5 Must Haves in Your 2021 Financial Plan

Start the new year with a plan, but don't leave out these important considerations.

A new year offers everyone an opportunity to revisit their financial priorities and to document them in a written financial plan. In an effort to keep your own financial life simple and manageable, it's advisable to have a list of core tenets that comprise its foundation. The list should be short but effective -- the hope is that it will remain relevant regardless of how the market performs in 2021. Below you'll find five must-haves in your 2021 financial plan. 

1. Commit to low -- or no -- fees

It's 2021 -- access to financial markets has never been easier or more convenient. As a result, investing is now free or very close to it. It's difficult to think of many valid reasons to hold high expense ratio funds or to pay commissions to a broker when free alternatives exist. Try to build a portfolio of high-quality stocks at zero cost by using a discount broker, or consider the time-saving approach of holding only broad market index funds

2. Open a Roth IRA

A Roth IRA -- assuming you're within the income limits to contribute -- allows you to deposit up to $6,000 ($7,000 if you're over 50) of after-tax money every year and invest it tax-free, forever. You won't pay tax on any dividends or growth going forward, even when you finally withdraw the money in retirement. If you are above the income limits to contribute directly to a Roth IRA -- a good problem to have -- you can investigate a backdoor Roth IRA contribution

Given the perils facing Social Security and the uncertain future existence of defined benefit pension plans, you should plan to take full responsibility for the cost of retirement. The Roth IRA is at the core of taking such responsibility. Also important to mention is that tax rates in the future are not likely to remain as low as they are now, providing further reason to pay tax today and allow money to grow tax-free into the future. 

3. Adequate insurance

What has the potential to go wrong almost certainly will, sooner or later. The beginning of the year is an ideal time to revisit all of your insurance coverage -- health, auto, home, and pet, among others -- and determine if you are receiving the right amount of coverage at appropriate value. Generally speaking, you have insurance to protect against catastrophe. This means that relatively small out-of-pocket amounts are acceptable if you have high-deductible insurance coverage. Just make sure you'll be covered in worst-case-scenario events.

4. An asset allocation

In the most basic terms, an asset allocation is another way of saying "division of assets." For example, a 90/10 asset allocation generally refers to a portfolio containing 90% stocks and 10% bonds. Your asset allocation is a guiding benchmark that helps you manage financial risk. An 80/20 portfolio, for instance, will have greater risk than a 30/70 portfolio. Finding the appropriate ratio of stocks to bonds (and/or other assets such as real estate) is one of the keys to creating a sound financial plan but understandably might take a bit of time to refine.

5. A general sense of your tax situation

Without spending the month of January with your head buried in federal income taxation books, it's at least useful to know some of the basics of your tax situation. Do you know approximately what bracket you'll be in once the year is over? Do you know if you use the standard deduction or itemize? Knowing the answers to these questions, among others, is undoubtedly useful in interpreting your broader financial picture. Furthermore, your actions within your investment portfolio will ultimately affect your tax return the following year, so it's helpful to know and understand the consequences of your investing actions before you take them. 

Know the basics

It stands to reason that those who will lead financially successful lives in 2021 do not need to know every last detail about financial planning. But they will know the basics and get them mostly right. This means having a written plan covering the above steps and mostly sticking to them -- perfection isn't the point here. Financial planning is also as much art as it is science, and being a little bit wrong is fine. At the same time, having some direction and knowing the fundamentals will go a long way in making your financial life a successful one. 

Sam Swenson, CFA, CPA Jan 10, 2021 at 7:32AM

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