It is a major understatement to say 2020 has been challenging. Whether you struggled with a business downturn or a lost job, health issues, school or daycare challenges, or other personal issues, we have all had something extraordinary thrown at us.
Looking ahead to 2021, there are some things you can do to deal with debt, get organized, and rebound financially from whatever you faced in 2020.
Dealing with Additional Debt
Many people incurred extra debt during 2020, but dealing with it is not as simple as “pay it down as quickly as you can.”
First, if you are in a good position with your cash flow, do not feel pressured to pay down the debt quickly. Consider focusing instead on increasing your savings, because it’s important to have ample liquidity for emergencies. There is always a balancing act between saving and paying down debt, but with an uncertain outlook for 2021, it may be wise to focus on savings and not be overly aggressive in paying off your debt.
However, if you need help with making monthly payments, or your interest rates are just too high, or you do not have a high tolerance for debt, there are several other moves to consider:
- Speak to your lender about a reduced or suspended monthly payment. Under the right circumstances, the CARES Act provides that your debt will still be reported as current to the credit bureaus if the accommodation is due to a pandemic-related hardship.
- Consider refinancing your mortgage. The general rule is that if you can shave at least a percentage point off your interest rate, you should consider refinancing. Interest rates are very low right now, and this could reduce interest and lower monthly payments.
- The CARES Act waived the 10% early withdrawal penalty on retirement withdrawals if they are needed due to hardships related to COVID-19. None of us like to tap into our retirement accounts, but if you qualify for the 10% penalty waiver, it may be a viable solution.
- If you have an outstanding loan on your 401(k) plan, you may be able to suspend loan payments and extend the term of the loan up to an extra year. This may be worth a discussion with your 401(k) plan administrator.
- Finally, if there is no better option, consider speaking to a reputable credit counselor or debt consolidation company. However, make sure you do your homework on both the company and the fee structure before jumping into a debt counseling or consolidation program.
Get Financially Organized
Financial organization is always helpful, but it’s especially important in dealing with the stress and frustration that came with 2020. Here are 7 ideas to help you get on top of your finances:
- Keep a detailed monthly budget. Even better, use a cash flow model. Your model should contain detailed line items by type of expense (mortgage, car payment, utilities, groceries, etc.), and columns for every week in the month. The budget should be advanced each new month, because many months will be different (one-time payments, five-week months, etc.). By keeping this going from month to month, you develop historical data that makes the process easier and more accurate as you move forward.
- Sit down at least once every week to review what bills are due and update your cash flow model as needed. By making this a weekly discipline, you will be much more in tune with your finances and will avoid mistakes (which can cause late fees and stress). Also, you’ll always be mindful of what bills are due in the next few weeks.
- Consider setting up automatic electronic payments with accounts that offer this. You will save time, and email reminders will be sent so the payments will not catch you by surprise.
- Keep a spreadsheet of contact information for banks, loans, utilities, and other vendors. Include phone numbers, names of contacts (if applicable) and website information. Consider using a secure password manager to save your login information, too. Having this information readily available in one place makes it easier to take necessary actions as they arise and can help avoid procrastination.
- Find a safe, neat place for your mail (bills, statements, etc.) and permanent documents. Keep them organized in a drawer or file cabinet. With all the challenges in our lives, rummaging through your house and garage to find an important piece of paper should not be one of them.
- Follow financial news that resonates with you. Subscribe to professional and financial newsletters or podcasts, most of which are free. Reading or listening to what experts say can educate you and reinforce concepts you already know.
- If you are a business owner, these same concepts apply. But in addition, you should know how to pull your financial information and payroll information quickly. If the government were to come out with another relief package, for example, organization of your financial data would be critical. Speak to your professional partners (accountant, payroll provider, banker, etc.) to make sure you have a plan to pull necessary data and documents.
Finally, you may be wondering what to do about tax planning in light of the recent presidential election. During the Biden presidency, there may be changes affecting the uppermost tax brackets and capital gain rates, but the timing of these changes is unpredictable at this time.
The two senate runoffs in Georgia certainly could have an impact on how quickly tax law might change. While we do not know if there will be significant changes for 2021, it is never too early to start looking at “what if” scenarios for your tax strategy. As always, we are here to help. Reach out to us at info@sbfcpa.com for help in preparing for your 2021 financial rebound.