After all of the challenges we faced in 2020, many of us are looking forward to getting back to some kind of “normal” in 2021. Not only did COVID-19 take a massive toll on our physical and emotional health, it dealt a mighty blow to the economy too.
The U.S. had already been in a recession by the end of the first quarter of 2020, one that marked the end of a long, historic economic expansion that began back in June 2009 — and those were still the early days of the pandemic. Then in the second quarter, with more lockdowns going into effect across the country, real gross domestic product (GDP) decreased a whopping 31.4%. The nationwide closure of many nonessential businesses during the first wave of the coronavirus also led to a 14.7% drop in retail sales. And by April, the unemployment rate had peaked at 14.7%. Outlooks were grim.
But as stores and restaurants reopened, the economy began bouncing back. Things started looking up in the third quarter: GDP shot back up to an annual rate of 33.4%. The last quarter has been shaky, largely thanks to a second wave of COVID-19, but things could’ve taken a worse turn. A forecast released at the Federal Open Market Committee meeting in mid-December projected that annualized GDP growth for 2020 will end up being down 2.4%. While that may not be as bad as some expected, the economy hasn’t yet gained strong momentum.
There’s reason to be cautiously optimistic, but you’ll still want to take a serious look at your personal finances to set yourself up for success — and security — in the coming year.
What are some things I should do now for a better 2021?
Here are four simple things you can do to save money next year.
1. Take stock of your finances
One of the nice things about getting a jump on things now is it means you have to sit down and go through all your financial documents, your bank statements, your 401(k), your credit card bills and other statements and get organized. That’ll start you down the road to being ready for tax day. Plus, planning ahead can help you avoid a big tax bill this year. For example, you might see, “Oh, I need to contribute to my retirement plan,” and if you start the year off doing that, you’ll lower your tax bill by reducing your taxable income.
2. Check in on your retirement fund
For most of us, this is the biggest single thing we can do to help our future selves. Your employer might provide a 401K or a 403B. If they offer matching, take full advantage of that if you can — otherwise you’re leaving money on the table. In 2021, the max contribution to a 401K/403B is $19,500. You may be able to add even more to it if you’re over 50, since the catch-up contribution limit has increased from $6,000 to $6,500.
For an individual retirement account (IRA) that you set up without your employer, the annual contribution limit is $6,000 (or $7,000, if you’re 50 or older). This is also a great time to review your finances and try to increase your contribution, if you can. An extra percent or two can really add up with the magic of compound interest.
3. Take a look at your HSA or FSA
Contributing to a health savings account (HSA) or flexible spending account (FSA) is a good way to lower your overall tax bill by helping you set aside tax-free money for your healthcare, commuting or dependent care expenses. But keep in mind that these tax-favored health plans also come with a “use it or lose it” policy, so check your balance to see how much is actually there and then follow up, either through your online account or with your human resources department, to confirm the deadline you need to spend those funds by. In some cases, you may be able to roll over up to $550 or get a two-and-a-half month grace period to spend it.
If you do want to use up your HSA or FSA funds before the end of the year but don’t have any more medical expenses to put it toward, check out the online FSA store. It has lots of products that are eligible for purchase with these accounts — everything from over-the-counter drugs and baby supplies to first aid kits and physical therapy devices. And don’t forget to save your receipts! You’ll need them when it’s time to itemize your HSA or FSA expenses.
4. Don’t forget to check your tax withholdings
You’ll typically set the amount of income tax that gets withheld from your paycheck when you start a new job and fill out a W-4. But life changes like getting married or divorced, having a baby or buying a home may affect how much you want to withhold during the year. Plus, if you’re keeping too much or too little from your paycheck, that could mean a bigger headache at tax time (no one wants an unexpected tax bill or penalty). You can discuss your withholding amount with a tax professional or use the free IRS tax withholding calculator to see if you’re withholding the right amount.