Originally released July 13, 2020
Today, we’re going to talk about managing your money during an economic crisis like the COVID-19 pandemic that has impacted people around the world, including over three quarters of Americans who reported that the coronavirus crisis has impacted them financially.
This is part one of a two part series that will be continued next week and in this episode, we’ll be focusing on what kind of relief and help is available to you, and what immediate changes you can (and shouldn’t) be making right now.
With over 40 million (at time of recording) Americans filing for unemployment as of this recording, it means that unemployment gains from the past ten plus years have been wiped out in record time! Even for those who were not laid off or furloughed, financial situations could still change in the future as companies find ways to adjust by, for example, cutting salaries and 401(K) matching programs. To make things worse, one-third of Americans who have filed for unemployment are still waiting to receive their unemployment benefits. Even once they do get it, many will need to find a way to supplement and stretch this money because it still won’t be enough to pay their bills. Plus, some economists think that 10% of these job layoffs will be permanent which would affect several million people, and the Federal Reserve has indicated that they expect unemployment to remain elevated for years.
In addition, women – who actually held the majority of non-farm payroll positions last December for the first time since 2010 – are now once again at a higher unemployment than men. And while jobs are beginning to return and the unemployment rate declined for white and Hispanic workers in May, it continued to increase for African Americans and Asians.
My point is, if you’re struggling to pay your bills, you’re not alone! It is definitely a very scary and stressful time! Most people are not prepared for a financial crisis like this, and about 60% of Americans are currently worried about paying their utility bills, car loans, and rent. The good news is that whether you’re trying to find ways to stretch every penny or feel uncertain about your financial future, there are resources out there and ways we can mitigate the monetary stress and plan for the future. The economic fallout from this could continue for quite some time, so whether you currently have steady income or not, it’s now even more important to take stock and take steps, even small ones, that can make us feel more empowered and less stressed.
So. Let’s take a deep breath, step back, and look at the big picture.
The very first thing to do is to look at your budget. List out all of your regular expenses like rent, car payments, insurance, utilities, Netflix, Spotify, phone bill, and any credit card and other debt payments. This will show you what you really need to pay, like rent, and lay out any savings and debt. With this big picture view, you can start trimming where you can. If you’re struggling to pay your rent or buy groceries, you don’t need to spend $10 per month just to not hear ads on Spotify! This also does not mean that if you have some extra money left over, you should spend it on some online retail therapy! I know that might be very tempting, but it’s more important to use any additional money you might have, like money normally spent on commuting or a gym membership, to set up a robust savings account right now. We’ll talk more about that in Part Two.
If you are currently unemployed, file for unemployment and see if your former employer is offering any resources. You can also call 211 or go to 211.org to find local resources and services to help with needs such as employment and education opportunities, food and housing assistance, and services for vets. Again, unemployment benefits are delayed for many, so you should file as soon as possible and call the office if you don’t hear back, although you’ll most likely need to call multiple times and deal with long waiting times before getting connected. Any money you receive from unemployment benefits and your stimulus check should be focused on absolute essentials like housing and food, while anything left over should be saved in an emergency fund.
The good news is that because of the pandemic, many banks and other lenders are providing options to defer or minimize monthly payments, and some may be cancelling interest or late fees entirely.
However, one of the things that did not get cancelled is your rent. Although there were many calls to “freeze rent”, rent payments were only postponed and not cancelled. Unless you got a letter from your landlord explicitly saying you do not owe rent, the only rent support currently provided by the government, outside of the stimulus check – which, personally, did not cover my rent – is postponement. This means that you could still be evicted if you do not pay the full amount of rent owed within a specific time period, so you need to think of it as a debt and have a plan to pay it. If you are able to pay it in full, you should pay it in full and avoid adding to any future debt since we still don’t know how long this crisis will last. If you’re struggling to pay rent, you might be able to negotiate with your landlord. Rents are coming down across the country right now as people cancel leases and move home, so many landlords are desperate to fill those units. Use this to your benefit! Having you continue to live there even if you pay less rent is still guaranteed money for them, vs. your landlord trying to find a new tenant to take your place if you have to move out. Whether you think this is a good solution for you or not, make sure to put any additional income or benefits towards repaying your rent at a later date if you need, stay in touch with your landlord about your financial situation if possible, and check your state’s guidelines to make sure you know when your full amount of rent is due.
On the other hand, if you own a home, don’t automatically assume that this is a good time to refinance! You might be able to lower your housing costs due to some lower interest rates, but it’s important to do your research on your own because some mortgage rates may have increased due to the number of people requesting refinances at the same time. In addition, some government recording offices may be closed or working with less staff, which means that services like home inspections and appraisals could be delayed or unavailable, so be sure to do your homework to make sure that refinancing right now is a good solution for you.If the money from unemployment and the stimulus check are not enough (or delayed), you can also explore loan options from local credit unions. These not-for-profit institutions tend to not only have better customer service, but also have lower interest rates and more flexible terms than banks. You can look for a credit union that might work best for you at asmarterchoice.org or at mycreditunion.gov. You might also have a better chance of getting approval from a credit union if you have fair or bad credit – meaning a FICO score of 629 or less. Some also offer payday loan alternatives, which are a much safer bet than going with your typical high-interest and short-term payday loans. Payday loan alternatives have a maximum annual percentage rate of 28% and give you more time to pay than a payday loan.
Due to COVID-19, some economists expect that 10% of these job layoffs will be permanent, which would affect several million Americans. In addition, the Federal Reserve has indicated that they expect unemployment to remain elevated for years to come.
If you have a retirement account, I know it will be tempting to pull money out to help pay for bills. But, while this is a solution, it is rarely worth it and really not a great idea if you can avoid it! Before you take money out of your 401(K) or traditional IRA, keep in mind that you’ll probably face heavy taxes and penalties for pulling money out early. If you pull money out of your Roth IRA while the market is down, not only could withdrawal on your earnings be taxed, but you could miss out on future market recovery, too.
Finally, if this is an option available to you, you could also reach out to trusted friends or family to borrow money and create a long term payment plan.
If you’ve exhausted all of your loan options, the next step is to turn to credit cards. I know that seems like unusual financial advice, but the usual rules about credit cards don’t apply right now and could be a helpful resource if you still need additional funds. However, it is so, so important to have a plan before going further into debt!
A good option if you have good credit (meaning scores of 690 or above), would be a 0% introductory APR card. This means that you don’t need to pay any interest within the introductory offer period, so you can purchase essentials like groceries on your card and pay it off months later without paying interest. If you go this route, remember that you do need to meet the minimum monthly payments during the 0% APR period or else you risk not only losing the 0% APR entirely, but also triggering an even higher APR. These 0% periods typically last 12-18 months, so don’t treat it as a magical, no-interest card! You have to pay off all of the debt on the card by then, or else you’ll be stuck not only with debt, but with high interest payments.
Also, be careful when picking a 0% introductory APR credit card! Some cards offer 0% only on purchases, others offer the promotion solely on balance transfers, and others do both, so be sure to look at the terms and descriptions before applying for the card to make sure you choose the one that best fits your needs. For example, if you need help buying essentials, the 0% offer on purchases will be your best bet. If you need help paying off existing credit card debt, the offer on balance transfers could be a better fit.
Another thing I want to point out is that while some store credit cards come with deferred interest, this means exactly that: the interest is just deferred or set aside. This is different from a 0% APR offer! Interest is still being calculated during this time, so if you pay off your balance in full before the deferred offer period then you won’t have to pay any interest. But, if you still have balance on the card, you will have to pay all of the interest that accrued during that entire period!
Whether you’re applying for a credit card now or outside of a crisis, always make sure you understand the terms of the credit card you’re applying for, and remember that applying for a new credit card or a loan and refinancing an existing loan can also cause your credit score to drop temporarily since new applications trigger a credit bureau inquiry. If you are concerned about your credit score or want to check it before applying for a loan or credit card, all three major credit bureaus are offering a free copy of your credit report right now at annualcreditreport.com every week through April 2021. One last thing to keep in mind before you start googling new credit cards: Be mindful of the number of credit cards you open! If you have multiple lines of credit, it might negatively impact your credit so don’t just keep opening new credit cards so you can keep transferring your balance and shifting the debt around.
If you’re struggling to make credit card payments, many credit card issuers are offering hardship programs to make payments more manageable. This could be a lowered minimum monthly payment, a reduced interest rate, or a waiving of late fees for a limited time. Some companies, like Chase, are even running new point programs so that you can pay off your credit card with your points!
Most of these adjustments are not being applied automatically but on a case-by-case basis, so you will need to contact your credit card issuer to explain your situation and learn how they can help. You can log into your account online and start a chat, or call the number on the back of your card. Either way, you should be prepared to wait before reaching someone. A late payment can result in a late fee and negatively impact your credit score, so it’s important to be proactive and call your card issuer before it’s too late. Another option is to consolidate the debt from your credit cards into a single loan. Because interest rates are at historic low right now, it could make sense to get a single loan at a lower interest rate than your credit cards so that more of your money goes towards paying off the actual debt, and not towards interest.
A quick tip: Even if you’re not struggling to make payments, if you have any debt on your card, you can always call periodically to ask about lowering your interest rate!
Another thing to remember is that in addition to having multiple lines of credit, using up a lot of your available credit can negatively impact your credit score, too. It’s generally recommended to keep your credit utilization under 30% which means that if you have a total credit limit of $10,000, then you should try and keep the balance on your account to under $3,000. If you are needing to utilize more of your credit, you can call your bank and ask if you qualify for a higher credit limit to help keep your credit score from decreasing.
If your struggles are related to student loans, there are resources available for you as well! If you have a federal student loan, the government is offering help to borrowers retroactively from March 13th through September 30th. This includes automatic forbearance, automatic waiving of interest, and stopping all collection activities on federal student loans in default. This means that for this 6 month period, no payments will be due and no interest will accrue. They will stop all collection activities, including collection calls and letters, wage and Social Security garnishment, and tax refund seizure during that period, and you’ll receive a refund for any forced student loan payments after March 13th. Your stimulus checks also cannot be taken due to defaulted student loans. Although this forbearance is automatic, you may still need to go in to cancel your auto-pay through your servicer’s website. If you forgot to cancel this auto-pay, you can contact them to request a refund for any payments made after March 13th. Keep in mind that because of the forbearance, your repayment term could be extended so that your final payment date is pushed back six months. In addition, if you had some other deferment or forbearance before this crisis, those will be reinstated on October 1. Any existing student loan forgiveness programs, such as PSLF – or Public Service Loan Forgiveness – are still available.
So with these payments and interest paused, what’s the best use of this money during this six month period?
While you can continue to make payments to reduce your balance, it could be of better use to pay off any high-interest debt you might have, or add to a savings account and emergency fund if you don’t need to use this money for essentials. If you don’t have any other outstanding debt and already have savings, then this is a great time to pay off the principal amount because all of your money will go towards lowering your balance, and not towards interest! This way, once interest kicks back in in October, you’ll also have a lower interest amount due to a lower principal amount. If you’re on track for Public Service Loan Forgiveness, it could make more sense to put the money aside in savings than making payments during the forbearance period.
If your student loan is through a private lender, you’ll need to check with your lender to see what kind of assistance they are offering. Most are pausing payments for up to twelve months with forbearance or deferment policies, although, unlike federal loans, these will continue to accrue interest. Others may be waiving or refunding late payment fees. Visit their website or contact your lender directly to find out what your options are.
If you do have different types of debt, make a ranking! Write out every single piece of debt, put down the interest rate of each one, and start paying off the debt with the highest interest rate. This isn’t the time to take advantage of lower interest rates or discounts by NOT putting a dent into that debt while you can. If you ignore it and don’t pay off the higher interest rate now, it might only get worse as things start back up and companies stop providing their current options!
Many health and car insurers are also working with customers to delay payments without penalty, and some states are also requiring insurance companies to extend grace periods and offer a 30-day period after payment is due to make payments before losing coverage. Some car insurance companies including Progressive, GEICO, Allstate, State Farm, and Liberty Mutual even provided discounts and refunds during the pandemic.
I do want to point out that insurance should not be an area where you cut costs! Health insurance, as confusing as it is, is especially important during a global pandemic, and just because you’re driving less doesn’t mean you should cancel your car insurance. Almost all states require you to have insurance to legally drive, even if you’re only driving once a month. Plus, a lapse in coverage could result in higher car insurance rates in the future. One possible option is to change your policy to a minimal coverage that only covers what is required by your state. But, this could mean that you become responsible for any costs caused by a collision, theft, or vandalism. A better option would be to call and ask your insurance company about good driver discounts, or comparing car insurance quotes to see if there’s a better rate out there for you. If you’re not driving much, you might also want to think about switching to pay-per-mile insurance, which means that you pay less if you drive less. Unlike your typical insurance, you pay a monthly base rate and then an additional per-mile rate measured through a plug-in device or a smartphone app, so your monthly payments are low when you aren’t driving as much. Metromile is an example of a company that offers pay-per-mile insurance.
I know that there are so many other bills or debts you may be worried about making payments for that I didn’t touch on today. The best way to learn about your options is by contacting the provider or lender directly. Many lenders are offering better interest rates right now, so you could potentially refinance your debt at better terms, and providers might be able to offer a flexible payment plan or eliminate late fees. If you do get some form of relief, make sure to get the agreement in writing and that you understand the terms fully, like any limited time period this relief might apply to. I do also want to remind everyone that there has been a surge of scams during this time, so be wary of any companies that reach out with any loan offers that are too good to be true or total debt forgiveness.
If you are currently job hunting, I feel your pain. I know it might feel like a never-ending battle, but remember that there are companies that are hiring right now! It is especially important to network, even virtually, and continue to be active on social networking sites like LinkedIn. Let your connections know what you’re up to and what you’re looking for! Use this opportunity to think about what you did and didn’t like about your previous job so you can better define what kind of job you’re looking for and what would be the best fit for you. Even if the specific role or industry you have the most experience in isn’t hiring, focus on your transferable skills to highlight why you’re a unique candidate! I know the job hunt can be overwhelming and requires so much patience, but I promise you will make it out of the other side.
My very last tip for today revolves around food. We already know that meal planning can help us spend less money on food by maximizing our groceries and spending less money on take out and delivery, but if you DO decide to order some take out…did you know that you could get two meals out of one for just a few extra dollars? When ordering a meal, add extra ingredients on the side – which usually aren’t that expensive, that could be used for a separate meal later. For example, you can add extra chicken on the side when you order lunch that could be incorporated into dinner later that day! If you have any other food-related money tips, I am all ears. Please send them my way because I am always hungry.
So what can you do if you do have steady income, or have found ways to cut costs and put aside some money? Should you focus on paying off debt, like student loans or credit cards, or building an emergency fund? How much savings should you really have, and how can you be set up so you are better prepared for any financial surprises in the future? Check out Part Two!