Enter 2021 Confidently with These 4 Financial Tips

The year 2020 will go down in history as one of the most consequential years in global history. Due to the pandemic’s major impact on public health, business, and working conditions, it’s safe to say that the ramifications of this year were felt by almost everyone.

Nevertheless, periods of great turmoil also result in a treasure trove of additional knowledge and experience that can better prepare you for the future. With the global pandemic not quite behind us, the lessons learned from 2020 are certainly applicable to 2021.

We reflect on 2020 and the lessons learned in this video: 

The Linscomb & Williams Wealth Management Team in Atlanta also compiled some of what we consider to be the biggest takeaways to help you confidently proceed into the new year, below. In many cases, these are classic lessons re-affirmed by the experiences of 2020.

1. Replenish and Maintain Your Emergency Fund

In addition to the tremendous toll COVID-19 took on global health, the pandemic also severely damaged a number of industries. Dozens of iconic brands have declared bankruptcy and millions of jobs have been lost since March. (Fortunately, the unemployment rate has fallen consistently since April, but no one knows for sure how long it might take to return to previous levels.)

As the job market hopefully improves, it’s extremely important that you replenish and maintain your emergency fund. A vaccine is currently in the works, but flare-ups of the virus can certainly cause additional rolling shutdowns or restrictions in business activity. Stay financially prepared for another potential lockdown.

COVID-19’s mortality rate has sharply fallen since its peak, but current projections of future outbreaks are still mixed. Some believe that the worst is behind us, while others believe a repeat of an early 2020-like outbreak is still possible. With this in mind, your emergency fund is one of the most straightforward financial safety nets you can use to protect yourself.

Aim for an amount in your emergency fund that represents 6 months or more of your normal ongoing expenses, if possible. Put forth your best effort to save for 6 months of expenses, using your 2020 spending levels as an example. That might vary based on where you live. Some states were only locked down for several weeks or a month before reopening. Others, like California, for example, initiated stay-at-home orders for two full months before implementing a plan to partially reopen. 

The bottom line is to mentally and financially prepare yourself for the possibility of another unexpected curveball. Having emergency savings in place can provide the peace of mind that you can pay your bills, regardless of what happens.

 

Talk with us! At Linscomb & Williams, we understand the impact 2020 has had on investors. And we’re here to help.

 

2. Stick to Your Investment Plan

Prudent investing is always of utmost importance, and this has certainly not changed heading into 2021. The S&P 500 fell more than 30 percent this year, only to rally back to exceed its pre-pandemic levels. One of the biggest takeaways for investors is to remember your long-term goals and to continue following your established investment plan. We've learned one thing in our 50 years of helping investors about market downturns: Panic is not a strategy! 

If you need help re-focusing, contact your financial advisor to review your plan.

If you have a wealth management strategy in place, your portfolio mix should be driven by your investment goals, time horizon, and risk tolerance. Portfolios with a long-term time horizon are usually diversified and built to weather periods of unexpected market volatility. Therefore, not only will proceeding with your existing investment strategy be the emotionally intelligent solution, but your current portfolio strategy may already have a layer of protection from severe market declines in place.

3. Don’t Wait to Make an Estate Plan

The importance of estate planning is akin to replacing your roof or making your diet a high priority: It often only becomes important after a major scare or disaster. The truth is, estate plans are important for adults of any age. Not having an estate plan becomes exponentially riskier as you and your family get older.

Your family legacy is at risk when you don’t have an estate plan. In the unfortunate event that you pass away without one, all of your assets are at risk of being lost or significantly reduced, damaging your legacy and threatening your family’s future.

Instead of your finances smoothly passing to your heirs with clear instructions, state law takes over and dictates if an individual has no estate plan, determining who gets what, eating away your assets with processing fees and taxes. With today's liberal estate tax exemptions, many estates will be relieved of any federal estate taxes. However, for those states that are taxable, on average, they will pay about one-sixth of their value in taxes (this can vary by individual and by state).

What’s more, smart estate planning can take the pressure off of your beneficiaries needing to be fully financially prudent at a potentially young age. Your estate plan can place useful restrictions on your assets, becoming available to your beneficiaries when they’re more likely to have the interest, maturity and understanding to take care of their inheritance. The behavior of a beneficiary who lacks financial literacy can unnecessarily and irreparably destroy the financial future you’ve worked so hard to create for them.

Consider starting small and adding to your plan going forward. At the very least, executing a valid will can determine how your assets will be passed down to your family members. Speak to your financial advisor about protecting your investments in even more detail.

4. Turn (Investment) Lemons into Lemonade

Even your occasional investment loss can be advantageous, if used properly. Should the market decline, any investments that have lost value may be useful for strategically lowering your tax liabilities for the year. This strategy is referred to as “tax loss harvesting.”

Simply put, if you are poised to selling an investment that has experienced a $10,000 gain compared to your cost, you can offset that gain by selling another investment with, for example, a $3,000 loss to reduce your total gains on your tax return to $7,000.

With tax loss harvesting, you can chip away or take a chunk out of your tax bill by selling investments that are underperforming at the moment. By doing this, you don’t have to stay married to an underperforming asset, giving you the chance to use the loss to your benefit, and even buy back the asset at another time. (There are some minimum waiting periods you must observe before buying back the investment sold at a loss to satisfy the IRS.) There are other components of tax loss harvesting with which your financial advisor can help you.

Manual tax loss harvesting may seem difficult and time consuming, but it’s easily done with technology. Many advisory firms offer a built-in tax loss harvesting feature to their portfolio strategies, working in the background while your portfolio is fully managed. Working with an advisor gives you the best of both worlds: The ability to work with a dedicated professional to align your financial goals with your investments, and the technology to easily execute the timing, trading, tax-loss harvesting and more.

Are You Ready for 2021?

The difficulties of 2020 may become motivation to exploit advantages next year. By experiencing and learning firsthand how the pandemic affects government decisions, industries and the job market, you can prepare yourself and your finances for the unexpected. For you, this year’s difficulty can be next year’s prosperity.

If you’re not currently working with a financial advisor or feel it’s time to make a change in your wealth management plan, contact the Linscomb & Williams Wealth Management Team in Atlanta to see how we can help. A simple conversation can make a world of difference.

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MaryJane M. LeCroy, CFP®

MaryJane M. LeCroy, CFP®

As a member of our Atlanta Wealth & Pension team, MaryJane M. LeCroy is a Managing Director and Wealth Advisor for Linscomb & Williams.

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