Financial Resolutions for 2021

In preparation for the start of the year, many engaged in the annual ritual of making New Year’s resolutions. Unfortunately, approximately 80% of people who make New Year’s resolutions will have abandoned them by the second week of February. With January already in the books, your eagerness to follow through on some of those good intentioned resolutions may have already started to fizzle out too. Although we won’t be able to help you with all of the important life changes you’ve planned for this year, many of the same personal goals we set can translate to our financial lives as well. Our hope is to outline a few financial habits that may be easier to keep, especially with guidance from your trusted advisors.

Resolution: Find Balance

Just as a well-balanced person seeks productive actions to move towards their life goals, we can do the same in our investment portfolios. Simple portfolio rebalancing is a proven value-add technique ensuring you maintain the right asset allocation and risk tolerance to achieve your financial goals. It provides the discipline to fulfill the mantra of “buy low, sell high” that characterizes successful investing. By rebalancing, you take the profits from winning investments and redirect them to others that have capacity for growth. If the volatility we experienced in 2020 left you questioning your risk tolerance, take this time to examine the overall mix between stocks and bonds that will allow you to stick with your strategy over the long-term.

Resolution: Stay in Touch

You may have made the resolution to reach out to friends and family more often this year. As you reconnect with the important people in your life, also re-examine those that you have elected to take care of your health and financial decisions for you in the case of your incapacity. Perhaps more than ever as we navigate a global health crisis, it is important to understand the duties and authorities that come along with these critical roles. A clear health care directive and durable power of attorney for financial decisions can make it easier on loved ones to carry out your wishes. Make sure to notify those individuals and formalize the arrangement in writing. If you find the need to make any updates, enlisting the assistance of your attorney will be essential.

Resolution: Get in Shape

Increasing physical fitness is easily one of the top resolutions each year. The same should apply to getting your portfolio in shape. If you are looking for ways to drop some weight, consider increasing the tax efficiency of your portfolio. Tax-efficient investing looks at the unique tax characteristics of each security and determines not only the suitability of that investment, such as whether you should invest in taxable vs. tax-exempt bonds based on your income tax rate, but also where you should purchase that particular investment. Based on their tax profile, some investments are better suited to be held within your tax-deferred accounts (401(k)/IRA) versus being held in your taxable account. This is referred to as an asset location strategy.

You can also go beyond tax-efficient investing to create tax alpha in your portfolio as a means to further enhance after-tax returns. This is accomplished by implementing a tax-loss harvesting strategy characterized by selling a security and swapping into a similar investment to capture losses that can be used to offset future capital gains. As you can only spend the resulting after-tax portfolio income, the benefits of tax efficiency will build up over time.

Resolution: Get Organized

I wish I could tell you to get rid of everything in your portfolio, like your closet, that doesn’t “spark joy.” However, I’m guessing for most that your diversified allocation in the S&P 500 ETF is not the most “joyful” aspect of your portfolio, yet, it serves a very important purpose. An organized portfolio can help you identify how different parts of your portfolio are performing and help you determine if you are overweight or underweight to certain areas of the market. Perhaps there are investments you are keeping simply due to your emotional attachment to them that may not be best suited to help you reach your goals. With a clean slate for tax purposes, now may be the time to consider a plan to exit or reduce those positions.

This is also a great time to organize and map out your cash flows for the year. Determine whether an increase in the contribution rate to your retirement plan or health savings accounts is warranted based on new plan limits for 2021. With current low interest rates on cash investments, consider whether excess funds in your savings account can be applied to your long-term financial goals. If you have large upcoming purchases or distributions, determine when and from which accounts you will need to create liquidity.

Resolution: Sleep Better

Besides downloading the latest meditation app, the next best thing (from our perspective) to a restful night’s sleep is knowing you have a sound financial plan in place. Having a plan is fundamental to successful wealth management as it helps to identify the roadmap to not only achieve your goals, but to maintain and monitor them over time. Understanding your primary goals and objectives, along with upcoming cash flows and unique circumstances, can help ensure your plan withstands various economic and market environments. While we know short term investing can be exceedingly unpredictable, stress testing your financial plan to contemplate various return sequences can help keep you on track when volatility strikes.

A sound investment plan should also line up with your estate plan. A quick review of the titling of your accounts along with the beneficiary designations on your life insurance and retirement plan assets can put your mind at ease that your accumulated wealth will pass on as you intend. Lastly, check your free annual credit report or consider whether freezing your credit is right for your situation. With cyber-security issues front and center, it is prudent to safeguard against potential identity theft.

Resolution: Be Flexible

While we set out with many goals in mind, perhaps the most meaningful is to remember to be flexible and adapt to the changes that come throughout the year. This year is likely to be no exception. With the recent change in administration comes the potential for a shifting landscape in tax, estate, and philanthropic planning. By building flexibility into your plan, you give yourself the opportunity to adapt and leverage planning strategies even if it requires you to change course.

As we all recognize, the most challenging part of resolutions is not making them but keeping them. Becoming financially fit can help ensure the best path forward for a successful financial future. At Greenleaf Trust, we are committed to helping you adhere to your strategy, navigate potential changes, and guide you as you set out to accomplish your financial resolutions in 2021 and beyond.