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- No one could have predicted the impact the pandemic would have on our finances this year. But it has highlighted a few ways we can manage our money differently.
- In 2021, I hope people will shore up their emergency funds and establish more than one stream of income — 2020 showed us our income can disappear overnight.
- I also hope more people will establish a budget and stick to it, and set up an estate plan to protect their family's assets.
- SmartAsset's free tool can find a financial planner to help you take control of your money »
No one could have predicted how the pandemic of 2020 would impact the world. The hardships have been unprecedented. And there is no financial plan that could have truly prepared us for this type of occurrence.
However, as we go through these challenging times, I believe that people will begin to see the importance of managing their money in certain ways once the dust settles. There are many things to consider, but here are three ways I think people should manage their money differently moving forward.
1. Shore up your emergency fund and establish more than one stream of income
Depending on an individual's financial situation, they should maintain somewhere between three months to one year of expenses in cash, which guards against the unexpected events of life. However, it is also important to evaluate the "security" of your income stream. 2020 has shown us all that circumstances completely out of our control can greatly reduce or even stop our earnings.
These types of unfortunate and devastating occurrences should get people to not only think about maintaining emergency cash, but also creating more than one stream of income. Not everyone has the desire to become a full-time entrepreneur, but people can still consider a side job that would supplement their main source of earnings.
2. Make an estate plan
Estate planning is already a cornerstone of any sound financial plan, but the challenges of the pandemic have highlighted the importance of this area even more. The loss of so many lives during 2020 has been heartbreaking. It has been a humble reminder to us all that tomorrow is not promised to anyone. We never know what might happen in this life.
From an emotional standpoint, creating an estate plan can be an extremely difficult task. However, it also brings peace of mind to a family knowing that if a person were to unfortunately die, then assets would be distributed to their heirs in accordance with their desires.
No matter the amount of assets you maintain, it is still prudent to consult with an estate planning attorney to at least establish the basic documentation, which includes a will, living will, and power of attorney. The complexity of an estate plan specifically depends on an individual's financial and family situation.
Given the constant changing of life circumstances, another item to consistently monitor is who is named as the beneficiary on your accounts (e.g. beneficiaries of a life insurance policy or retirement account). You wouldn't want someone you're no longer in touch with to be listed as your beneficiary simply because you haven't updated your beneficiary designations.
3. Understand your spending habits (and stick to a budget)
This area of financial planning is so simple to explain, but for some reason, can be very difficult to implement. Many of us claim that we know where each of our dollars is going every month but have not really taken the time to do a complete evaluation of this part of our financial lives (i.e. establishing a budget and tracking how well we're adhering to it). This is an exercise that can greatly benefit and provide much-needed clarity to an individual, no matter how much money they earn.
With incomes being lost or drastically reduced, there have been many scenarios in 2020 where people have been forced to take a closer look at where they are spending their money. Having this awareness is already a significant step in addressing any potential cash-flow issues that might arise.
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