As a financial strategist, I'm constantly looking for ways to improve our personal and business finances, and then trying to extract from what I come up with ideas that can benefit others like you. Recently, the things I've been working on include trimming discretionary spending, finding ways to reduce interest on debt (e.g., refinancing our mortgage), and increasing our emergency fund.
Given what's going on nationwide and around the world, these are especially timely moves for most of us. However, even if there was no pandemic and no global economic upheaval, most American families were already struggling with stagnant income. Far too many of us were unable to cover a $1000 "emergency" without going further into debt, and talking about retirement seemed like a cruel joke.
The reason I put "emergency" in quotation marks above is because $1000 isn't what I'd call a real emergency, it's just life happening. A real emergency is losing your income for months or years. It's having a medical emergency that costs you tens or hundreds of thousands of dollars out of pocket.
The ongoing pandemic-caused upheaval has brought these true emergency situations far too close to home for far too many of us. That's why I've tried to distill my thoughts on what the crucial next steps are for people in different circumstances.
Depending on your situation, the next few months are a crucial time to take corrective action with your money. In general, these fall into 5 categories:
- Reviewing your budget and trimming where possible.
- Looking for assistance programs where appropriate.
- Paying down consumer debt, especially of the high-interest variety, and most especially if you recently had to go deeper into debt.
- (Re)building your emergency fund until you hit your perfect fund size, especially if you had to dip into it recently.
- If possible, setting aside and investing money for your long-term goals.
Here are your crucial next steps, tailored for different situations. Feel free to read them all, or skip straight to the one that fits you best.
Your Income Dropped Due to the Coronavirus Pandemic, and Hasn’t Gone back Up
If you’re in this unlucky group, here’s what may help.
1. Review your spending and see where it may not align with your priorities and goals (which frankly now means keeping a roof over your head and food on the table). Where you find such excess spending, cut it out of your budget.
2. Reach out to any lenders to see what programs they have that can help (e.g., deferring payments, reduced interest, etc.).
3. If you’re renting, see if your landlord is willing to negotiate a lower rent at least until you get back on your feet; this is a good avenue especially if (a) you can’t afford to pay the rent, and (b) your state has put in place new laws or regulations that prevent evictions. If this is the situation, paying at least what you can will go a long way to convincing your landlord to work with you, and possibly to renew your lease when your current lease ends.
4. Try to open a credit card with 0% teaser rate for 12-18 months, and transfer to those any high-interest consumer debt (don't do this with student loans unless you understand the consequences such as losing access to programs that let you get rid of this debt by working for the public good, etc. and it still makes sense).
5. Look into assistance programs that can help, such as higher unemployment benefits if you’re eligible, EIDL or PPP if you own a small business, etc.
Your Income Dropped Due to the Coronavirus Pandemic, and Has Now Gone back Up
If you’re in this somewhat luckier group, here’s what you should do.
1. Review your spending and see where it may not align with your priorities and goals; where you find such excess spending, reduce it or cut it out of your budget entirely.
2. Dedicate as much as you can of your resurging income to pay down consumer debt (e.g., credit card balances you haven’t been paying off each month, high-interest student loans, high-interest auto loans, etc.); this is especially critical if you’ve had to borrow money to make it through the past several months.
3. See if you can open any credit cards with 0% teaser rates for the next 12-18 months, and transfer to those any high-interest consumer debt (before transferring any student loan debt, make sure you understand the consequences such as losing access to programs that let you get rid of this debt by working for the public good, etc.).
4. Dedicate at least some of your income to rebuilding your emergency fund, since you likely had to dip into it if you had it in the first place. Keep going until you hit your perfect emergency fund number; if you have no consumer debt to address in the previous steps, double up on this one.
5. Dedicate at least some of your income to investing for your long-term financial goals; depending on how long until you want to hit those long-term goals, consider investing a large fraction of this money in diversified, low-cost mutual funds or ETFs that have a long-term record of beating the market.
Your Income Hasn’t Been Affected Much by the Coronavirus Pandemic
This is a luckier-than-average group. If this is you, do this.
1. Review your spending and see where it may not align with your priorities and goals; where you find such excess spending, reduce it or cut it out of your budget entirely.
2. Dedicate as much as you can of your income to pay down consumer debt (e.g., credit card balances you haven’t been paying off each month, high-interest student loans, high-interest auto loans, etc.).
3. See if you can open any credit cards with 0% teaser rates for the next 12-18 months, and transfer to those any high-interest consumer debt (before transferring any student loan debt, make sure you understand the consequences such as losing access to programs that let you get rid of this debt by working for the public good, etc.).
4. Dedicate at least some of your income to building your emergency fund until you hit your perfect emergency fund number; if you have no consumer debt to address in the previous steps, double up on this one.
5. Dedicate at least some of your income to investing for your long-term financial goals; depending on how long until you want to hit those long-term goals, consider investing a large fraction of this money in diversified, low-cost mutual funds or ETFs that have a long-term record of beating the market.
Your Income Went up During the Coronavirus Pandemic
Really?
What’s your secret? :)
If you’re in this uber-lucky group, here’s what you can do to create even more good fortune for your future self.
1. Review your spending and see where it may not align with your priorities and goals; where you find such excess spending, reduce it or cut it out of your budget entirely.
2. Dedicate at least 15% of your income increase to paying down consumer debt (e.g., credit card balances you haven’t been paying off each month, high-interest student loans, high-interest auto loans, etc.).
3. See if you can open any credit cards with 0% teaser rates for the next 12-18 months, and transfer to those any high-interest consumer debt (before transferring any student loan debt, make sure you understand the consequences such as losing access to programs that let you get rid of this debt by working for the public good, etc.).
4. Dedicate at least 15% of your income increase to increasing your emergency fund until you hit your perfect emergency fund number; if you have no consumer debt to address in the previous steps, double up on this one (i.e., 30%).
5. Dedicate at least 50% of your income increase minus the amounts used in the previous two steps to investing for your long-term financial goals (e.g., if you set aside 15% for Step 1 and 15% for Step 2, make this 20%; if you set aside 15% for Step 1 and nothing for Step 2, make this one 35%, etc.); depending on how long until you want to hit those long-term goals, consider investing a large fraction of this money in diversified, low-cost mutual funds or ETFs that have a long-term record of beating the market.
Note that the above are coming from your pay increases, so you don’t have to tighten your belt much, if any. However, if you were previously over-spending, make sure your spending aligns with your goals and priorities, tighten it where it doesn’t, and use any decreases in spending to bulk up the above set-asides even more.
The Bottom Line
While the general steps are mostly the same, each specific group above needs to implement them differently, in a way that best fits their circumstances.
Here are some more specific resources with concrete advice about these general steps.
- Ace your budget.
- Use the snowball or avalanche method to pay off debt faster.
- Calculate your perfect-fit emergency fund size.
- Figure out how much you'll need to retire.
Financial strategy is all about setting financial goals, crafting a plan to reach them, and doing what's needed to start implementing that plan in both your business and personal life whether times are good or bad. If you'd like to learn what this can help you accomplish, email me and we'll coordinate a free, no-strings-attached phone call to explore that possibility.
Disclaimer
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
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