Every day, something new comes out about COVID-19 and how it’s impacting our society. We’ve seen the financial markets experience a lot of volatility over the past couple of weeks (and it looks like there’s probably more to come), which can be scary and nerve-racking for a lot of people. It’s completely normal to feel that way given all of the news around these events and all of the different points of view we may hear. I’m sure that things will probably get scarier with more people testing positive for the coronavirus and more things shutting down to try and mitigate the spread.
With that being said, all of this news is likely to strike fear in many and lead them to wanting to make changes. The same part of the brain that tells us to be afraid also tells us that we need to take action and do something about it. That’s why people are going out and buying all of the canned goods, toilet paper, and hand sanitizer that they can – it makes them feel like they’re doing something and helps to ease the fear.
With the world essentially being shut down for who knows how long, there’s a good chance that we’re going to end up in a recession and that many more people will lose their jobs in addition to those who already have. For those who will be fine, these tips should help you with your personal finances. For those who could lose their job, some of these tips could be more vital to your financial strength.
Your Portfolio
Don’t look at your retirement and other investment account balances. It’s going to be ugly and it could make you panic, which is exactly what we don’t want to happen.
You can, however, continue making your systematic 401(k) contributions. Continuing to dollar-cost average your funds into the market will allow you to buy in at multiple points along the market’s cycle. Trying to time the market is a loser’s game and using a disciplined approach like making regular purchases through your 401(k) each time you’re paid can help reduce volatility and lead to a successful approach to investing.
If you have an appropriate portfolio allocation and an evidence-based investment strategy in place, then your investment philosophy shouldn’t change and you should continue to manage your portfolio in accordance with the plan, including rebalancing appropriately. An appropriate portfolio strategy should be determined by taking into consideration many factors of your Financial Plan including your time horizon, risk tolerance, and financial goals.
We know that markets go up and down, and they can change very quickly during times like this, but we should remain focused on the long-term rather than making decisions based on what we think could happen in the short-term. There has been a lot of volatility, but it’s important to remember that this is temporary. In comparison, we can look at a long-term graph of the market and see that the Great Recession from 2007 to 2009 now looks like a bump in the road.
If you want something to do rather than being told to sit back and let this pass, then let’s focus on some things that we can control. Instead of making changes to your portfolio, here are some things that you can consider instead which could help with cash flow in the short-term in case you need it, but could also help to leave a long-term lasting impact.
Payroll Tax Holiday
This hasn’t been confirmed yet, but there has been speak of the US extending a Payroll Tax Holiday. This would mean that you would no longer be responsible for paying FICA taxes (Social Security and Medicare), which would leave 7.65% more money in most W2 earners’ take-home pay.
If this happens, then it will be more prudent to save this money rather than to spend it (although the government is hoping that you’ll spend it to give a boost to the economy). I’m sure that there are plenty of us who want to help the local small businesses who will have a hard time surviving during the shutdowns, but we also have to think about taking care of ourselves.
If we start spending the extra money that we have that typically goes towards paying FICA taxes, then we could end up getting used to it. The problem with this is that when the taxes begin being taken out of our pay again once the Payroll Tax Holiday ends, we will either have to try and adjust for our extra spending by saving less or have to learn to go back to our old lifestyles.
Make a plan to save this money if a Payroll Tax Holiday is extended. This could be a good addition to your emergency fund.
Find Ways to Free Up Cash Flow
Another action that you can take which could provide a positive impact to your financial situation is to take a look at your bank and/or credit card statement and find where you can cut back and save some money. You can even make it a game to see how much money you can save. There are likely things that you’re paying for right now like monthly subscriptions or trips to the coffee shop or other convenience items that you can live without and actually wouldn’t really miss if they were gone. And if you do find that you miss them, then you can add them back later!
Some other areas where you may be able to find some extra money in your monthly cash flow are to consider getting quotes from an independent insurance broker for your homeowner’s and auto insurance. You may find that they can get you better coverage for a lower premium than you have through your captive insurance agent. This is one of the first things I look at when working with a new client to see if I think they can improve their coverage and save some money.
Consider refinancing your mortgage. Mortgage refinance interest rates are low and could potentially continue going lower. You can always get a quote without having to follow through. Something to consider when thinking about refinancing your mortgage is how extending the term of your loan could affect you. While you don’t have to refinance your mortgage to a 30-year term, this seems to be the default and will provide a lower payment than refinancing to a shorter loan. If you’ve been paying on your mortgage for a significant period of time, then you may want to consider how refinancing to a 20-year or 15-year term would affect your finances.
Any amount of cash flow that you can free up is positive, especially if your job is vulnerable to a layoff.
Work Through These Money Wins
In January and February, I wrote articles about easy money wins that you can get under your belt to make some progress. If you haven’t already done these, then now is a great time to knock them out.
5 Easy Personal Finance Wins for the New Year
- Check your credit report & create a monitoring schedule
- Freeze your credit reports
- Increase your retirement savings contributions by 1%
- Increase your automatic payments on your high interest rate debt
- Setup automatic payments and online bill pay
5 More Personal Finance Wins to Keep Making Progress in 2020
- Find and/or create the login information to all of your accounts
- Check your beneficiary information and make sure that it’s up-to-date
- Securely store your login information
- Close old accounts
- Create a net worth statement
That should be plenty to keep you busy for a while. If you get through all of that, then you can consider more ways that you can systematize your personal finances.
