How You Should Adjust Your Budget for 2021

The new year is a great time to reset your budget, especially if you overspent or took on debt in 2020. Now is the time to figure out how to best allocate your funds and come up with a plan that you can stick to so that you end the year in a better place than you began.

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Not sure where to start? I spoke with financial experts to get their best advice on how to adjust your budget for 2021 -- here's what they said.

Start With the 3 Essential Buckets

The first step to setting your budget is to determine what Amy Richardson, CFP, a financial planner with Schwab Intelligent Portfolios, calls the "three essential buckets: how much you take home from each paycheck, how much you’re spending and how much you’re saving."

"If you’re not sure where your money is going, take it step-by-step," she said. "First, track your spending for 30 to 60 days. There are several digital tools out there to make this easier that you can take advantage of. From there, determine how much money you need to cover your fixed monthly expenses, like your mortgage, utilities, car insurance, etc. Then you will be able to identify how much you can put away for other goals."

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Consider a '50-15-5' Budget

You may not know how much money to allocate to each area of your budget, so Meredith Stoddard, life events experience lead at Fidelity Investments, suggests this budgeting rule.

"A simple way to budget is with the '50-15-5 rule of thumb,' which means ideally half of your income goes to essentials like housing, healthcare and utilities; you’re saving 15% toward retirement or long-term goals (which could include an employer match), and 5% goes to short-term savings," she said. "The remaining 30% should cover taxes, charitable giving or discretionary spending. In areas with higher costs of living or if you’ve faced financial challenges over the last year, this may be an aspirational budget breakdown, but the most important thing is to have a plan that fits in with your life and works for you."

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Be Sure To Prioritize Building an Emergency Fund

If you don't already have an emergency fund in place, make building one your short-term savings goal.

"If 2020 taught you anything, it's that emergencies happen," said Barbara A. Friedberg, investing expert and CEO of Barbara Friedberg Personal Finance. "Even a nine-month emergency budget doesn't seem so crazy today."

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Create a Debt Repayment Plan

"If you have debt, the new year is a great time to take control of it," Richardson said. "Just like starting a new workout routine, you need a plan that is reasonable and something that you can stick with. Ideally, you should pay the minimum on all debts and prioritize paying more on higher-interest debt."

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Minimize Big Expenses

If you're entering the year with debt or want to be aggressive about meeting savings goals, cutting out your daily latte probably won't make a huge dent in your overall budget. Instead, see what major expenses you can cut down on.

"Now is the time to trim back on the big-spending items," Friedberg said. "Minimize car and housing expenses and beef up saving and investing."

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Max Out Your Retirement Contributions

"Invest the maximum, if possible, in your 401(k) and/or Roth IRA," Friedberg said.

If you can't contribute the maximum, figure out if you can at least increase your contribution rate from 2020. At the very least, be sure to meet your full employer match to your 401(k) plan if one is offered.

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Have a 'Fun' Goal You Are Saving Toward

Once you've allocated money for fixed expenses, short- and long-term savings goals and debt repayment, figure out how much you can put aside for a nonessential money goal, like a vacation, as well. Knowing that you are saving for something you will enjoy can motivate you to stay on track with your budgeting plans.

"I personally can’t wait for travel to come back and I am saving for a fun trip in 2021," Richardson said. "Knowing I have something fun on the horizon keeps me focused on my own budgeting and saving."

Tips: How To Budget and Plan For a Vacation in 2021

Automate as Many Payments as You Can

"Automating savings and investing is one of the most important financial moves that you can make," Friedberg said. "Now is the time to have a set amount automatically deducted from your salary, or if self-employed, transferred from a checking to a savings account."

You can also automate payments to your lenders so that you stay on top of your debt repayment goals throughout the year.

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Gabrielle Olya contributed to the reporting for this article.

About the Author

Jaime Catmull

With eight years of experience working in the personal finance space at GOBankingRates, Jaime Catmull has amassed an extensive network of financial influencers and experts. Now, she’s tapping that network to get the real scoop on how you can live your best financial life and increase your wealth.

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