10 Ways to Improve Your Finances in 2021

Happy New Year!

The turning of the new year brings two things to mind for a lot of us:

1. Whoa, I spent too much money last month/year
2. How can I improve my finances this year?

I’m not a big fan of new years resolutions (most don’t stick).

But I believe in habitual change — deciding something is worth pursuing and taking steps toward that objective every day.

Making better money decisions every day should be a habit we all incorporate into our daily lives.

If January 1st is the right start date for you, go for it. 

You’ll come across quite a few of these kinds of blog posts this time of year. I hope to inspire you to level up your financial security and build a sturdier financial foundation to enable more freedom in the next decade. 

Think of these ideas as long-term improvements to last beyond 2021.

1. Plan for Uncertainty

When the economy sours suddenly, as it did in March 2020, I’m always struck by how immediate most Americans feel the impact. It should be no surprise, considering more than two-thirds live paycheck to paycheck. 

There’s this repeated storyline that parallels economic cycles. As the macro situation improves and prosperity rises, people tend to spend more, borrow more, and make themselves more vulnerable.

Workers become more reliant upon their jobs and careers to maintain their lifestyles.

But when the economic tide turns, causing job losses or pay reductions, the repercussions emerge quickly and are more severe. 

It should be the opposite — spend less or the same, owe less, and become more hardened. Then take steps to become self-sufficient without full-time work. 

When the economy goes bad, be prepared to pounce on opportunities. 

Even though COVID-19 and the financial crisis of 2008-2009 were mostly unpredicted, we should always anticipate that an event (global or personal) can occur tomorrow that could jeopardize our economic security. 

Instead of trying to predict what will happen, know that something will happen and prepare.

Here are a few ways to prepare for inevitable challenges:

• Reduce debts and recurring expenses
• Increase cash on hand (grow your emergency fund)
• Avoid lifestyle inflation (don’t automatically increase spending when you get a raise)
• Create multiple income streams to reduce reliance on your primary income

Every dollar of reduced debt and every extra dollar saved or earned improves your defenses. Remember that in 2021.

2. Solve Problems by Smarter Means

Trailblazing early retirement internet celebrity Jacob Lund Fisker from the blog Early Retirement Extreme retired at age 33 on an annual budget of around $7,000.

In a guest post on Get Rich Slowly in 2019, he said this:

We consider spending money a failure to solve our problems by smarter means. — Jacob Lund Fisker

Adopting this mindset changes the way you think about inconveniences. Instead of rushing to Amazon to purchase something to fix a problem, why not find an alternative solution that costs less or doesn’t involve money?

Borrow from a neighbor, find a helpful YouTube video with a DIY solution, or invest some sweat equity into your problem to make it go away. 

Think more creatively before succumbing to the urge to spend. The savings can be meaningful. 

3. Create a New Income Stream

Warren Buffett once said to never depend on a single income.

Who would have guessed so many industries could be disrupted so badly by a global pandemic? Travel, restaurants, movies, etc.

2020 is an anomaly, but even seemingly secure jobs can go away. Yours and mine included. 

Creating secondary income streams has the double benefit of income diversification and building wealth.

Additional income does not detract from primary income — it’s complementary.

How you go about creating new income streams depends on your skills, available time, knowledge, current wealth, and personal situation. 

I prefer passive income streams because they require less of a time commitment. But any additional income this year will improve your finances. 

Here are some ideas:

• Get a second job (still works)
• Buy an out-of-state rental property
• Invest in crowdfunded real estate
• Start a low-cost (high-margin) online business
• Buy dividend stocks
• Freelance, or provide online gig services via sites like Upwork or Fiverr

Get creative and start earning more money. It’s worth it, even if you start with small amounts. 

But beware of how pursuing more money will impact your lifestyle and family priorities. New active income streams take up more time. 

Read more: 25 Small Investment Ideas to Cultivate Wealth

Read more: 9 Alternative Investment Ideas for Asset Diversification

4. Implement Regular Investing

One way to significantly increase the likelihood of becoming wealthy is to invest regularly. 

Employer-sponsored tax-advantaged plans are the easiest way to do this. If your employer offers one, max it out if you can — start or increase contributions at a minimum.  

For those without employer plans, use an IRA or Roth. If you can afford to front-load, do that (see below).

Otherwise, use a dollar-cost average strategy to deposit funds into investments by creating equal, automated, timely withdrawals from your bank account into index funds, ETFs, or stocks. 

Once you’ve maxed out tax-advantaged accounts first, use a taxable account. 

I’ve done this for years. Now I’m using my M1 Finance account, an online broker that makes it easy to construct your ideal portfolio and fund it over time.

I invest a set amount bi-weekly into my account. It’s an automated withdrawal, forcing me to invest before I spend my paycheck. 

Read more: Getting Started with Investing? Here’s What You Should Do

5. Front-Load Investments

Front-loading is investing a lump sum of cash now instead of dollar-cost averaging (investing smaller equal amounts) over time. 

For example, if you have $6,000 and plan to invest $500 per month for one year, front-loading is investing all $6,000 in the first month.

If you have the money, consider investing the lump sum in January instead.

According to many studies, lump-sum investing is mathematically superior to dollar-cost averaging, including this study by Nick Maggiulli at Of Dollars and Data. 

I’m now using this strategy for college savings.

For the last five years, I’ve invested $900 into 529s for my three kids on the 25th day of each month, totaling $10,800 per year. 

In 2021, I’ll invest $4,000 per kid into each 529 in January rather than monthly. This way, I’m increasing the total investment to $12,000, taking advantage of more time in the market, reducing outflow from my monthly budget, and simplifying my finances. 

I realize not everyone can do this. I happen to have the cash available because of my investment property sale.

If you can’t, dollar-cost averaging a smaller equal amount every month is an acceptable alternative. 

6. Invest Better

We all should invest in stocks. Long-term stock investing is a proven path to wealth. 

Your specific investment strategy depends on your knowledge, willingness to learn and research, and comfort level. 

Passive index fund investing is an appropriate strategy for everyone. It involves investing in stock and bond index funds and ETFs with broad diversification as your primary investment vehicle. 

With this strategy, you’ll match the market returns, which is acceptable for most people.  

For those looking to add individual stocks to the mix, dividend and speculative growth stocks may help achieve your objectives — though you’ll struggle to beat a diversified index strategy over the long-term. 

One way to increase your chances of success is to subscribe to an investing newsletter that provides stock recommendations to supplement your research.  

I use investment newsletters to help narrow the universe of individual stocks worthy of my investment dollars. 

I subscribe to and recommend The Sure Dividend Newsletter for dividend growth investing. It’s a monthly publication that recommends ten dividend growth stocks in each issue. 

I’m going on three years of subscribing, and I appreciate the extra analysis which I can rely on and save myself some time.

Look for an RBD review on the product coming soon. Use the above link or coupon code “RBD41off” to save $41 off the regular price of $159.

I also subscribe to and recommend the Motley Fool Stock Advisor for speculative growth stocks. 

The newsletter pointed me to Zoom (ZM) and The Trade Desk (TTD) in late 2019. These were massive growth stocks in 2020. 

The Motley Fool helps to identify massive long-term investing trends and encourage subscribers to ride the wave, even when stocks may appear to be overvalued.

It’s taken me some time to adjust to this strategy, as dividend investing is about finding value in high-quality operators rather than disruptors. But it’s worked for me. 

At $99 for the first year, my God, it’s been an incredible return on my money.

Another newsletter, which I haven’t tried yet, is Motley Fool Rule Breakers, which I may explore in 2021 to find more multi-baggers to inject alpha in my annual returns. 

Read more: Motley Fool Stock Advisor Review

7. Implement an Estate Plan

According to an unscientific poll, 41% of RBD readers with kids don’t have an estate plan. Another 24% waited more than five years after their first child to finish their estate plans. 

If you have a family, life insurance and an estate plan are essential financial planning devices.

Dying and leaving a bundle of financial confusion is no way to treat your loved ones. 

For life insurance, I recommend Bestow *, a company providing term-life insurance quotes and policies online.

This company has simplified the life insurance process, requiring no medical exams to apply for a policy. Term-life is simple and will cover your family’s needs if you die.

In my opinion, term life is sufficient for most people’s needs.

For estate planning, ask neighbors and friends for a local attorney who can help. Compare prices. Expect to pay at least $1000-$1500 for a baseline plan.

If your situation is uncomplicated, a will, trust, durable power of attorney, and advanced medical directive will cover what you need. 

Estate plans can be a little confusing, so talking to a trusted attorney can be worth the cost and put your mind at ease. 

For those who prefer online interactions, a company called Gentreo can help put together a comprehensive plan for a monthly or yearly fee, including frequent revisions. 

8. Increase Monthly Cash Flow

In personal finance, positive cash flow is what’s leftover at the end of each month. To measure cash flow, you need a decent way to track income and outflow (spending). 

Software such as Mint and Personal Capital will track it for you. Or use a spreadsheet to track spending as I do.

Once you understand where every penny goes each month, you can work to reduce the outflow of cash from your possession. 

Here are three suggestions for increasing monthly cash flow. 

a) Refinance Your Mortgage

If you own a home, intend to stay, and your interest rate is 4% or above, it’s worth looking into a mortgage refinance to lower your monthly payment. 

As rates have decreased since the 2009 financial crisis, I’ve refinanced various mortgages six times!

It sounds ridiculous, but each time it’s saved me thousands of dollars.

By resetting your mortgage back to a 30-year loan duration, you can extend the payment term and often get a lower interest rate. This combination of more time and lower rates reduces the monthly payment, leaving you with more cash left over each month. 

Or refinance to a shorter-term loan (15-20 years) and pay it off sooner (we reset to a 20-year mortgage refinance in September). 

The last time I refinanced, I used Credible to compare rates. This company uncomplicates the mortgage refinance process. 

b) Payoff a Debt

Consumer debts that require a monthly payment are holding you back from becoming wealthy. These include low-interest car loans, credit card balances, and personal loans.

Debts require regular payments, decreasing positive cash flow. Paying them off is a short-term sacrifice to enhance traction in the long-term. 

Identify these kinds of debts and stop justifying why you still have them (even the 0.9% car loan). 

The goal is to keep more of your income every month, not give it to someone else. This should be obvious.

You’re not getting wealthier by servicing a 0.9% loan on a depreciating asset. 

Most importantly, think hard before taking on new consumer debt this year.

c) Eliminate Recurring Expenses and Automated Withdrawals

Subscriptions, unused memberships, wine of the month clubs, etc., can be easily be forgotten. Take a look at your credit card statement every month and eliminate recurring expenses that aren’t necessary. 

More and more businesses are changing to recurring revenue models.

We’re encouraged to set and forget expenses, so the company is more likely to get paid. They call it convenience, but they use this model to help you forget about the expense.

Our family pays for piano and dance lessons on the first of every month. Each time I see those charges, I question whether it’s worth it. In these cases, it still is. 

But that may not be true for everything. Now’s a good time to reevaluate the recurring expenses you spend every month. 

Another option is to remove the automation. Though I love automating finances (see below), sometimes forcing yourself to pay a bill manually every month makes you think twice about it being worthwhile. 

9. Simplify to Improve Your Finances

Financial simplification is another recurring theme that comes up at the beginning of each year.

Minimizing the complexity of your financial life makes room for leisure. It reduces stress and frees brainpower for other endeavors. 

There are many ways to accomplish this:

• Close redundant accounts (bank accounts, credit cards, brokers)
• Own fewer stocks/ETFs
• Reallocate employer-sponsored contributions to fewer funds
• Pay off debts
• Sell mediocre assets 

Over the years, I’ve both increased my financial complexity with new income streams (real estate crowdfunding), then reduced complexity in other areas. 

For example, I sold my rental property in 2019. This freed up cash and uncomplicates my taxes from now on. 

Eliminating car payments for life was another simplifying commitment. 

I’ve also reduced the number of automated withdrawals from my checking account. I went from weekly investments into my M1 Finance account to bi-weekly.

Implementing a front-loading 529 strategy eliminates monthly withdrawals too. 

The goal is fewer monthly transactions. 

10. Automation and Speed Bumps

Implementing automation in your financial life has many benefits.

You won’t miss bills or required payments, and it frees your time and brainpower to do other things.

One strategy is to use automation to encourage good habits such as regular investing and paying your mortgage and essential expenditures (e.g., utilities) on time.

Set up online bill-pay or pay directly on the company websites. I use autopay for my mortgage directly on my administrator’s site.

On the other hand, you can add manual steps (speed bumps) to rethink less desirable habits such as discretionary spending. Manually walk through your credit card bill to see where you’ve spent the money, so you see it before scheduling the payment. 

If you’re a spreadsheet junkie like me, export .csv files from your bank or broker and import them into a spreadsheet template ready for calculations and charts.

I use spreadsheet automation to format data extracts from my brokers to create the charts you see on my Portfolio page. Excel can do incredible things if you set your spreadsheets up with automation in mind. 

So instead of manually typing numbers, the data comes in clean, and you save time. 

Conclusion

Most New Years’ resolutions are broken within 30 days.

Instead, think about your long-term financial objectives and take daily steps in that direction. 

Start small and build each day. 

Some days you’ll choose poorly, but you can get back on track the next morning. 

In what ways do you plan to improve your finances in 2021?

Note: Bold links indicate links from RBD affiliate partners. 
Featured photo by Lindsay Henwood via Unsplash
* The compliance department of RBD’s affiliate partner, Bestow, would like you to know the following: the opinions and ideas expressed in the article are those of the author(s) and are not promoted or endorsed by Bestow or North American.