Prior to the Covid-19 pandemic, an astounding 53% of the American population felt anxious about personal finances. Undoubtedly, that percentage has grown significantly, with more than 26 million Americans becoming unemployed since then. The statistics are alarming, but it is not time to panic — it’s time to plan.
Although many financial plans will need to be reassessed due to the changes that businesses and households face, proactive planning will aid you in achieving your short- and long-term financial needs and goals, especially in times of hardship.
To gain perspective and make decisions, you can evaluate your current assets, weigh your risks, rework projections to match the new conditions and proactively alter plans according to your needs, goals and values.
1. Manage your rainy day fund: Most Americans have insufficient savings to handle their bills for several months, despite the long-standing recommendations of financial advisors. Ideally, most people should save 20% of their income.
Generally, you should build up three to six months of expenses in savings to be kept in safe interest-bearing accounts. After that, you should aim to continue saving 20% and put it to work in qualified retirement plans, individual retirement accounts and non-qualified brokerage accounts, according to your individual needs and goals.
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Emergency savings can prevent you from getting into credit card or payday loan debt, and from withdrawing from your long-term investments. However, many households have had insufficient income or time to build these lines of financial defense. Because of the economic hit from the pandemic, many who have substantial rainy day funds may still deplete them.
2. Review the CARES Act: Regardless of your emergency fund balance, it is important to plan how to avoid high-interest debt and past due bills. The $2 trillion federal CARES Act provides some valuable options.
First, stimulus payments to qualified Americans provide a temporary cushion of up to $1,200 per adult and $500 per dependent child. Enhanced unemployment benefits — an additional $600 per month — can help carry a household for a while, as well. Americans can also take a coronavirus distribution from their 401(k) plan or IRA without a 10% penalty. Prior to doing so, they should consider the distribution’s impact on their taxes and retirement.
For those with severely reduced income, other measures may be necessary.
Any savings should generally be conserved for emergency items and used as an alternative to taking on debt or selling investments. Additionally, reviewing your household budget and separating wants from needs can help conserve cash. Furthermore, many lenders are willing to grant payment deferrals, which can extend the life of a rainy day fund substantially.
The CARES Act also supports small businesses through forgivable Small Business Administration loans, as they are eligible for tax credits if they maintain employment levels. Further, Congress granted substantial enhancements in carrying back net operating losses.
3. Weigh the real-estate risk: For most people, their home is their largest expense. Renters can potentially conserve savings by negotiating with their landlord to defer rent or apply the security deposit towards the next month. Homeowners may also be pleasantly surprised at their mortgage company’s willingness to grant a payment deferment or interest-only accommodation.
Real-estate debt, whether a lease or a mortgage, presents the biggest risk for most Americans. If your circumstances change drastically, it is important to update cash-flow projections and determine whether your place remains affordable.
4. Update cash-flow projections: As stated previously, since the start of this crisis, more than 26 million Americans have lost their jobs. To make matters worse, only 40% of Americans can meet an unexpected $1,000 expense with their savings and, with 80% of workers living paycheck to paycheck, it is easy to imagine why so many people are concerned about the future.
However, unemployment continues to rise, causing many people to begin thinking about living in and financially surviving this “new normal.”
Updating your cash-flow projections allows you to manage your budget and know where you stand in the short- and long-term. When cash-flow projections make it clear that cuts are necessary, many people find it helpful to use the four-step process below to decide what non-essential spending to pause:
- Take an hour to write your most important values (family, education, philanthropy, etc.) on sticky notes, then narrow them down to the five most important.
- Rank and record your top 10 financial goals (retiring early, leaving an inheritance, buying a home, etc.)
- Create a monthly budget. Be sure to categorize all of your historical monthly expenditures.
- Going line by line, determine which expenditures are incongruent with your (a) values and (b) goals and cut them out.
Financial advisors can be extraordinarily helpful in creating adjusted long-term cash flow projections and determining how they impact financial goals, such as retirement, college savings or a business venture. These cash-flow projections account for monthly savings goals, expense levels and investment returns to paint a holistic financial picture.
5. Check in with a trusted financial advisor: Additionally, it can be beneficial to create a few coronavirus scenarios with your advisor to help you plan and make decisions. For example, your advisor can help in deciding whether to deploy cash reserves back in the markets.
Financial planning prepares us for the curve balls life chucks our way. It acknowledges that we all face unexpected challenges, and it seeks to create a financial framework where they can be met.
Proactive and comprehensive financial planning creates savings for emergencies, investment for the future and protection from disaster. The unique challenges of this pandemic are serious, and not fully known. By proactively creating a plan or reevaluating an existing plan, you can set yourself up for success on the other side of this crisis.
— By David Flores Wilson, senior wealth manager at Watts Capital