Preparing For a Better Tomorrow
Article by Kaylee Wagner
Photo by Brett Jordan on Unsplash
At the end of each year, we find ourselves reflecting on the past to make changes for the future. And boy 2020 has taught us many things, one of the most important being prepared for the big "What Ifs" in life. Unexpected life events can make an impact on your finances if you are not prepared. Fret not, there are steps we can all take to ensure we have enough 'padding' to help soften the blows that life gives from time to time.
One of the best things you can do is having a healthy emergency fund. Many individuals this year dealt with unemployment, furloughs, or even layoffs due to the pandemic. While you do not have to expect a pandemic to come along very often, there are plenty of situations that can lead to lapses in employment. To prepare for this, depending on your situation, you will want to have enough money to cover anywhere from 3-12 months of basic living expenses. This will help ensure that you do not have to withdraw from a taxable account or rely on credit cards to help through times of hardship.
Another important milestone to plan for is your retirement. You will want to carefully look at your target retirement age. Many people this year ended up retiring earlier than anticipated for a variety of reasons. Some due to lack of work, others for health concerns, and some to help care for family members. The best way to prepare for an earlier retirement is by maximizing your contributions so you have enough to retire before your goal age. It is always a good idea to plan as if you may end up retiring earlier than anticipated. Those extra years of saving past your target date will do nothing but benefit your retirement accounts!
Not only do you want to consider your target retirement age, but it is also crucial to keep in mind your risk tolerance. Bear markets show up from time to time and you do not want a high-risk portfolio if retirement is in the near future. However, with that being said, it is always best to stick with your investment strategy, dealing with short-term volatility is better in the long term than selling at a loss. Ensuring your portfolio has a mixture of investments helps to buffer the swings of the market, especially in turbulent years like 2020.
This past year we have also learned that we need to make sure we can protect our loved ones in the event of sickness or death. Taking a good look at your life, health, and long-term care insurance as well as estate plans can help make sure you are prepared. Depending on your insurance plan, a flexible savings account (FSA) or health savings account (HSA) can help you prepare for large medical expenses. You will also want to check into disability insurance, especially if your company does not have coverage options. Maximizing your insurance plans is the best way to help prepare for medical issues that can happen, especially as you get older. According to Joseph Tanitillio, quoted in Merrill's article, Preparing for the Big ‘What-Ifs’ in Your Financial Life, "Seven out of 10 Americans over the age of 65 will have some health event for which long-term care is necessary, and the cost can decimate savings ". With the likelihood of needing long-term care as we live longer, you want to be prepared so you aren't depleting your retirement funds and to make sure your loved ones do not end up shouldering the burden of high medical costs in the future.
To end on a more positive note, 2020 has provided many opportunities to increase your savings despite the economic situation. Many things were put on hold this year, especially travel, adding up to a lot of extra money that would have been spent elsewhere. So while a lot of major events got put on hold or canceled, this freed up plenty of money to be invested and saved. There was also a decrease in mortgage and auto insurance rates. Many people were able to refinance their mortgages, and even get decreased car insurance rates leading to great savings this year as well! Not to mention all the money you saved in gas, due to the prices being low and most people driving less during the quarantine. All these extra funds can be put to good use for contributions to your savings.
With all these things in mind, we can take the steps to help us prepare for the road ahead and devise a better tomorrow. Cheers to a happy and healthy new year!
