Five Ways to Do Financial Planning Differently in 2021

Millions of Americans have been furloughed, seen reductions in their wages or have lost their jobs. Small business owners across the country have been forced to change the way they operate, interact with customers and conduct business during this time. Setting a plan in place for your business's financials will be imperative as we head into the new year.

We talked to a few financial planners and small business owners about how to do financial planning differently for 2021. Here are their best tips to prepare for the upcoming year.

1. Have an Emergency Fund

Small businesses of all shapes have been impacted by the events of this year. Many companies were forced to reduce their workforce as they navigated through reduced hours of operations and loss of business. Government support early in the pandemic through the CARES Act helped prop a number of businesses with grants, payroll support and aid packages, but this source of relief soon dried up with no guarantee of continued funding. Millions of unemployed Americans are also expected to lose aid as federal programs are set to expire .

According to a recent Pew survey , only 23 percent of Americans have enough money saved to help cover expenses in case of an emergency. Richard Hill, lead advisor at Compass Financial Group , emphasizes the need for an emergency fund: "Emergency funds are more important than ever — economic shocks such as those from COVID have shown us the importance of having emergency reserves to cover unexpected events such as layoffs, furloughs or car and home repairs."

He also highlights the concern when it comes to independent contractors and freelancers who “are at greater risk for frequent and longer work interruptions and therefore should seek to build larger emergency funds than those with more stable employment.”

Lorrie Delk Walker, a financial advisor for Allen & Company , recommends having three to six months of income set aside in case of emergency. “If you’re single, shoot for six months. If you’re married and both of you work, you can consider having only three months set aside.” Having an emergency fund in reserve can help create some cushion and give you time to shift gears and adjust your business strategy.

2. Don't Forgo Retirement Savings

Make sure that you are not neglecting your savings strategy when it comes to funding for your retirement. Socking away money each month will ensure that you have enough in your nest egg when the time comes to enjoy your golden years. Saving for retirement also comes with its own tax advantages and benefits. Many companies match a certain percentage of your contributions, and the money that is invested is tax-deferred and can grow in value as it compounds interest over time. Putting this money to work early can provide many years of added income and growth and you won’t have to pay taxes until you begin drawing on the money after retirement. There are also a number of retirement options available if you are self-employed and working as a freelancer.

One of the most popular vehicles that individuals use to save money outside of a company-sponsored 401(k) plan is through a traditional Individual Retirement Account (IRA).

Brian Martucci, a finance editor at Money Crashers , recommends opening up a tax-advantaged IRA with a reputable broker. "You can contribute up to $6,000 per year (or $7,000 if you’re over age 50) to a traditional IRA, which is a nice boost for your nest egg.”

In addition to a traditional IRA where taxes on contributions will be due upon withdrawal, other retirement savings options include:

• Employer-sponsored 401(k)
• Solo 401(k)
• Simplified-Employee Pension (SEP) Plan
• 457(b)
• Roth IRA
• SIMPLE IRA
• Health Savings Account (HSA)

Richard Hill of Compass Financial Group recommends going with a Roth IRA. “With a high probability of tax rates going up in the future, tax-free income will be especially valuable. Roth IRAs provide income free from federal and state taxes provided you are 59 ½ and at least five tax years after the first contribution to any Roth IRA you own. This means adding $1 to ANY Roth IRA starts the five-year clock ticking on ALL Roth accounts.”

3. Have a Plan B

Whether you are ready to retire or have recently lost a job, it’s always advisable to have a backup plan in a time of need. As the lead advisor for Compass Financial Group, Hill highlights the importance of having a Plan B as part of your 2021 strategy. “While the average worker estimates they will retire at age 65 or 66, the actual average retirement age is closer to 62. A good financial plan should run 'what-if scenarios' that consider early work stoppage due to health conditions or unexpected layoff.”

If you are not ready to retire but have lost your job or are concerned with job security, now may be the right time to look into a new career path, or at the very least, explore your options by doing some freelance work . Being an independent contractor and your own boss comes with its own set of benefits. And setting up an LLC or S Corp can help provide added security during uncertain times.

For those close to retirement age, there may still be the need to continue working for a variety of reasons, including financial reasons and the need to remain socially engaged. Whether you are ready to retire or not, Hill suggests that your financial plan for 2021 "should consider the possibility of part-time work in retirement if your health is good to help you achieve your goals."

4. Look for New Opportunities

Pay attention to your investments. Although the stock market has seen wild swings, some companies, including Amazon, Zoom and Apple, have proven to be resilient and have seen an increase in value. Others, such as airline, entertainment, hotel and cruise stocks, have experienced steep declines.

Ty Crandall, the CEO and founder of Credit Suite and author of two best-selling books on consumer and business credit, also sees 2021 as an opportunity for real estate investment . With the sudden shift to remote work, many companies no longer see the need to maintain large offices. Many small business owners and residential property owners may also be forced to sell, downsize or go into foreclosure. This, according to Crandall, “provides some amazing opportunities to buy residential and commercial properties as an investment at very low prices.”

5. Plan Ahead for Taxes

Don’t neglect setting money aside for taxes. Financial advisor Lorrie Delk Walker suggests putting 20 percent of your earnings in a savings account to cover your tax bill. Tracking your expenses and receipts is also important. “For those just starting out, it can be as simple as an envelope system where you have envelopes for office supplies, meals/entertainment, auto repairs, gas, equipment purchases, etc.” Lorrie also recommends working with a business tax consultant or bookkeeper to help identity what expenses you should track for tax purposes.

Making financial decisions can be difficult, and any missteps can cost thousands of dollars. For support and advice, consider working with a financial planner or an investment advisor to ensure that you are taking advantage of investment tools and tax advantages . For many across the country and around the world, 2020 cannot end soon enough. With a financial and business plan in place, and a strategy for a post-COVID world, businesses and individuals will have a clearer path moving forward.