The coronavirus pandemic is more than a public health crisis. It’s an economic wrecking ball. Since the first reported cases in the U.S. in early 2020, COVID-19 has single-handedly wiped out more than $11 trillion of wealth, induced a global recession, and put at least 33 million Americans out of work — either temporarily or for good.
It’s not yet clear how long it may take for families to get back on their feet financially, but we do know from past experience with economic crises that there are steps we can take today to potentially restore our financial wellness faster.
“No matter where you are at now, there’s always a path toward recovery,” said Tim Essman, a financial professional with West Coast Wealth Strategies and Insurance Solutions in San Diego in an interview. “The key is making sure that you have the fundamental pieces in place and that you know the next steps.”
Those steps include:
1. Staying calm
2. Using stimulus checks wisely
3. Paying off credit cards
4. Repaying your retirement loans
5. Considering a refi
6. Looking for investment buying opportunities (if you have the means)
7. Insulating your finances
If you contribute to a retirement plan or invest in a brokerage account, your future account balance depends on what you do right now. So avoid making moves based on emotion rather than rational planning.
If you already have a retirement savings program under way, with asset allocation appropriate to your risk profile and long-term goals, you probably want to continue following your plan.
“The simplest and most proven way to recover fastest from a downturn in the market is to stay the course by keeping your money invested,” said Essman, urging investors to resist the temptation to panic sell, which is often a costly mistake.
Guidance from a trusted financial professional is key. Essman spends much of his time these days educating clients about the importance of staying the course in times of market turbulence.
“I show them data from the worst recessions America has faced since the Great Depression and in four out of six of those recessions, the markets had more than recovered within one year,” he said, noting historical context yields perspective. “I then show my clients that the statistical return for average investors over the last 20 years is just 2.2 percent — well below the returns of those who stay invested. Why? Because they got scared and sold their stocks when the markets were down and missed the recovery, or they never got into the market at all. Now their investment portfolios don’t even keep pace with inflation.”
The more investors embrace the discipline behind the process of long-term investing, he said, the more financially secure they become.
Using your stimulus check wisely
If you are receiving a stimulus check from the federal government, you should also put those dollars to the highest use.
That begins with paying off bills that are immediately due and would otherwise generate a late fee. Don’t forget that missing your monthly payments can ding your credit score, which directly affects the cost of future loans, your ability to secure credit, and potentially even your ability to secure a job.
As you prioritize which bills to pay with limited resources, however, check with each of your service providers and lenders first to inquire about leniency. Many are offering temporary, penalty-free payment deferral, which may help you stretch those dollars further.
Paying off credit cards
When the COVID-19 crisis is over and you’re back at work, you’ll need to begin paying down any debt you incurred, which includes credit card bills and retirement account loans.
One way to rid yourself of debt faster is to use any tax refunds you receive to that end. Bonuses and annual raises from your employer may be in short supply this year, but as the economy recovers and your compensation (hopefully) climbs, you may also be able to use that extra income to pare down debt.
More immediately, you can explore opportunities to trim waste from your budget—including unused gym memberships, premium cell phone plans, vacations that involve travel, and dinners out—and direct those savings to reduce the amount you owe.
Start by paying off the debt that costs you the most. Generally, that means credit cards balances. Many charge interest fees of 18 percent or higher, which makes it difficult to dig out and limits your ability to fund other financial goals, such as retirement.
If you have multiple credit card balances, Erika Safran, a financial professional with Safran Wealth Advisors in New York, recommends a strategy of applying as much disposable income as you can toward your highest interest credit card first, while continuing to make the minimum monthly payments on all other credit card bills to avoid late fees. After the first card is paid off, cut it up and roll that payment into the next highest interest rate card until they are all paid off and you’re left with one or two credit cards with a zero balance. You don’t want to eliminate them all because responsible credit card usage helps to optimize your all-important credit score.
Safran also notes that homeowners with significant credit card debt would be wise to consider using a home equity line of credit to pay off their balances.
“Rates are so low right now that this is an attractive source to supplement income shortage or pay off high rate cards,” she said.
But there’s a downside to everything. HELOCs can be pricey to set up and many offer a variable interest rate, so be prepared for your monthly payment to change over time. The biggest drawback to using a HELOC, however, is that the loan is secured against the equity in your home. Failure to make payments on time means you could lose your house.
Repaying your retirement account loans
If you’ve tapped into your retirement savings to help make ends meet, you should also do everything you can to make yourself whole.
Under the CARES Act, which seeks to assist families that are facing financial hardship as a result of the coronavirus outbreak, the federal government temporarily raised the limit for 2020 on retirement account loans from a 401(k), 403(b), 401(a), and other qualified government plans to $100,000 from $50,000 or 100 percent of the vested account balance. But borrowers must still repay their retirement account loan on time. Failure to do so will convert the unpaid balance to an early distribution, which would be taxed as ordinary income.
The CARES Act similarly relaxed the rules for retirement account withdrawals, allowing those age 59½ and younger who have been financially harmed by the coronavirus to take up to $100,000 from their retirement account in 2020 without incurring the standard 10 percent early distribution penalty. They would still owe ordinary income tax on the amount withdrawn. That tax, however, can be avoided if the withdrawn amount is replaced within three years.
Financial professionals generally prefer a retirement account loan to an outright withdrawal, since a withdrawal (if not repaid) can have a devastating effect on your ability to maintain your lifestyle during retirement—or even to retire at all. If you’re in a position to repay a retirement account withdrawal, you should consider doing so. Your future self will thank you.
Considering a refi
If you’re strapped for cash, you might also consider refinancing your loans to lower your monthly payments.
For example, it might make sense to refinance your mortgage loan if you plan to remain in your home for at least five more years to offset the closing costs and you can reduce your interest rate by at least 2 percent. Depending on your financial picture, however, it could be wise to refi if you can lower your interest rate by even 1 percent, especially if helps you to eliminate paying private mortgage insurance because the equity in your home has reached 20 percent. Be aware, however, that if you turn the clock back on the term of your loan, say, starting it over at 30 years, you will likely pay more in interest over the life of the loan, despite the lower monthly payment.
You may also have the option to do a cash-out refi, which replaces your current mortgage for a new loan with a higher balance than you owe. You collect the difference in cash and can spend the money on whatever you like. Be aware, however, that your home serves as the collateral for your mortgage. If you don’t keep up with the new payments, you risk losing your home.
If you have student loans, you can also potentially refinance to a lower rate loan. Just be sure you understand the implications. For example, a variable interest rate loan may come with a lower interest rate and lower payments than a fixed interest rate loan, but it is also subject to increase if interest rates should rise.
Looking for bargains
Many investors have been sitting on the sidelines for the last few years while the bull market raged, keeping a portion of their investable assets in cash while they waited for a buying opportunity. For those with disposable resources and the intestinal fortitude, this may be it.
“If you are positioned properly from a financial standpoint, it may be a good time to take advantage of the market downturn,” said Essman.
Indeed, while past performance is no guarantee of future returns, those who regularly put their money to work when the market is down champion the belief that “bull markets make you money, but bear markets can make you rich.” And some have been hugely successful.
But make no mistake, bargain hunting for undervalued stocks is risky business. It is not appropriate for all investors, especially those who need their cash on hand to cover the bills. Guidance from a financial professional who can help assess your cash position, goals, and tolerance for risk is critical now more than ever.
Average investors who have neither the expertise nor inclination to research individual stocks are generally better off making regular contributions to a diversified portfolio than trying to time the market. Regular contributions without regard to Wall Street performance, a popular investment strategy known as dollar-cost averaging, takes emotion off the table and can lower the average purchase price for stock investments.
“Right now, probably the best advice is to be still,” said Essman. “Let the dust settle and perhaps look for buying opportunities as we start to see a clear path forward. It’s vastly important as we go through cycles like this that we as financial professionals reinforce the same concepts and continue to communicate calm and confidence in the strategies that work.”
Insulating yourself for next time
No one knows yet how far the economy may fall as a result of COVID-19, but we can safely assume it will not be the last financial crisis we face.
As you take steps to restore your financial well-being today, don’t forget to insulate your finances for tomorrow.
If you don’t already have one, start putting money away for an emergency fund to pay the bills during bouts with unemployment, or when unexpected expenses crop up such as home repairs and medical bills. Having savings set aside prevents you from having to rely on credit cards or drain your retirement account in a pinch.
Most financial professionals suggest setting aside at least three to six months' worth of living expenses in a liquid, interest-bearing account. (They recommend having up to a year’s worth of expenses saved if your income is unstable.)
You should also review your insurance coverage to be sure that your family is protected no matter what. Beyond basic health insurance, you may wish to consider life insurance to protect your loved ones in the event that you should pass away prematurely, and disability income insurance to help replace a portion of your income if you should become injured or too ill to work.
Finally, review your investment portfolio carefully to be sure it’s still on course to meet your financial goals.
You may have discovered, as investors often do during market volatility, that your appetite for risk is not what you once thought. By working closely with a trusted financial professional, you can potentially reallocate your assets as needed to create a portfolio that is diversified enough to help you ride out future storms, but not so conservative that you sacrifice potential growth.
The coronavirus has threatened our health care system and economy like never before, leaving millions of American families struggling to pay the bills. As we continue to practice safe social distancing and hope for medical progress to combat COVID-19, it helps to know that there are steps we can take starting today to put our financial house back in order as quickly as possible.