Back to the Basics in 2021
As we start a new year in 2021 (thank goodness), it’s a great time to evaluate the state of your personal finances. A financial check-up so to speak. Here are some questions you might want to ask yourself:
What is your net worth?
Do you have an emergency fund? Did you wish you had one this last year?
Are you living below your means? Do you track your monthly expenses? Are there any areas you could reduce spending (especially on things that don’t add value to your life)?
Are you burdened by debt, whether it be credit card debt, auto loans, student loans, medical bills, or all of the above? Do you have a plan to work your way out of debt?
Do you have a written financial plan? Do you review and update it regularly?
Are you saving for retirement? Are you on track for your retirement goals?
Do you understand what you are invested in? How are your investments performing?
What fees are you paying for your investments or to a financial advisor? Could you make small changes here that might save you hundreds of thousands, if not millions, of dollars over the course of your lifetime?
Are you adequately insured (life insurance, disability insurance, umbrella insurance, etc.)?
Do you have a will or trust? Would your family know how to handle the household finances if the unthinkable were to happen and you died or were incapacitated?
I’m sure everyone that reads this list of questions can identify multiple areas where they can make improvements. I do this stuff all the time and there are still areas I want to work on.
The Fundamentals
As you consider these various aspects of your own personal finances, I think it’s important to review the basics of financial independence. After all, if you’re reading my blog, you likely have a goal of someday becoming financially independent.
These four basic principles are what I consider to be the pillars of financial independence. If you optimize each of these four areas in your life, you can’t help but improve your financial position and progress towards FI.
Maximize Income
As I’ve discussed before, this is your offense. It’s how you put points on the board. The more money that comes in, the easier it will be for you to achieve your financial goals. This could be the active income from your day job, or it could be more passive streams of income, like dividend payments from stocks or rental payments from real estate.
Are you earning a salary that reflects your productivity and skill set? Maybe it’s time to ask for a raise or a promotion. If you are commission based, is there a way you could increase your production or sales?
Are you contributing enough to your employer sponsored retirement plan to get your full employer match? This is a part of your salary. If you don’t get 100% of your available match, you are essentially leaving money on the table.
2021 could be the year you decide to start a side hustle that brings in some extra income. There are plenty of ideas out there for ways to bring in extra money, ranging from blogging to being a virtual assistant to tutoring to renting out a spare room in your home.
Reduce Expenses
It doesn’t do any good to bring in more money if you spend it quicker than you can make it. Reducing expenses is your defensive strategy. And, as my one my favorite commercials so eloquently states, defense wins championships!
It’s hard to reduce expenses if you don’t know where your money is going. One of your goals this year might be to track your expenses if you aren’t doing this already.
If you already track your expenses, take a look at how last year went. Were there any areas you could have improved? What about the big three expenses: housing, transportation, and food? It has minimal impact on your finances to save $50 a month on small expenses if you are unnecessarily paying $10,000 a year in mortgage interest that could be saved if you were to refinance at a lower interest rate. We are in the process of refinancing our mortgage and I’ll write about what I’ve learned soon.
What about subscription services? Do you really need all the streaming services, like Netflix, Hulu, Disney+, Apple TV+, Amazon Prime, HBO Max, AND Peacock? Maybe pick your favorite two and cancel the others. Are you using that gym membership from your 2020 resolution? What about recurring app subscriptions you no longer use?
Increase Savings
Bringing in more money by maximizing income or reducing expenses does little good if you turn around and spend it on something else. You need to save that money. Pay yourself first!
What was your savings rate this last year? Most financial experts recommend saving 10-15% of your income. While that is a great start, if you want to become financially independent ASAP, you need to save more.
I think the first step is to determine where you currently are, and then make incremental improvements from there. If you spend more than you bring in, start by just living within your means. If you save 10% of your income, then make a goal this year to shoot for 15% or 20%. If you’re at 20%, shoot for 25%, etc. The more you save, the quicker you’ll build wealth and reach your financial goals.
Invest Wisely
Just saving money isn’t enough either (unless you are willing to wait 40-50 years to reach FI). Given the meager interest rates that savings accounts earn today, you may as well be stuffing your money under your mattress. You need to invest it . . . wisely. This will give compound interest the chance to work its magic.
What are you currently invested in? Do you understand it?
Are you paying high fees? Are you properly diversified? Does you asset allocation match your stage in life, financial goals, and risk tolerance?
Is it time to part ways with your financial advisor because he or she is pushing commission based products or charging a high assets under management fee?
Or is this the year to find a good fee only, fiduciary, financial advisor to help you make complex financial decisions? Maybe it’s time to talk to an estate attorney about establishing a will and trust?
Conclusion
Hopefully this post has started the wheels turning in your head. Hopefully you have identified some areas you need to work on and you are excited about improving your progress towards FI in 2021.
No time is better than now to get your financial house in order. As you review the list of questions above, choose one or more to work on right away and take action. Optimizing these basic principles will put you far ahead on the road to becoming financially independent.
As you make plans and goals for the upcoming year, please browse the blog and use it as a resource. I’ve written a lot of content about most of these topics already. I will continue to try to add content this year sharing the lessons I am learning on our path to FI.
Thanks for reading. I hope you are doing well in your progress towards reaching FI. If you have any questions or comments that might help other readers, please list them below. In the meantime, keeping working towards Freedom Through FI!
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