My name is Thao, and I give people financial advice for a living. Like many of you, I believe that, even though the vaccine is coming, it will take a while for things to get back to “normal” again.
2020 was such a historical year. Many of us suffered losses in some ways. We have all experienced uncertainty.
As a first-generation Asian-American, I have learned–as many of you have–that the greatest things that we all can get from times of struggle is the realization of what is truly important to us. There are many outside variables that powerfully affect you and what you value. Some you can control, some others you can’t. This pandemic, market uncertainty, upcoming tax changes, and this unusual political environment are among the things outside of our immediate control.
Instead of focusing energy there, try focusing on yourself and working intentionally and steadfastly on things within your control.
I have a few suggestions on house cleaning things that you can do to make sure things your values are protected, especially during volatile time like this. When things get back to normal, these steps will ensure that our values are protected.
You can do these on your own. As a professional financial planner, I can help with any and all of them.
1. Re-examine estate plans and insurance:
Make sure you have a proper plan in place for your loved ones. If anything happens to you, if passed away or became incapacitated, would they have enough to get through the hardship on their own? Does your insurance have enough coverage? How would your assets be distributed? I witnessed my own family fall apart over estate splitting. Trust me, that’s the last thing you would want your family to go through during a time of grief. If you have any minor children, make sure you designate a custodian to care for them, and look after their respective financial affairs. Don’t simply assume that a certain family member can care for your kid(s). Ensure there is a concrete plan in place to avoid potential court costs and custody battles.
2. Review your accounts’ beneficiaries:
You can designate beneficiaries to all your financial accounts including your bank accounts. If you have any insurance policies, any retirement accounts, annuities, taxable brokerage accounts, make sure you designate your beneficiaries. You have the option to even further designate the contingent beneficiaries in case your primary beneficiaries predecease you. With brokerage accounts, you may do so by retitling your account to a “Transfer On Death” (TOD) account. If you have bank accounts, ask your bank teller how you can retitle them to “Payable On Death” (POD) accounts. If/when changes occur in your family, make sure you update your beneficiaries. What is the problem if you don’t? When you pass away, your estate will ultimately need to go through probate court, which is often is costly, timely, stressful. Furthermore, your estate information will become public knowledge.
3. Build an emergency fund (if you haven’t already):
How many of us lost a job/business this year, went through break-ups/divorce or know someone who did? Not having enough emergency savings was among the biggest regrets for Americans in 2020. The rule of thumb is to have at least 6 months worth of your monthly expenses in liquid cash. You may argue that cash doesn’t earn you any interest. You can look further in opening a savings account through online banks which normally offer higher yields than the traditional large banks; or you can also consider buying Money Market Mutual Funds.
4. Review your investment allocation (Diversification is key):
Give your portfolio a check up to make sure your investments are still suitable for your risk tolerance and time horizon. It may be tempting to get into any vaccine or work from home related stocks or bitcoins right now. It’s all hype! These speculations remind me of the tech bubble back in the late nineties.
Unless you have done serious research, don’t just follow the trend or let your FOMO guide you. Trying to pick the next best stock is like getting stuck in a traffic jam and you are trying to switch lanes to get ahead of others. It causes frustration, anxiety and increases your uncertainty. What makes you think you are smarter than hundreds of thousands of these highly educated and well trained investment specialists? Invest in index funds and let the market work for you.
5. Adjust paycheck withholding:
Did your income change last year, and this coming year? If you haven’t made enough tax withholding last year because your salary increased, you can file for 2020 fourth quarter’s estimated tax payment before January 15th. Talk to your CPA about this. If you estimate your income will be higher this year, you might want to increase your withholding rate.
6. Adjust retirement saving rate:
Can you increase your saving rate this year? The rule of thumb is to put away at least 15% of your gross income into either paying down debts or savings/investments. You don’t have to wait until you finish paying all your debt to start saving. On average, the stock market can give you an annual return of 7-10%. If you have an interest rate lower than 4%, you can invest your money, and use your earnings to help pay off your debt. If you have high rate debts, prioritize paying down your debts first. As soon as you have the ability to put some money away, do that. Take advantage of your employer’ retirement benefit, and put away as much as you can. At the very least, try to max out the matching. It’s free money to take and add on to your own savings. Also, you don’t have to limit your savings through your retirement account only. You can also save by putting your after-tax money into a brokerage account. If you want to invest, again, diversity is key!
7. Refinance your home/student loans (take advantage of the low interest rate):
With this current situation, and the availability of the new vaccine, interest rates will probably remain low in the coming year. Take advantage of the current low rate while it lasts. It’s hard to get a rate this low again in the future. Refinance to reduce your monthly mortgage payment. I was able to save $491/month, $5,892/year, or $34k over my total mortgage for being able to reduce the interest rate by 1.1%. With an excellent credit score, you can even get below 3% . Although Federal Student Loans had been suspended on payments and interests until Dec 31, 2020, you can still consider refinancing your student loans obtained through private lenders to enjoy the lower interest rates.
8. Review your credit score:
Everyone needs to apply for car loans, mortgages or credit cards at certain points in their lives. It’s good to review your credit scores and reports for accuracy at least once a year. Check for any missed payments, errors, or signs of identity theft like any new credit lines that you’re unaware of. You can dispute errors and work on improving your scores. Many credit cards nowadays allow their clients to review their FICO score. Free sites like Creditkarma.com and AnnualCreditReport.com also give you free access to your full credit reports. With CreditKarma, you can have unlimited access to TransUnion reports. However, there are 2 other credit report agencies: Equifax and Experian. AnnualCreditReport is a mandated free service from the government, which allows you one free access a year to each of these agencies. You can space them out, and schedule one review every 4 month at each of these 3 agencies.
2020 has past and 2021 is a chance for us to develop a proper plan to protect ourselves. Many Asian families have multiple generations living together. Some of us might have to also monitor our parents’ financial matters. It can be very time consuming to review all these components for multiple people. Do yourself a favor and start early!