Written by: Corey Janoff
It’s a new year, heck, it’s a new decade, and who doesn’t like a good list of goals to accomplish in the new year!? To kick-start 2020, I wanted to put together a list of 20 money tips for 2020 that you can strive to implement this year.
Some of you will already have most of these taken care of. If so, pat yourself on the back. I would bet that very few of you have done all of these things in the last six months. Skim through the list to find the things you haven’t done recently and sit down and get it done!
Most of these items are applicable to almost everyone. However, personal finances are personal, so be sure to assess whether or not it is right for you and consult with your financial advisor if you’re not sure.
With that, let’s dive into my 20 money tips for 2020.
1. Pay Off Credit Cards in Full
Paying interest on credit card debt is one of the most detrimental financial mistakes people make. Most credit cards carry interest rates of 15-20% or higher! Imagine if you gained 15-20 pounds a year. That’s basically the equivalent of what you are doing to your finances by carrying a credit card balance.
If you have a credit card balance that doesn’t get paid off each month, it means you are spending more money than you should be. Make it a high priority to pay off that credit card in full before engaging in any more fun activities that cost money. Cut out the travel, no more shopping for clothes, de-activate your Amazon account until your credit card is paid off. Once that is taken care of, continue to pay off your credit card in full each billing cycle.
2. Open a High Interest Savings Account
A high interest savings account is one of the easiest ways out there to get free money. You won’t get rich from it, but most high interest savings accounts are crediting between 1.5-2% interest in early 2020. If you have $25,000 in your emergency savings account, that could be $500/year in interest the bank credits you. Again, not going to make you rich, but I would gladly accept a free $500/year if it’s being offered.
If you don’t already have a high interest savings account, simply Google “high interest savings” and you will find plenty of options. I don’t really care which bank you use. Make sure it is FDIC insured, has no fees or transaction costs, and no catches. You can link it to your primary checking account online and transfer the money back and forth as needed.
3. At a Minimum, Get Full Employer Match on 401k
Another easy way to get free money is to contribute at least enough to your retirement plan at work to get the maximum matching contribution offered by the employer.
Many employers will match your contributions up to a certain amount. For example, your employer might match your contributions 1:1 up to 6% of your salary. Or they might do 1:1 on the first 3% and then $0.50 per dollar on the next 2% of your salary. In that scenario, if you contribute at least 5% of your pay, they will match 4%.
Whatever their matching contribution is, make sure you are taking full advantage of it and getting all the free money they are offering you. A dollar for dollar match on contributions is the equivalent of getting an instant 100% rate of return on your investment. Good luck finding that elsewhere.
4. Max out a Roth IRA/Backdoor Roth IRA
In 2020 you can contribute up to $6,000 to an IRA ($7,000 if age 50+), provided you earn at least that amount of income this year. You can also contribute to an IRA on behalf of your spouse, even if your spouse doesn’t earn income.
If your income is below a certain threshold, you can contribute directly to a Roth IRA, unless you are married and file taxes separately. If your income is above a certain threshold, or you file taxes separately, you can make a non-deductible contribution to a Traditional IRA and then convert that Traditional IRA into a Roth IRA. This is commonly referred to as a Backdoor Roth IRA.
Before proceeding here, talk to your financial advisor or tax accountant, as there are many nuances that could trip you up and create tax problems for you. While appropriate for most people, there are some instances where it is not appropriate to make IRA contributions. Assuming you are eligible to contribute, and contributing/converting won’t create any tax problems, this can be a great way to fund an account that can be accessed tax-free in retirement. Who doesn’t love tax free money!?
5. Max out 401k/403b
After getting the full employer match and maxing out your Roth IRA, make it a goal to max out your 401k/403b for the year. In 2020, you can contribute $19,500 to a 401k, 403b, TSP, or 457b, plus an extra $6,500 if age 50+.
If you don’t have one of those accounts available at your employer, max out whatever your employer offers. If your employer doesn’t offer a retirement plan, talk to them about making that an option. If they need some guidance on setting one up, have them get in touch with us (#shamelessplug).
If you are self-employed, you could contribute up to $57,000 to a 401k (plus $6,500 if age 50+), which is a great goal.
Why is it a good idea to max out your retirement plan at work? For one, you are saving for retirement. The accounts are also tax-sheltered, and many are highly protected in the event of a lawsuit. You also can’t go back and add money for missed years.
6. Set 401k/403b to Auto-Rebalance
Many employer sponsored retirement plans have an option to set an auto-rebalance feature. This automatically adjusts your investment allocations back to your desired targets every year, or semi-annually (or whatever timeframe you choose).
This is beneficial, because over time, market movements will skew your portfolio away from your desired investment allocation. Rebalancing will help keep the portfolio risk in line with your goals.
For example, let’s pretend you choose four funds to invest in: A, B, C, and D and want to allocate your portfolio 25% to each. Over time, due to differing rates of return in each fund, you may find that instead of 25% in each, you have 15% in A, 30% in B, 20% in C, and 35% in D. Rebalancing will sell off 5% from fund B and 10% from D and invest 10% in A and 5% in C to get back to the 25% each desired allocation.
You can do this manually, but it’s way easier to have it done automatically and it will save you time and energy.
7. Set-up Auto Contributions to a Brokerage Account
If you can’t tell, I’m a big fan of automation. I believe the less work you have to do to keep your financial goals on track, the more likely you will achieve those goals. If you manually have to do something, you have to wake up in the morning and say, “Today I’m going to do this,” and then you actually have to go and do it. Automating it means you don’t have to wake up and remember to do it, and you don’t have to take any action because it is taken care of for you automatically!
Your retirement contributions at work are automated – they take a percentage of each paycheck and deposit into your retirement account without you having to do anything. You can essentially do the same with your other investments.
Once you are maxing out your tax-favorable retirement accounts, set up an auto-deposit into an investment account outside of work. Set it and forget it (maybe check it once or twice a year and rebalance if necessary).
If you have to manually log in and make a deposit each time, you likely won’t contribute as much as if you automate your contributions throughout the year.
8. Max out HSA if Eligible
If your health insurance plan allows you to contribute to a health savings account (HSA), I strongly encourage you to do it. It is the only account available that is triple tax free. Tax-deductible contributions, tax-deferred investment earnings, and tax-free withdrawals if used to pay for eligible healthcare expenses. This is a great way to cover your out of pocket medical expenses in a tax-favorable manner.
Also, the money carries over from year to year, so if you don’t use the money this year, you can save it for future years and possibly grow the balance over time. Once you reach age 65, you can use the money for things other than healthcare if you choose (but you have to pay income taxes on withdrawals if not used for healthcare, similar to a Traditional IRA or 401k).
9. Save at Least 20% of Income for Retirement
If you have read any of my previous blog posts, you have probably seen me reference the 20% rule. Try to invest at least 20% of your income for retirement. I’ve done the math enough time to tell you that if you can save at least 20% of your income for retirement starting in your early 30’s, that should put you on a health track to potentially retire at a reasonable age and live a lifestyle you grew accustomed to living while working. No guarantees. The more you save, the more likely you will achieve financial independence, or the sooner you will get there.
Between 401k’s, IRA’s, brokerage accounts, etc., I challenge you to try to invest at least 20% of your gross income and earmark it for retirement.
10. Adequately Fund 529 College Savings Accounts
If you don’t have kids or don’t plan on paying for their college, you can skip this one. If you do have children and want to pay for their college, read on.
529 plans are like Roth IRA’s for college. After-tax deposits, tax-deferred growth, tax-free withdrawals for qualifying education expenses. Many states offer a tax deduction on state income taxes if you contribute to your own state’s sponsored 529 plan. This is great, because you can get a little tax deduction while investing for your kids’ college.
At the very least contribute enough to get the full tax-deduction. Unless the tax-deductible amount is more than you need to contribute to reach your goals for college savings (then save as much as you need to reach your goals and 100% of it will be tax-deductible at the state level).
11. Tax-Loss Harvest in any Taxable Accounts
After the investment gains we saw in 2019, unless you were invested heavily in pot stocks, you probably don’t have many unrealized losses in your taxable accounts. However, we don’t know what 2020 will deliver for us from an investment return standpoint. If you find any of your investment holdings are trading at a loss compared to when you purchased the shares originally, consider selling the position(s) at a loss and reinvesting in similar but different positions. While I would rather see my investments only go up and would gladly pay taxes on the gains, losses help offset gains and reduce your tax bill.
I want to elaborate on the “reinvesting in similar but different positions” from the previous paragraph. If you are using mutual funds or ETF’s in your portfolio, each one is likely investing in a particular asset class (US stocks, international stocks, bonds, etc.). Let’s pretend you are investing in an S&P 500 index fund for your US stock exposure and that is trading at a loss. You could sell that position to realize that loss, but if you reinvest in another S&P 500 index fund, it will likely be considered a wash sale and you will lose the ability to claim that loss for tax purposes.
Instead, consider reinvesting in a different US stock fund, maybe a total US stock market index fund, or a Russell 1000 index fund. That way, you are investing in a similar, but not identical position and still maintaining the desired exposure to that broad asset class (large US stocks).
12. Pay Extra to Debts, Highest Interest Rate First
Everyone would like to be debt-free one day. I challenge you in 2020 to make extra payments to your debts so you can pay them off faster than required. Start with the highest interest rate debt first and work your way down the ladder, highest to lowest interest rate. Once your highest interest rate debt is paid off, pop some champagne to celebrate (or Martinelli’s if you don’t drink alcohol) and then start working on the next highest interest rate debt.
Ain’t nothin’ like a debt free party
While there are other debt elimination strategies out there, this one is mathematically the most efficient way to become debt free.
13. Apply the 90/10 Rule with Any Bonus Income
Bonus income is great. It provides an extra boost to your bottom line and often gives you some flexibility with your finances. Since most of you are paid on a consistent basis throughout the year and hopefully your regular paychecks are enough to support your lifestyle (living within or below your means), you hopefully don’t need the bonus income to survive.
With any bonus income, I challenge you to take 10% of it and do something fun. Take a vacation. Do a home improvement project. Buy the new flatscreen TV. Do a spa day. Buy floor seats to the basketball game. Whatever you’re into. Splurge.
With the remaining 90%, I challenge you to direct it towards your financial goals. Either pay down debt, invest for retirement, kids’ college, or whatever you are trying to accomplish financially. Use that bonus money to accelerate your financial progress.
14. Review Disability Insurance Needs
Your ability to work and earn an income is your most valuable asset and if you lose that ability, you will have a hard time achieving your financial goals. We are working so we eat, provide shelter for ourselves, send our kids to college, and stop working one day, among other things.
As long as you rely on your income, protect it as best as possible. Review your disability insurance every year to see if it is adequate. If your income and lifestyle has changed over time, you may need to increase your coverage (or possibly decrease coverage) to adequately protect the income you need to survive and accomplish your financial goals.
15. Review Life Insurance Needs
Life insurance is no different than disability insurance. Review periodically to see if you have enough or if your term policy will last long enough. If you need more (or less), revise your coverage accordingly.
In my opinion, it’s better to over-insure early in your career, because you can always decrease it later if you don’t need it. If you are underinsured and need to buy more in the future, age and health changes could make it considerably more expensive or you may not be able to qualify.
16. Review Home/Auto/Umbrella Insurance Needs
It’s good to check your insurance coverage annually to make sure they are appropriate. Is the amount of coverage sufficient? Do you need to increase it to adjust for an increase in home value? Are your liability limits still appropriate? Do you need to add another $1 million to your umbrella policy to reflect an increase in your net worth?
Consider purchasing earthquake and flood insurance too, as those catastrophes typically aren’t covered in a standard home insurance policy.
It could also make sense to increase your deductible if you have a sufficient emergency reserve. Going from a $500 deductible to a $4,000 deductible on your home insurance could potentially cut your premium payments in half. Yes, you will now be responsible for the first $4,000 of a claim before the insurance company covers anything. However, if you have a sufficient emergency fund, you can probably afford a $4,000 unexpected expense without breaking a sweat. If you end up saving $1,000/year in insurance premiums, you will likely make up the difference before you ever have to file a claim.
17. Review/Update Your Estate Plan
Estate planning is a must if you have children, but it is smart for everyone to consider. If something happens to you, will your children and your money be taken care of according to your wishes?
If you don’t have an estate plan, get one. If you already have one, thank you. It’s good to review these documents annually to make sure everything is appropriate and possibly reconnect with your estate planning attorney during a major life event, or every 5 years for a more formal review/update.
For some more insights on estate planning, listen to the estate planning episode of our podcast. Available on our website or wherever you get your podcasts.
18. Review Your Financial and Life Goals and Make a Plan to Achieve Them
We’ve made it through 17 tips for 2020 and haven’t stopped to consider why we are doing all of these things. The “why” is just as important as the what or the how. Why are you saving for retirement? Why are you saving for college? What are your goals, why are they important to you? Once you have that in focus, you can take the previous tips and apply them appropriately to your particular situation.
19. Have a Financial Talk With Your Parents
This one could get awkward/frustrating/insert-adjective-here. However, it’s a must. Your parents’ financial situation will one day become your financial situation, for better or for worse. The more you are on the same page with each other, the smoother that transition will be.
We wrote an entire blog post about dealing with your parents finances and I encourage to give it a read for some ways to get that conversation started.
20. Remember to Have Some Fun
Hopefully all of you are enjoying life. Enjoying in moderation, but enjoying, nonetheless. What’s the point of living if you’re not having any fun? Make sure to take some time for yourself. Relax. Unwind. Go outside. Breath fresh air. Get some sunshine (wear sunscreen of course).
Taking time to do the things you enjoy with the people you enjoy the most is really what this is all about. We are planning our finances around that single theme. Doing things you enjoy with people you enjoy. How can you structure your financial goals, so over time you can do more of that?
Everyone’s situation is different and not all of these tips are applicable to everyone. Carefully consider each one as it pertains to your own specific financial goals and circumstances and consider implementing it if it is right for you.
Have a happy and healthy 2020!