Just a few months ago, unemployment was at a record low. Now with 22 million people unemployed, there is a good chance that many families across the country are suddenly struggling or dipping into reserves. Statistically, most of these families are not prepared. If you are one of those currently experiencing a crisis, here are some steps to help you manage financially through this difficult time.
Manage Household Cash Flow
Ideally, prior to your current situation, you would have recession proofed your household and would have the savings to weather this storm. However, this may not be your reality. In that case, the goal is to manage cashflow.
Start by taking a look at your checking and credit card statements over the last three months. Look for unnecessary subscriptions and expenses that you can cut out temporarily. Classify each expense into simple categories. Housing, food, transportation and utilities should be the only needed items. The goal is to cut out as much as possible to lower the outflow of money.
List out debt balances, interest rates and minimum monthly payments. Organize by the smallest balance first. Are there any that could be quickly eliminated to lower your monthly outflow of cash? Ideally, you want debt paid off. However, cash is king, so if you still have a job then perhaps refinancing the debt into a low interest credit card or an unsecured bank loan could save money vs the high interest minimum payments.
Another option is a home equity line of credit (HELOC). The benefit of a HELOC is that many allow you to make interest only minimum payments. This helps your current cashflow. However, remember that if you can’t make the payment, you are putting your home at additional risk.
Mortgage rates are the lowest ever. If there is enough equity in your home, you can refinance to a lower rate and roll in the debt. Normally I do not suggest this, but it is a reasonable option if you see a crisis coming.
After determining how much of your cash is flowing out each month, ask yourself how long will your savings cover your expenses? If it is not enough to cover the time period you are concerned about, then more drastic measures may be needed.
To help increase cash flow, you can stop contributing to your 401k plan for a short time. If your contributions stop for less than a year, the effect on your retirement should be minimal.
The CARES ACT has allowed for individuals affected by COVID-19 to withdrawal funds from their IRAs and 401(k)s without incurring a 10% penalty. However, you will still have to pay income tax on the withdrawal. If income is down, this could be an opportunity to pull cash out to pay off debt to improve cash flow or add to savings in order to cover living expenses. This should be a last resort and if bankruptcy is ever a consideration, then retirement assets should never come into play as they are protected during bankruptcy.
If you are directly affected by COVID-19, many mortgage companies are allowing three months of payments to be skipped. The payments will be added to the back end of the mortgage. You will not be deemed late for credit reporting services. This is a great opportunity to help weather your storm, HOWEVER, I am hearing reports that some mortgage servicers are asking for the mortgage to be caught up at the end of three months and are reporting the payments as late to the credit bureaus. Therefore, be sure to verify the payment terms prior to making the change.
Remember, this is a temporary situation and you can do anything for a short time. Even minor changes to your budget and cash flow can have an impact to your overall financial picture. You should not compare yourself to others, so focus on your situation. Consider finding a friend to help you stick to your goals and they might be in the same situation too.
Prepare for the Rebound
Prepare your resume for seeking out a new job or if you are still working, prepare your resume just in case. After your income recovers, eliminate your debt and start saving for retirement again. Reflect on what you have been through and start saving to prepare for the next storm.
Finally, make sure to stop and celebrate that you survived!