Heading into the New Year, it’s time to take stock of your budget, debt and investments—and check them against your financial goals. These 6 steps can guide your thinking.
With COVID-19 vaccines on the way and the economic recovery gathering momentum, the year ahead offers plenty of reason for optimism. After a challenging 2020, getting your financial house in order can be one of the most positive and empowering things you can do in the new year.
Here are six ways to get a fresh start in 2021:
Stay-at-home orders meant that some of us spent less on travel and entertainment, with more money going into savings instead. The new year offers a fresh chance to reassess your budget and, in the process, decide whether you are ready—and willing—to return to your pre-2020 spending levels.
Why not use this period to reassess the line items you may no longer want or need in your budget? For example, maybe you simply didn’t miss some of the gym or other memberships that you couldn’t really use in 2020. Consider redirecting those savings toward financial goals, such as paying down debt or adding to your retirement plans.
If 2020 has taught us anything, it’s how the unexpected can flip people’s finances overnight. If you dipped into savings—rather than saving more—in 2020, how will you build that reserve back up in 2021? Perhaps you hadn’t set aside cash for emergencies in the first place—the new year is a smart time to start doing just that.
Not only can an emergency fund help keep you afloat if your employment situation changes for the worse, it can also help you avoid having to liquidate portfolio assets at depressed prices during a rocky market. This is especially important for retirees who rely on their investment portfolio income to cover regular spending. Ideally, you want three to six months of living expenses in a safe, liquid account. One way to save: Create a monthly autotransfer from your checking account to a savings account, even if it pays little interest.
It’s also a good time to assess your personal balance sheet, with an eye toward opportunities for reducing and consolidating debt. First, create a strategy to pay down high-interest debt, such as monthly credit-card balances or consumer loans, which can make saving for longer-term financial goals more challenging. For example, if you get a raise or bonus—or find a higher-paying job, as the economy recovers—consider applying it to the balance with the highest interest rate.
Then think about consolidating any remaining debt, which can let you swap the varying interest rates on multiple loans, credit lines or cards for a potentially lower rate on a single loan. Reducing the number of loans you carry can also help simplify your financial life and ease money stress. You may want to ask your Financial Advisor about possible strategies.
For those who enjoyed job security in 2020, the recession and market volatility may still have created some financial uncertainty—and we can bring that anxiety with us to our jobs. In fact, 3-in-4 workers surveyed by Morgan Stanley at Work said that their financial stress distracted them at work. “Employees from companies both large and small say that their finances are their greatest source of stress—more than their work situation, health issues or even family issues,” notes Jed Finn, Head of Corporate and Institutional Solutions, Morgan Stanley Wealth Management. “Financial wellness is first providing education about how to best manage your personal finances to achieve your financial goals, and then creating a pathway to help you achieve that.”
Commit to de-stressing in the New Year by taking advantage of any employer wellness resources for physical, mental or financial health. For example, some companies offer financial-education programs and digital learning tools, which can supplement the advice you receive from a Financial Advisor. Using these tools can help you not only bring a sharper version of yourself to the job, but also set you up to make better use of other employer-sponsored benefits, such as a workplace retirement plan, equity compensation or group insurance, if available.
Given recent market volatility, it’s important to check whether you’re still tracking toward your goals, like saving and investing for a comfortable retirement. If you’re off track, work with your Financial Advisor to figure out why—and how you can get back on the right path. For example, if you temporarily reduced your retirement contributions to free up income to cover emergencies in 2020, how did that impact your retirement savings? In 2021, can you restore your contributions to a workplace retirement plan or individual retirement account back to their previous level or, better yet, contribute more?
If your investments haven’t performed well, your Financial Advisor may suggest changes to your asset-allocation strategy or specific investments to help improve overall performance. You may also consider planning to retire later, reducing the amount you plan to spend in retirement or even increasing portfolio risk, though only after carefully considering your risk tolerance. The tailored solution may involve some combination of these strategies.
In a 2020 survey of more than 1,100 Morgan Stanley Wealth Management clients, nearly 30% said that charitable giving had become a higher priority. That same trend in the wake of the pandemic has also led some investors to rethink how and where they invest. For example, some investors are avoiding investments that generate revenue from activities they find objectionable. Others are applying sustainability criteria to identify investment opportunities that align with their values and interests, such as enhancing diversity at companies, supporting eco-friendly business practices, tackling climate change or helping to alleviate poverty. Your Financial Advisor may have tools to help you build a portfolio that’s aligned with both your goals and your values.
The New Year we’ve been waiting for is here, so work with your Morgan Stanley Financial Advisor to pursue your goals for 2021 and beyond.