a financial planner and founder of Financial Staples, a financial planning firm based in Atlanta, GA. For example, traditional wisdom says an emergency fund should be three to six months of living expenses. You may have realized now that you want to be on the more conservative end of that spectrum or that you need to consider other factors beyond living expenses. “A homeowner may need money for repairs, for example, or a business owner may need more money set aside than if they were an employee,” says Moore.
Debt is another major financial factor that can chip away at your financial foundation. “I’ve seen a lot of people getting pulled further into debt, so I think 2021 will be a year where many will be trying to just get back to normal,” says Frazier. If you’re torn between saving and paying down debt—as many people are—remember that both are worthy goals. “When it comes down to it, either will have a positive outcome,” Frazier says.
How Can I Budget Smarter This Year?
If you responded to economic uncertainty by trimming your budget down to essentials, keep that financial habit going in the new year. “2020 was a year we all learned to cut unnecessary costs,” says Frazier. “Personally, I’m trying to cut out the things I can live without.”
Realizing you can live without an expensive car lease or a constantly updated wardrobe may actually be a sign that your spending is aligned to your values, which is what many financial advisors recommend as a first step toward financial wellness. “Review your expenses and ask yourself where did your spending align with what’s most important to you, and make adjustments going forward,” Moore advises. “Priorities really change when something like this happens.”
One way to stay accountable throughout 2021 and save money in a consistent way is to try zero-balance budgeting. With this technique, you account for all your spending, down to the last dollar. Track your earnings and all your expenses (including debt payments and discretionary spending), as well as everything you save. Your income minus your expenditures should equal zero. If you are over budget, you need to decrease your spending (or boost your income). If you’re under, you need to find a place for those funds (ideally saving the extra cash).
It’s a strict system, but it helps you get a sense of where your money is going and prevents stress when bills come due, since they’re already in the budget. “Zero-balance budgeting has a lot of value,” Frazier says. “It gets people in the habit of tracking and recording all expenses. It also keeps them accountable for what they’re spending and if they’re going over.”
The best budget is one you stick to, so find what works for you. “If you aren’t disciplined enough for zero-balance budgeting, just keeping a basic record of incoming and outgoing cash is one of the most important steps in being financially healthy,” Frazier says.
Should I Reconsider My Risk Tolerance?
If you’re a young investor, 2020 may have been a shocking year—a first taste of real market volatility. But again, it’s all about learning from a difficult situation. “Those who have been through any financial crisis come out tougher and with a greater sense of their true risk tolerance,” says Frazier. “This year is no exception.”
If you haven’t reviewed your portfolio recently, out of fear or simply not finding the time, now is the time, says Moore. “A lot of my clients aren’t looking at their accounts right now,” she says. “But it’s a good time to take a look at your portfolio and reassess your risk tolerance: What were your feelings back in March when the market tanked?” Based on that information you might need to rebalance your portfolio, she advises, or ensure your portfolio is diversified to manage risk.
Remember, too, that investing is a long game. “Regardless of the market, the economy or a pandemic, my advice is always the same,” says Frazier. “Invest for the long term in high-quality and diversified funds. Prepare for the worst and expect the best. And use dollar cost averaging to provide some protection from market turbulence.”
Will There Be More Market Volatility in 2021?
When it comes to the pandemic, the light at the end of the tunnel is glimmering as vaccines start being deployed. But the health crisis is far from over and will likely continue to create economic uncertainty in 2021 as the global recovery slowly rolls out. So how do you face a year that promises only more unknowns? Moore advises adjusting your expectations around income in the new year with job losses rampant and companies still struggling, as well as dialing back spending and holding off on big purchases until things get better.
Then, take a breath. “When it feels like so many things are out of control, focus on what you can control; it’s too much stress to worry about things we’re not sure are going to happen,” says Moore. “Make sure you keep your expenses in line and build your savings. Do those fundamental things to put yourself in a better situation.”
Will Policy Changes Impact My 2021 Finances?
The short answer is we’ll have to wait and see. A new administration this year could mean changes to federal economic policy, but any legislation is likely to be months if not years down the line. And such possibilities are just that—possibilities. So discuss them with your financial advisor and then keep an eye on developments. “Until something is actually passed, we just have to focus on sticking with the fundamentals and making sure our financial foundation is in place,” says Moore.
How Can I Plan for My Financial Future?
Carrying over the lessons of 2020 into 2021 is a good start, but maintain a long-term perspective as well. The most important part of your financial future is your retirement savings, which could have taken a hit last year. “For those people who saw a decrease in income or found themselves in a tough financial situation in 2020, it’s okay to cut back on retirement contributions for a bit until you can get on solid ground,” says Moore. “If you didn’t have an emergency fund—or had to wipe it out—or you got into debt this year, reduce your contributions down to company match, or altogether if needed.” Once you are more financially secure, you can ramp your contributions back up.
For those who were in a stable or good financial situation last year, now is no time to neglect saving for the future. Take a good look at your retirement contributions. If you weren’t saving enough previously, use any financial windfalls to play catch up and get more aggressive with your contributions, Moore advises.
After all, each new year is simply a stepping-stone to building a future with a secure retirement—and with a financial foundation that can weather the storms like we had in 2020, you can do just that.
Julie Anne Russell is a Brooklyn-based freelance journalist. She writes on personal finance, small business, travel and more.
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