How to Get Started on a Post-Pandemic Budget Recovery Plan

Rebuilding emergency funds, paying off debt and planning for the next crisis are top strategies for 2021.
Kimberly Palmer
By Kimberly Palmer 
Edited by Kenley Young

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Many Americans are hoping to get their finances back on track in 2021 after a rough year. Increasing savings, paying off debt and improving credit scores were the most popular goals cited by Americans in a recent NerdWallet survey.

At the same time, many Americans also said they want to keep some of the good habits they developed earlier in the COVID-19 pandemic, like spending less on wants and travel.

The challenge is how to do this amid so much continued uncertainty as we head into the new year. To help you design your own budget recovery plan, we asked financial planners about the advice they're giving their clients. Of course, recovery plans depend on individuals’ experiences in 2020.

"For those whose lives have been relatively unaffected, we’ve been working on replenishing emergency funds and paying off high-interest debt. .... For those who have been furloughed or laid off, we’re helping them take advantage of all the programs they are eligible for to help make ends meet," says Dana Menard, certified financial planner and founder of Twin Cities Wealth Strategies in Maple Grove, Minnesota.

Whether you’re in the first or second group, here are five steps to get started setting up a post-pandemic budget recovery plan:

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Refine your budget

Before creating a budget for the new year, Jovan Johnson, CFP and owner of Piece of Wealth Planning in Atlanta, says it’s important to look back on how you spent money over the past year — and chances are, it was a little different than in past years.

"We spend less on gas and entertainment but more on groceries and utilities," Johnson says. Those who lost their job were forced to make even bigger cuts in spending as they scrambled to cover expenses like rent and food.

As 2021 unfolds, spending patterns will shift again, which means you might be tempted to start spending more. Using a tool like the 50/30/20 budget calculator can help you stay on track. It allocates 50% of your take-home income to needs, 30% to wants, and 20% to savings and debt payments.

"Make sure you reallocate your spending categories" as schools and businesses reopen, Johnson says. In other words, if you start spending more on travel, gas and restaurants, try to scale back on groceries, utilities and at-home entertainment. And if you have gotten used to spending less in general, try to continue that habit so you can increase your savings.

Crank up savings

Johnson suggests putting savings into an FDIC-insured, high-yield savings account through a regular direct deposit from your paycheck. That way, those short-term savings will continue to grow even when you aren’t actively managing them.

If you get a tax refund or any other additional income, that can also help grow your savings account. If you have longer-term savings that you don’t need in the near future, then you might also want to consider investing in the stock market.

Unload high-interest debt

A recovery plan for 2021 also includes paying off debt as soon as possible, whether it’s new debt acquired in the past year or older debt that’s lingering.

Dan Herron, CFP and co-founder of Elemental Wealth Advisors in San Luis Obispo, California, suggests first reviewing outstanding debts and checking interest rates, fees and status of any payments that fell under COVID-19 relief programs. If possible, he says, ask for lower interest rates on outstanding credit card debt and consider refinancing your mortgage if it would save you money.

Taking those steps can help free up much-needed cash flow, which you can direct toward paying off debts. The two main strategies to do so are focusing first on the highest-interest rate debts (aka the "debt avalanche" method) or starting with the smallest debts (aka the "snowball method").

Plan for the next emergency ...

As bad as 2020 was for so many people, it’s always a good idea to look ahead and prepare for the next possible crisis, too.

“COVID tested people’s financial plans, which makes it the perfect opportunity to review any weaknesses,” Herron says. If you still have your job, for example, he suggests running through what you would do if you were to lose it.

In a world of so much uncertainty, Herron urges people to pad their emergency funds even more than normal, ideally saving up one year's worth of expenses. While that may not be realistic for many, you can start with a smaller goal, like $500, and grow it from here.

… As well as a more promising future

Looking even further into the future includes planning for retirement, college savings for children, and even estate planning. If you temporarily stopped retirement contributions to free up more cash in the past year, for example, try to return to contributing at least enough to get a company match, Herron says.

"If your job is secure and you have adequate savings, I would encourage individuals to go back to your original allocation percentage," he says. When it comes to estate planning, he suggests reviewing your beneficiaries, will and life insurance and making any necessary updates. "Make sure you have an adequate policy to provide for your loved ones," he adds.

Embracing that level of preparation is another lesson from 2020 that can help us make better money decisions long after the pandemic ends.

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