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As the song of 2020 fades out, (cue the rapturous applause) a new melody is just beginning. Dust off your tuner and warm up those pipes because 2021 is officially here. How can Gen X start the new year in tune?
Today, we’re going to look at the top ways the generation that wears many hats can prioritize their financial wellbeing in the new year.
1. KEEP DEBT IN CHECK
Gen X notoriously carries the most generational debt, outpacing both Boomers and Millennials. Experian found that on average a Gen X individual carries over $134,000 in debt, nearly $41,000 above the national average, and the effects of the pandemic certainly haven’t mitigated this trend.
So what can you do about it?
First, come to terms with the type of debt you have. All debt is certainly not created equal—there is both good and bad debt. Taking advantage of all-time low-interest rates to buy a car, refinance your mortgage, or consolidate loans might be a great move for you.
However, paying 22% interest on your credit card bill for miscellaneous items you bought last year at random can be a wealth destroyer. Those items likely didn’t further your goals or enhance your lifestyle, so it doesn’t make sense to carry that balance on your shoulders month to month.
Another warning sign of bad debt? Dumping a big chunk of change on depreciating assets that won’t further your goals. Think about this point in terms of a high-end car. Spending $70,000 (with an average 5% interest over a 5-7 year term) on a luxury car that will depreciate to roughly $30,000 in less than 4 years doesn’t make sense for most Gen X individuals and families.
Instead of funneling that money into an asset that is working against you, consider allocating these funds to your retirement or brokerage accounts. For a 50-year-old couple, every $10,000 saved today has the potential to turn into $30,000-$40,000 to fund your retirement.
This example isn’t to say that all large purchases are bad, simply that you need to take careful thought and consideration before making them. Before you buy something for status, see how it fits into your financial goals now, and how that purchase will impact your future. Our advice? Consider escrow for large purchases and make a detailed plan to pay it off before signing on the dotted line.
2. RE-FOCUS RESOURCES TO RETIREMENT AND BROKERAGE ACCOUNTS
At your peak earning years and retirement on the horizon, 2021 presents an important opportunity to double down on your investments. Gen X is so often sandwiched between financially dependent children and parents that it makes prioritizing their own financial health a challenge, to say the least. Take some time this year to evaluate your investment strategy both in terms of retirement accounts and outside investments like brokerage accounts, real estate, etc. Ask yourself some questions.
Are you automating your contributions?
Workplace retirement accounts, IRAs, and brokerage accounts all apply here. As Warren Buffet said (loosely), “spend what you don’t save, not the other way around.”
Automating your investments helps you grow your wealth without thinking about it. Removing that extra step brings consistency to your plan, ensuring that you are regularly investing from month to month. You’re busy enough as it is—take one thing off your plate by automating investments.
Can you increase your contributions this year? If you received a raise, perhaps you can allocate a percentage or two to your retirement account or bump up your monthly contributions to your brokerage account. Periodically increasing your contributions will help bolster your investments each year.
Is your portfolio properly allocated?
2020 was the year for testing risk tolerance. The intense market volatility caused many people to re-evaluate both their tolerance (personal ability to stomach risk) and capacity (financial ability to assume risk) for risk in their portfolio. Your allocations will also change depending on where you’re at in life. If retirement is quickly approaching, you may want to look at how your investments are allocated to ensure you have the right mix for your time horizon.
Diversification is crucial to a strong portfolio, but you already knew that. What you might forget, though, is regular rebalancing to keep your portfolio properly allocated and diversified. If you didn’t do this at year-end, the beginning of the year is another good time to see if your accounts need a bit of a rebalance.
Are you hitting your targets?
Everyone’s retirement savings journey will look a little different. Someone who wants to open their own restaurant in retirement will need a much softer cushion than someone who sees themselves jamming with a house band on Saturday nights.
It’s also important to balance investing in vehicles with different tax treatments. Your 401(k), IRA, Roth IRA, and brokerage account all bring varying tax liabilities. Having tax diversity come distribution is a powerful tool to maximize your accounts’ balances.
As a general (very general) rule of thumb, you want to shoot for saving at least 15% of your income.
3. BUILD UP EMERGENCY FUNDS
Dipping into your emergency fund is never fun, but last year may have forced your hand and that’s more than okay. 2020 is why we have emergency funds! In the new year, be intentional about rebuilding this fund to safeguard you and your family against tougher times. Ideally, you’ll want 3-6 months of living expenses in a high-liquid account.
How can you turn your attention toward this fund?
- Allocate some of your discretionary monthly spendings to your emergency fund.
- Put a portion of your year-end bonus in this account.
- Intentionally cut costs like subscriptions/dining out/shopping/etc.
Worst case scenario: what happens if you need money but your emergency fund is still lackluster? For most people, turning to a home equity line of credit (HELOC) is a strong first step. HELOCs can be a smart financial planning tool because you can access funds as you need, and can borrow against your credit at any time. Utilizing a HELOC can save you from putting massive medical bills or other unexpected expenses on credit cards.
A robust emergency fund gives you much-needed flexibility in this dynamic world.
4. PRIORITIZE HEALTH SAVINGS
In this season of life, health issues can pop up seemingly out of nowhere. It’s important, then, to be able to cover yourself in case of larger health costs. If you’re enrolled in a high-deductible health plan, maximizing your health savings account (HSA) is the first step.
We like to call HSAs one of the greatest gifts from the tax code because by following the rules, your money is never taxed. Contributions are pre-tax, funds grow tax-free, and distributions for qualified medical expenses remain tax-free.
Another perk? HSA funds roll over year to year, making it an incredible long-term savings agent. Investing your HSA funds over the long-term opens up important opportunities in retirement like money for long-term care, caregiving assistance, and other end-of-life considerations.
In 2021, do yourself (and your family) a favor by prioritizing your HSA contributions. You can put in $3,200 for single coverage and $7,200 for family coverage in 2021.
5. SET SMART GOALS
Goal-setting is critical for every generation, but especially Gen X. Given the financial, personal, and professional hurdles you have to jump through, focusing on your own financial health sometimes falls to the wayside. This year, get ahead of that stress by setting SMART goals.
- Specific
- Measurable
- Attainable
- Relevant
- Time-bound
This strategy takes your goal-setting to the next level by asking you to critically analyze how each goal fits into your plan. Using the SMART acronym not only encourages you to set goals that are important to you but also helps you carve a path to accomplish them.
You can use this formula and apply it to any goal you have like maxing out your 401(k), fully funding your HSA, and building a bucket for larger spending goals.
6. REVISIT YOUR ESTATE PLAN
2020 was a stark reminder that plans can go awry in the blink of an eye. Keeping your estate plan up to date brings clarity and efficiency to a stressful process. Consider the following.
- Update or create your will.
- Double-check beneficiary designations (insurance policies, retirement accounts, investment accounts, property, trusts, etc.)
- Fund your trust(s).
- Ensure property and other assets are properly titled.
Estate planning is a financial chore many put to the back burner, but bringing your plan up to date can quell stress and confusion.
7. CONDUCT A FINANCIAL WELLNESS CHECK
The new year presents an essential opportunity to check-in on yourself and your finances. It’s critical to care for yourself first.
Once your needs are properly met, then you can turn your attention to the other people and responsibilities on your plate. Allow yourself to put your savings and investments first, then make a plan for what’s left.
Consider the following questions:
- What are you looking forward to accomplishing this year?
- Are your spending, saving, and investing habits aligned with your goals and values? If not, how can you get there?
- How can you better prioritize your financial health this year?
A fresh start leaves room for new beginnings and bountiful opportunities. We certainly gave you a lot to consider as you start the new year. If you’d like to talk more about how these ideas fit into your financial plan, set up a call with our team today.
Related: Why It’s Important to Teach Your Kids Early About the Value of Money and How to Do It