In 2020, we learned the hard way how important money management is to our everyday lives. By managing your money wisely, you can work to cover your daily expenses, avoid debt, and save for the future. Most importantly, daily money management can help you be more prepared in the event of life’s little messes like a job loss, a family emergency, or a global pandemic.
So what are some of the best ways to manage your money and develop the money skills you need to thrive? To answer this question and help set you up for financial success in the upcoming year, we’ve created this handy list of 12 smart money management tips, one for each month of 2021. Ready to start the year right? Read on.
Create a budget
You’ll find it much easier to take control of your finances and improve your money skills and habits with a budget. At its core, a budget is just a spending plan based on your income and expenses. Even if you are not sure where your income will be this year due to job loss, January is still the best time to create a budget so you know how to manage your money in the months ahead. Some of the most popular types of budgets include:
- Line Item: With a line item budget, you list out your expenses for an entire year. As you go through the year, you compare current expenses to previous ones to determine if you’re on track. If you go this route, be sure to add a savings line item to your list of expenses so you don’t forget to save.
- Pay yourself first: “Pay yourself first” is the method where you devote a certain percentage of your income towards savings as soon as you get paid. This is a great option if saving money is your top priority in 2021.
- Zero-sum: The zero-sum budget has you assign each dollar of your monthly after-tax income a “job”. This budget can help you figure out what is most important to you and maximize your cash.
Set up or update retirement deductions
If you’d like to grow your nest egg substantially, compound interest (the interest you earn on interest) is important. The magic ingredient that allows compound interest to work is time. After all, the more time you have to invest, the longer your investment can compound and increase in value.
Therefore, it’s important to determine how much you can save for retirement each month and set up automatic deductions from your paycheck or checking account near the start of the year, rather than in November or December. If you don’t have an employer-sponsored 401(k) or 403(b), but do have funds, you can open a retirement account like a Roth IRA or Traditional IRA.
Prepare for tax time
Yes, taxes are usually due April 15th. However, you don’t want to wait until the last minute to get your tax situation squared away. In addition, you may be able to file a little early this year, allowing you to get your return sooner. To prepare for tax time, you should:
- Figure out if you’re going to do your taxes yourself, use software, or enlist the help of a professional.
- By the end of January, you should’ve received all the documents you need to file your taxes. These may include W2s, 1099s, and Form 1098. If you plan on itemizing, round up all your receipts in addition to these documents.
- If you’d like to reduce your tax burden and have extra money, you may want to increase your retirement contributions for 2020.
Spring clean your house to earn some extra cash
As you spring clean your house, don’t just throw everything away. Chances are you own items you no longer want or need that others will value. Use this as an opportunity to earn some extra money by selling items on Facebook Marketplace, eBay, LetGo, Poshmark or any one of the dozens of online marketplaces. Another option is to host a garage sale, or just donate items for a charitable tax deduction.
Budget for summer vacation, entertainment, and childcare
The summer months are prime time for summer outings with friends and family. Depending on your situation and the vaccine roll out, summer may also warrant extra childcare expenses since your kids will be out of school. For these reasons, it can be all too easy to go into debt in the summer. The good news is you can avoid it by budgeting and planning to save, even if you are on vacation. Review your current budget and figure out how you can reduce current expenses or earn more money to accommodate these extra expenses.
Check on your emergency fund
In 2020, we all learned the importance of having an emergency fund. During the month of June, take a look at your fund to see how much you have saved. In the event it has less than three to six months of cash, start working on increasing your savings so you’re better protected from unexpected financial obstacles in the second half of the year. Here are a few ideas to help you add to your emergency fund.
- Eat at home: You may be tempted to skip cooking and eat out on restaurant patios when the weather is nice — assuming pandemic conditions permit. Do your best to eat at home as much as possible and put the money you save in your emergency fund.
- Try a staycation: After 2020, you are probably dying to travel this summer – but if you need to prioritize savings, you may want to do one more year of staycation instead. Travel will be tempting, but you’ll reduce money stress even further by saving and getting creative with your staycation. Try lemonade, picnics, board games, and camping in your backyard. Your savings account will thank you.
Review your spending
July 1st marks the halfway point of 2021. Think of Independence Day in a new way – are you more independent from overspending and debt this year? It’s a great time to look at how you’ve spent your money over the past six months.
If your budget shows you’ve overspent on things that don’t mean much to you, try to make some adjustments and be more intentional with your money in the next several months. On the contrary, if you’ve been doing a good job with your spending, congratulate yourself and keep up the good work!
Set up a 529 college savings account
In honor of the back to school season, set up a 529 plan for your child(ren) if you haven’t already done so. The money you save will grow tax-free and won’t be taxed if you take it out to pay for eligible college expenses. Depending on where you live, you may also cash in on a tax deduction or credit for contributing to a 529 plan.
Use your flexible spending account (FSA) money
With an FSA, you can cover medical expenses that your insurance won’t pay for via tax-free dollars. If your employer offers this option, you can contribute up to $2,750 through a payroll deduction. Since you may have to use your FSA money before the end of the year, September is a good time to do so. Some employers grant a two-and-a-half month grace period, or allow you to carry over up to $500 of unused money to the next year, so read your plan’s fine print to understand your options.
Save for the holidays
Before you know it, December will be here and you’ll be ready to shop for gifts and holiday celebrations. To avoid overspending and going into debt for the holidays, it’s important to save and budget for your extra expenses. These tips can help you out.
- Design a holiday budget you can comfortably afford and stick to.
- Create a holiday shopping list and don’t buy anything extra.
- Start shopping for deals right away.
- Spread your purchases out over a few months.
Evaluate your health insurance policy
Open enrollment for 2022 starts on November 1, 2021. During this time, you should reevaluate your medical needs and financial situation. If your current health insurance plan is no longer the best fit, you’ll want to shop around and enroll in a new plan for the upcoming year. Here are a few reasons you may want to switch plans:
- Your current plan no longer covers an important prescription.
- You were recently diagnosed with a medical condition that results in higher medical costs.
- Your doctor does not accept your plan anymore.
- You made adjustments in 2020 to cover Covid-19 costs, but don’t need them anymore.
Create a financial plan for 2022
Take the time to analyze how you’ve performed financially in 2021. Determine which goals you’ve met and which ones you’ve fallen short on. Use this information to create a financial plan and keep working on your money skills or the next year. To do so, you’ll want to:
- Set short and long-term goals.
- Create a budget.
- Manage debt.
- Plan for taxes and retirement.
Ready to become debt free in 2021? FDR can help.
It can be difficult to meet your financial goals in 2021 if you’re struggling with a large amount of debt. If you’re ready to leave your debt behind you and work toward a more secure financial future, talk to a Freedom Debt Relief Certified Debt Consultant. They can educate you further on the program or help you better understand other options. Get started now.
- Should You Change Your Financial Planning? (Freedom Debt Relief)
- 7 Good Financial Habits to Master (Freedom Debt Relief)
- Ways to Save More Money (Freedom Debt Relief)
- 8 Simple Money Management Tips to Follow in Your Daily Life (Entrepreneur)