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Blog » Personal Finance » Steps to Take Now to Prepare Your Finances For 2021

Steps to Take Now to Prepare Your Finances For 2021

Updated on May 30th, 2023
Prepare Your Finances

If 2020 has shown us anything, it’s that you can never truly be prepared for every curveball life may throw your way. A global pandemic has taken all of us out of our normal lives and into something completely unexpected. We now know more than ever how important it is to prepare your finances ahead of time, so you can handle the unexpected when it happens.

However, quite a few financial cornerstones remain fairly standard. While personal finance isn’t exactly “one-size-fits-all,” you can usually count on certain financial steps to bring you desirable results. 

As we prepare to wrap up 2020 for good, it’s the perfect time to begin getting ready for a new year. While there’s nothing magical about flipping the calendar to January 1st, that fresh start can be really encouraging. It gives you a reason to reset your life in all kinds of ways, including your money. So let’s talk about the most important steps to take now in order to prepare your finances for 2021.

Prepare to Get Your Debt Under Control

A great way to prepare your finances for 2021 is to start paying down debt. Get it under control by paying it off as quickly as possible. Keeping debt around isn’t doing you any favors, so it’s important to make debt payoff a priority as you prepare your finances for the new year. 

I’m primarily talking about consumer debt—credit card balances, personal loans, etc. It’s essential to tackle any consumer debt head-on, reducing it by a little (or a lot) each month until it’s gone. You’re likely paying a high price to borrow that money. 

You can look at several different strategies for debt reduction.

Debt Snowball

In the debt “snowball,” you start with your lowest-balance debt first. Look over all of the accounts you owe money to, figure out what’s the smallest total, and get rid of that one first. While doing so, pay the minimums on every other debt. Once the smallest debt is gone, do the same with the next-lowest balance until they’re all zero.

Debt Avalanche

The debt avalanche is slightly different from the debt snowball. Instead of focusing on the smallest amount, you focus on paying off the debt with the highest interest rate first. So if you have a $5,000 student loan at 3% and a $15,000 credit-card balance at 16%, you’d pay minimums on the student loan and throw every extra dollar at the credit card to pay it off more quickly. 

Other Debt Circumstances

Mortgage and student loan debt are “better” types of debt, but you still want to keep plowing away at repayment. With such a low percentage of student loans having been approved for forgiveness, and the future of student debt policies uncertain, it’s best to keep paying down student loan debt when you’re able to. (Currently, federal loans are in forbearance (due to coronavirus) but that is set to end on Dec. 31, so be prepared with a plan to resume payments in 2021.)

The key thing to remember is that debt is probably holding you back in some way. It may make it harder (or impossible) to start that new business or purchase a home. Debt hinders you from saving well for retirement and other future goals. 

Believe that you can become debt-free, and make a plan to do it. Whether you have to get a second job or side gig, embrace frugality, or start budgeting for the first time, paying off debt is a great way to kick off 2021.

Prepare Your Finances By Shoring Up Your Emergency Fund

An emergency fund is one of the most crucial pillars of preparing your finances. You simply can’t plan every single expense every month for the rest of your life. What you can plan for is that you’re bound to face an emergency at one time or another, and those incidents can often be costly. Preparing in advance with an emergency fund helps ensure that emergencies don’t ruin your life.  

60% of respondents in a recent poll admitted they couldn’t afford a $1,000 emergency expense, and 40% also couldn’t come up with $250 for an unexpected expense. Those are scary statistics. Any of us could face a sudden need for a few hundred dollars at any point. 

Just think of the expensive situations that might occur:

  • Home repairs (what if your heating system goes out in the winter?)
  • Car repairs 
  • Medical or dental emergencies
  • Job loss or a reduction in hours/wages/clients

In most cases, no one can prevent these circumstances. They just happen, and they happen to everyone. 

So, if you don’t have an emergency fund yet, or yours has been decimated by pandemic-related problems, start off 2021 by saving up an emergency fund as soon as humanly possible. Even if you’re only able to save a few bucks extra per paycheck, don’t dismiss that as “not worth it.” Every little bit will help. 

Just think of how many Americans have struggled in 2020 due to a job loss, even if it was only for a few weeks or months. You’ll thank yourself later if you make the sacrifices necessary to build up a real emergency fund.

How much do you need? Conventional financial wisdom says 3-6 months’ worth of expenses. Many also recommend a more robust fund, such as 9-12 months’ worth. It depends somewhat on your job; if you’re an entrepreneur or have irregular income, it’s generally better to have a bigger cushion in case of setbacks. At the very least, $1,000 is a nice start to keep you afloat when smaller unexpected events happen.

Keep Holiday Spending In Check

A great tip to prepare your finances for 2021: keep your holiday spending in check. There’s nothing like a holiday hangover involving crazy credit-card bills from buying and overspending. 

Think about how to make “Future You” feel better. In January, wouldn’t you like to look back at your holiday bills and see that you enjoyed yourself without breaking the bank or racking up debt? Look at ways to save money on gifts and events, whether you’re giving gifts to loved ones or to clients and contractors

There are plenty of easy strategies for spending less. I love using my credit card rewards from the year to pay for Christmas gifts; it makes my holiday budget a breeze and uses points I would have earned anyway. If someone truly cares about you, I’d hope that they wouldn’t want you killing your budget just to buy them more junk they don’t need. 

You don’t have to become a total Scrooge, though! Be creative and make a holiday spending budget to keep yourself on track. It’s fine to spend money on making the holidays memorable. Just be intentional about what you spend and why. The holidays are no excuse to start off the new year stressed about money.

Prepare Your Finances By Learning to Budget

Budgets may sound intimidating if you’re new to the concept. But trust me, it’s not as difficult as it may sound, and it’s so helpful in preparing for financial success in the new year. And you don’t have to do it perfectly; it’s a constant growth process.

Many people like to follow a zero-sum budget, which means that you account for every cent you earn and spend until everything “zeroes” out. Others prefer a looser structure, with larger categories for saving, fun, and bills. 

You can go old-fashioned, with pencil and paper. Or try a spreadsheet for your budget, like Excel or Google Sheets. There are also great online budgeting tools that can help anyone who’s new to the world of budgets.

Total up your income and expenses. To be most effective, you want to set up your budget for the upcoming month, so you have a plan in advance. 

Tally up all sources of income. If you have one employer, that’s easy; just look at your pay stub. If you have extra freelance gigs or other sources of income such as rental income, be sure to include all of the money you bring in each month. (If it’s unpredictable, make your best estimate.)

After you know the income side of things, look at your expenses. Fixed expenses remain the same from month to month, and variable expenses…well, they can vary from month to month.

Typical Fixed Expenses

  • Mortgage/rent payment
  • Cell phone 
  • Car payment
  • Health insurance premium
  • Life insurance premium
  • Entertainment subscription (cable, Netflix, etc.)
  • Gym membership
  • Student loan payment
  • Retirement contribution (though you can adjust this)

Typical Variable Expenses

  • Food/groceries
  • Dining out
  • Fuel
  • Utilities (although many companies make fixed-payment plans you can choose)
  • Clothing
  • Miscellaneous expenses
  • Savings

Many people are surprised when they do the math and figure out just how much they’re spending in a month. Even if you don’t stick with zero-sum budgeting forever, it’s a very useful exercise to do for a few months so you learn how much you spend (it’s often more than you think). It can be eye-opening. 

To do the zero-sum budget, look at your spending estimates, total them up, and see how close you are to your total monthly income. The goal is to get them to equal one another. If you have money left over to spend, you can add more to savings or another category. If you don’t have enough income to cover your spending, figure out what you can decrease. 

Other Budgeting Strategies

  • 50/30/30 budget (50% for needs, 30% for wants, 20% for savings or debt payoff)
  • Anti-budget (more casual: set up 3-5 major spending categories, check how you did at the end of the month, and adjust your goals accordingly)

Budgeting carefully can show you areas where you could cut back. Are there subscriptions you aren’t using, like for that gym you never go to? Could you decrease your dining-out frequency from twice a week to once a month? Could you call your insurance company or cell phone provider and ask for a discount? Any and all of these efforts could help streamline your budget and give you more room for saving, debt payoff, and more. 

Protect Your Loved Ones

You need to plan ahead so that anyone who is dependent on your income would be all right in the event that you passed away or became unable to work. There are several important legal tasks that you should get done. Many of us procrastinate on these somewhat annoying tasks, but they are much too important to ignore. 

So as you finish up 2020, be sure that you go into the new year with a solid plan to protect your loved ones financially. You work too hard to not prepare your finances in this way. This means setting up a will, as well as life insurance and possibly other paperwork like a Power of Attorney.


Create a will so that your assets will be distributed as you wish if you die. This is also essential if you have children; you need to designate a guardian for your kids in the event that both parents pass away. A will helps prevent arguments and legal battles over money and other important issues.

Life Insurance

Most working adults need life insurance, and usually term life insurance policies are the way to go. These protect you for a set period of time (the “term”) and you pay premiums throughout that time. 20 years is a common term for life insurance. You pay a set amount monthly, and if you pass away during the term specified, your beneficiaries get a set payout from the insurance company. 

Anyone who is providing for a spouse, children, or others in their household should have term life insurance. It’s relatively cheap and provides a level of protection so no one suffers needlessly if you pass away unexpectedly. 

Power of Attorney

Power of Attorney is another useful document to have on file. In case you become unable to make decisions for yourself due to an illness or injury, power of attorney legally designates a person you trust to make those decisions on your behalf. Look into both medical and financial power of attorney and arrange for a trusted family member or friend to take charge in those unfortunate circumstances. 

Prepare Your Finances and Begin Saving for Retirement

If you’re not yet saving anything for retirement, make it your goal to start in 2021. Some of these other goals need to take priority ahead of retirement (like a starter emergency fund), but as you start to get a handle on these other issues, stop putting retirement on the back burner. 

If you can only afford to set aside $5 a week ($20 a month), go ahead and start. Set up your 401(k) or Roth IRA if you don’t have one yet. If you’re self-employed, get a SEP IRA. Get in the habit of investing in your retirement now, and as your income increases (or debt decreases), keep increasing the amount of your contributions.

The most important thing your retirement fund needs besides contributions? Time. You want to give yourself as much time as possible for your investments to grow.

Set Your 2021 Professional Goals

Another important step to help you prepare for the new year is to set your professional goals for 2021. Do you want to increase your revenue, raise your rates with current clients, network with more financial influencers in your field, start a new business, get some education or train for a new career?

Potential business goals:

  • Send out more pitches
  • Improve your marketing skills
  • Learn a new skill 
  • Outsource tasks to focus more on the big picture
  • Raise your rates
  • Read great business books
  • Streamline bookkeeping

Take some time in December to plot out your highest priorities for your work and professional life. If you want to grow, you need to think ahead about how to make that happen!

Whether you have a one-person freelancing business or you run a large company, you should contemplate how you’ve fared professionally in 2020 and how you’d like to improve in 2021.

Make 2021 Your Best Financial Year

You know you want to dive into 2021 ready to learn, grow, and succeed. Taking some time now as the year comes to an end will help you to start the new year off on the right foot. Prepare your finances today and work to accomplish even bigger money goals than you’d ever imagined.


Kate Underwood

Kate Underwood

Kate Underwood is a personal finance writer who frequently annoys her friends and family with finance recommendations. She graduated from Wheaton College with a teaching degree. She pivoted a few years ago, leaving a longtime teaching career to pursue freelance writing, and has loved every minute of it! She's a mom of two and in her free time enjoys all things related to nature, hiking, and The Office.

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