In 2021, resolve to save for an emergency

As we attempt to put the dumpster fire of the year known as 2020 in the rearview mirror, it’s time for the annual ritual of making — and more importantly — keeping resolutions.

Despite a pandemic, a roller coaster stock market and an emotional election, the most common financial resolutions for 2021 remain the same, according to Fidelity Investments’ annual survey: Americans hope to save more, pay down debt and spend less. The one obvious sign of COVID-19’s impact was the fact that 38% of respondents said that they would be in “survival mode” in 2021.

For the survivalists, as well as everyone else, the start of the year is an ideal time to review what’s coming in and, more importantly, what’s going out. To track your cash flow, download a free app like Mint or Clarity Money or use your bank’s app. The idea is to figure out where you stand now and how much money is available to help achieve your resolutions. Then you can create a plan to fulfill them.

In the past, I have turned to what I like to call “The Big Three” to help you think about your financial goals. The first is an emergency reserve fund that can cover six to 12 months of your living expenses. (More than eight in 10 Americans say this is their top financial resolution for 2021.) The second is to reduce credit card or other high-interest debt. And the third is to fund retirement plans to the best of your ability, especially if you are entitled to a company match.

Until the pandemic hit, I had advocated giving “The Big Three” equal weight. But given the results of a Pew Research Center survey, which found that “one in four adults have had trouble paying their bills since the coronavirus outbreak started” and “a third have dipped into savings or retirement accounts to make ends meet,” I think focusing on funding the emergency reserve should take precedence over the other two.

You can use technology to help. Start by automatically transferring a set amount of money from checking to your emergency reserve fund. Once you have accomplished that goal, you can direct the same amount of money and make automatic payments to pay down debt. Finally, use an employer-based retirement plan or IRA to help jump-start your long-term retirement savings.

This is usually the time that I try to guilt you into drafting your will, power of attorney and health-care proxy. But if that process seems too daunting, you can start with an easy task: update your beneficiary designations. The basic idea behind naming a beneficiary is to make the transfer of money upon death quick, easy and clear. Like a will, thoughtfully considering who will be your beneficiary allows you to have control over how your assets will pass to your heirs. While in most cases, a beneficiary is a spouse, child or another family member; you can also choose a trustee of a trust, an estate or a charity to be a beneficiary. The most common accounts that provide for the options of naming the person (or people) who will inherit the account value upon your death are retirement accounts, pension plans, life insurance policies and annuity contracts. Certain non-retirement accounts called “Transfer on Death” or “Payable on Death” also allow you to name beneficiaries.

Finally, the Fidelity study asked respondents who said they were able to keep their 2019 financial resolutions to share the secrets to their success. They included “setting clear, specific and achievable goals.” Go get ‘em!