Invest Financial Planning

Your Guide to Bulletproofing Your Finances In 2021 

Pam Krueger  |  January 15, 2021

You're stronger than ever, so why shouldn't your finances be, too? A look at how to protect your money for the long haul.

We’ve just said goodbye to a very difficult year. 2020 shocked everyone into a new reality regarding their finances. Worrying about both health and money showed us why it’s so important to have an emergency fund in place – and to be prepared for events that you may have never imagined. Who could have predicted at the start of 2020 that there would be millions of Main Street businesses shut down and entire industries pulled apart at the seams. Millions of people saw their jobs disappear, schools closed down for months, the stock market took us on a wild ride, and more than 88 million people worldwide were struck by a deadly virus.

This last year brought into stark relief why we need to have a financial back-up plan that can help when unexpected events come our way. If, for example, your current position was eliminated today, how long could you continue paying your expenses? If you have money in a safe and accessible account, you could weather some of these financial challenges without landing in high-interest debt or having to tap your retirement savings.

But I know how challenging it can be to build up an emergency fund during these tumultuous times – or to replenish it if you had to tap the account over the past year. But now is still a good time to get started on fixing your finances, and getting started is the whole key. A  solid first step is to aim to sock away a “just in case” fund. That’s enough money to cover six months of your living expenses. That number may seem intimidating at first, but you can start small. Make one of your top financial priorities to set aside a few hundred dollars each month until you get $1,000 in your emergency fund. Having that money will provide you with some protection in case you have unexpected expenses pop up. Then, little-by-little, build up your fund until you have a few months’ worth of expenses covered. Keep that money in a completely separate account so you won’t spend it or confuse it with your regular expenses.

Where To Keep Your Money 

The tough situation now when it comes to your finances is that interest rates are so low that your savings are likely to earn little or no interest. That’s OK. Remember, this is “Plan B” money and it needs to be kept safe. You can take risks with other money you have for your long-term savings. A savings account at a bank or a credit union is usually a safe and accessible place for your emergency money. You may be able to earn slightly more interest with a savings account at an online bank. You can search for the best deals at FDIC-insured online banks at Maxmyinterest.com.

In addition to keeping your emergency fund in a safe savings account, you can also set aside some extra money that can do double duty – in a tax-advantaged account where it can grow for the future, but also be accessible without penalty if you need the money before then. Money in a Roth IRA, for example, can build up tax-free savings for retirement – you can withdraw the earnings tax-free after age 59 1/2, but you can also withdraw your contributions at any time without taxes and penalties, making it a good back-up emergency fund. You can contribute up to $6,000 to a Roth IRA in 2021 (or $7,000 if 50 or older) if your modified adjusted gross income is less than $125,000 if single or $198,000 if married filing jointly. The contribution amount starts to phase out if your income is higher, and you are not eligible to make Roth IRA contributions in 2021 if you’re single and your AGI is more than $140,000 or if you’re married filing jointly and your AGI is more than $208,000. If you don’t earn an income from working but your spouse does, he or she can contribute to a spousal IRA on your behalf, which can also be a Roth IRA if your joint income is less than the cut-off.

Looking To Your HSA

Another good source of extra emergency money is a health savings account. If you have an HSA-eligible health insurance policy (with a deductible of at least $1,400 if you have self-only health insurance coverage, or $2,800 for family coverage),  singles can contribute up to $3,600 to an HSA in 2021 or up to $7,200 for family coverage. Plus, if you’re 55 or older, you can add an additional $1,000 for the year.  You can withdraw money from the account tax-free for out-of-pocket medical expenses at any time, including your deductibles, co-payments, prescription drug costs, and dental, vision and other medical expenses that aren’t covered by insurance. And the eligible uses for HSA money were recently expanded – now you can also use the money tax-free for over-the-counter medications and menstrual products. You can also use HSA money tax-free to pay your health insurance premiums if you’re receiving unemployment benefits, or to pay COBRA health insurance premiums if you lose your job and continue your employer’s coverage.

There are no use-it-or-lose-it rules for HSAs – you can leave the money growing in the account for future expenses. And there’s no time limit for taking the eligible withdrawals you incurred since you opened the HSA – if you pay those health-care costs in cash now but keep your receipts, you can withdraw that money tax-free anytime in the future. It may be a hassle to keep receipts whenever you go to the grocery store to buy ibuprofen and other over-the-counter drugs and menstrual products, but you can get in the habit of taking a picture of the receipt and put it in a phone app scanner to file it away electronically. You’ll be surprised how quickly those numbers add up – and then you can withdraw that amount tax-free from the HSA at any time if you need a back-up emergency fund.

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