Debt, 401ks, and Preparing Your Finances During Coronavirus

Below is a summary of some of the important questions and topics we covered, including how to both prepare for an economic downturn and handle a stock market crash. Read along while listening to the webinar replay, and stay tuned for future money conversations! As always, we remind you to do your homework and seek your own custom, professional advice when managing your finances. 

Debt

On a good day, paying down debt can feel like a daunting task. While we’re not quite *technically* yet in a recession, financial experts agree that the impact coronavirus has had on our economy has us headed toward a slowing financial future. That being said, the tables have turned on making debt your personal financial priority. Consider slowing expenses and building up your liquid cash reserves. That means no more extra payments on credit cards, and keeping your savings easily accessible in case of an emergency. A few other specifics: 

I have heard that I don’t have to make student loan payments for six months, is that true?

It depends. If you have a federal student loan, according to The CARES Act, student loan payments are deferred (as of now) until September 30, 2020. As a reminder, this is an option, and you may have to manually request it from your lending institution. You will not face any penalties or late fees for not paying your federal student loan. You will also pay no interest on your student loans until September 30. 

Do the new student loan protections apply to private loans?

Probably not. Under The Cares Act, only federal student loans owned by the government are deferred. Private loans, as well as FFEL Loans, are not covered. This does not mean certain lending agencies are not providing custom relief, so be sure to check in on any outstanding debt owed to see if you can get any support with your student loan. 

Should I prioritize paying off my credit card or saving right now?

Financial advice should always be customized to the individual, but as a blanket statement, you want to save right now. Due to the uncertainty of the economy, job market and more, it is better to be prepared with 3-6 months of savings (if you are lucky enough to have already done this), or start now. Cut dispensible spending, save what cash you can and start your emergency fund for this period of time, or any future events as well! Also, make any proactive moves you can. Call your credit card companies or any other high-interest debt agencies and ask if they’ll consider lowering your APR due to the coronavirus. 

Anything else?

It’s important to remember that if you have a federal student loan, you won’t be negatively impacted by pausing your payments related to any loan forgiveness programs. Also, just because your payments are paused, your balance will not change.

401ks

It’s important to remember that your 401ks or retirement investments are just accounts. The news is running wild with tons of shocking horror stories of the swings and downturns of the stock market, retirement funds and more. While this information is very real - you can take a deep breath and pause. Your accounts are invested and playing the long game in the market. You are going to wait it out. 

My 401k lost money in March. Why? I thought retirements were supposed to be safe.

Let’s get back to those accounts. Your 401k or retirement accounts are a bundle of investments that are made into different types of brokerage accounts, with different levels of risk based on factors such as your tolerance and age. In general, the younger you are as an employee or investor, the riskier your account investments will be. Your money will be bundled into investments such as bonds, but also heavily in stocks, a “riskier” investment. This is because on average, the higher the risk, the higher the reward! Stocks fluctuate on the daily, but long-term, always net a higher average of return. You may have lost some money in March, but if you can be patient and wait it out to see the long-term results of your investments, you will reap the benefits in retirement. The most successful strategy long-term is sticking with it, riding through the hard times and stay along for the ride so you’re there for the stock market upswings as well. 

Should I sell my investments to avoid losing more?

Unless you are in critical need of cash, it is best to avoid selling investments on the market at times like this. You are losing money by selling the tiny stakes of each stock you have invested in at a lower rate of return than at a different time on the market. 

Is now a good time to buy into the market? 

It can be stressful to time the market, but if you are *completely* financially stable, go for it. That means all bills covered, 6+ months of emergency savings, guaranteed income and more. Only then would I recommend buying into the stock market. Pick up those funds that others have sold and buy them at a discounted price. As we learned above, the price is going to rise, and you will see the earnings. 

What causes stock market volatility?

The stock market is a completely volatile market because it is based on consumer and business confidence and security. Any time major political events happen, a disruption in services could occur, a new product is launched on the market or more - stocks fluctuate as an indication of “the mood” of what may come with future investments.

What should I do if I need the money in my 401k?

For a limited time under The Cares Act, you can withdraw up to $100k without penalty if for coronavirus related reasons. Remember though, you have to be able to prove this. While this cash can be a major lifesaver for big expenses like a mortgage or health costs, it is important to consider and plan that you will also be on the hook for your increased income taxes next year based on this withdrawal. The government will get their income taxes - withdrawing funds on non-taxed 401ks means you increased your income for the year. In some cases, if you pay your withdrawal back in a certain amount of time, taxes may not apply. 

Preparing for a Recession

We talked with Amanda about what else you can do to prepare for a recession. Since this term technically applies to a longer-term status in the market, it’s important to remember that saying our current economy is in a recession is a bit of a misnomer. That being said, most experts expect the extreme decline in financial activity as a result of the coronavirus to lead to this impact in a global fashion. It’s important you get your money house in order and buckle in for the long ride. 

Should I shut off my retirement contributions right now in order to save money?

Sadly, the answer right now is probably for most investors. Unless you have a guaranteed, stable job without adjustment or threat to your personal finances in any way, it is worth considering shutting off your retirement contributions for this period of time and instead, save for a potential emergency. 

I lost my job. What are my next steps? 

First and foremost, we’re sorry. To date, more than 10 million individuals, more than any in any other period of history, have lost their jobs along with you. That being said, your next step is to apply for unemployment (we’ve got a guide on how to do this per state). Under The CARES Act, unemployment applies to a unique category of workers, including part-time and freelance employees in some cases. If you lost your job related to COVID-19, you are also guaranteed $600 per week in addition to any unemployment benefits you receive (which is on average, about 40% of your former salary). The goal by the government here is to stimulate spending, including from your pocketbook, to make sure you stay home safely, but also invest in food, rent, and resources to keep the larger financial economy working. 

What are some ways that I can earn money if we are in a recession?

While many traditional nonessential jobs are being eliminated, emergent economies often spring up that need new workers and employees during a recession. While these new jobs may not be in your normal wheelhouse, or perhaps may leave you underemployed, this is a great way to earn money and stabilize your bills and expenses during critical times. There are also tons of companies hiring remotely, and many local grocery stores and essential services still in need of support. Different organizations will evolve in the coming months that will need new workers, as well. 

What can I expect from the government?

Keep your ear to the ground on future support and expectations from the government. While it’s difficult to think about, there is a major presidential (and many other types) election taking place in November off this year. Politicians are keenly aware of not only their responsibility to support us immediately but in the long-term. In addition to the current $2 trillion dollar stimulus package, there are proposals being made for future long-term support as well. 

What else?

Above all else, remember that historically, the best strategy is to be completely unbothered by the ups and downs of our current economy, and to consistently save money where you can, just in case.  Be fearful when others are greedy, and greedy when others are fearful. Stay safe, stay employed of you can, and ask others how you can be essential to the success of getting past this crisis. The economy always fluctuates, and you will make smart moves to ride the wave! 

Want to keep learning? Amanda also writes a women + money blog called The Dumpster Dog Blog and provides free investing education on Instagram (along with the occasional #TRASHION outfit). We’ve also got tons of money moves to keep you on track, no matter what’s on your financial horizon.