As we welcome 2021 and try to put 2020 far into the rear view, it is always a good idea to put plans in place to succeed financially throughout the year. Here are eight areas we believe require your thought and attention at the beginning of the year to provide a kickstart to success during the remainder.
- Set Short- and Long-Term Financial Goals: Whether you want to be debt free in ten years or own a home in three, you are more inclined to save if you have specific goals. Factor these goals into a budget and figure out where you can squeeze the extra money from to make these goals realities.
- Budgeting: Every effective financial plan starts with a budget. Identify necessary spending and savings items. Give yourself a little leeway but try to stay disciplined to your budget.
- Emergency funds: These can be a financial lifesaver! A sudden job loss, major surprise expense, or unexpected health issue can change your financial picture quickly. The general rule of thumb is to maintain an emergency fund equal to 3 times your monthly living expenses if you are a dual income household and 6 months if you are a single income household or one person’s income is relied upon to provide for the family’s standard of living. During the COVID-19 pandemic it is a good idea to bolster these funds with an extra month or two of savings.
- Debt reduction: Look to see if there is some high interest debt (like credit cards!) that can be paid off. With interest rates near record lows, putting extra money towards low interest debt may not be the best idea. If you think you can earn a higher rate of return than the interest being charged on your debt by investing that extra money, in the long run you should come out ahead. Some forms of debt such as a mortgage on a house may also be acceptable due to the tax deductibility of the interest.
- Retirement plan contributions: If you already contribute to an employer plan such as a 401(k) or 403(b), keep it going. The IRS left the maximum contribution amount unchanged from 2020 at $19,500 ($26,000 if over age 50). 401(k)s and 403(b)s should be maxed out before utilizing other tax-advantaged retirement accounts because they are protected by federal law if you are ever sued and have a judgement against you. If you own your practice, determine if you are utilizing the best type of retirement plan for your specific situation.
- Traditional and Roth IRAs: If you are already maxing out employer provided retirement accounts and wish to save additional amounts towards retirement, consider contributing to a Traditional or Roth IRA. These accounts also offer excellent tax-advantaged growth and are protected in most states from lawsuits. The contribution limit remained unchained at $6,000 per year for 2021 ($7,000 if over age 50). Please note: deductibility and the ability to contribute are determined by your income so it is important to be aware of the limitations.
- Disability & Life Insurance: Often overlooked, disability and life insurance are actually very important components of financial security. Disability insurance supplements a portion of your income in the event you are sick or disabled and unable to work. In the event of a long-term disability, it could ensure you stay in your home and/or are still able to save for financial goals like retirement. All eligible physicians should have comprehensive disability coverage that provides at least 60% of their pre-disability income. Life insurance is slightly more situational, but if you own a home with a mortgage or have any other debts that would not be absolved at your death, have children whose college educations you would want to guarantee, and/or have an individual or organization you would want to provide for in the event of your death, then life insurance should be considered.
- Estate planning: The complexity of an estate plan may vary based on your assets and needs but having basic estate planning strategies in place is important. Work with an estate planning attorney to review whether you need wills, powers of attorney, trusts, etc.
Having these eight important issues well in hand will give you a good foundation to start moving towards a financially secure future. We recommend speaking with your financial advisor about other areas of your financial plan that could use improvement.
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