It’s a scary time right now for all of us—especially financially. Faced with job uncertainty, we’ve all got questions about what we should or shouldn’t be doing with our money. We spoke to Jess’s financial advisor, Kevin R. Worthley, CFP® and Executive Vice-President of Wealth Management Resources, Inc. for his take on how we can get (and keep) our finances in order—plus, how to better prepare for a future crisis. It’s tempting to ignore or put off looking at your finances when you’re scared, but learning about how you can set yourself up for success can relieve a lot of anxiety and can be incredibly empowering.
How to Make Smart Financial Decisions Now and for the Future
When the economy is so uncertain, how should we be changing our spending?
The economy is forcing us to spend in different ways, so it depends on your personal situation. As in any kind of crisis, you want to look at your cash flow and ask yourself; How secure is my income? For most people today, it may be no income, which creates more uncertainty. If that’s the case, then a focus might be looking at your discretionary income.
This actually applies to everyone. We don’t know how quickly the economy will recover. The recent government stimulus is a short term, maybe one-time boost, so this is not a time for freewheel spending. Cut expenses where you can; limit shopping for new clothes, defer purchasing that new car, and avoid ordering takeout all the time. Live within your (new or adjusted) means.
What are the best ways to sure-up finances and be more prepared for moments like this?
Sometimes when life is good, we embrace excess and we forget the lessons of the past—if COVID has taught us anything, it’s that crises of some sort occur periodically and unexpectedly, both personal and societal. While you can’t prevent such events, you can be prepared by having roughly three to four months of living expenses tucked away in case of an emergency. Having these funds means you can avoid having to dip into your retirement accounts (incurring taxes and penalties), and you’ll have a cushion to pay bills. You’ll also want to be careful about discretionary spending, depending on what’s coming in. I’d also encourage people not to run up credit card debt, because at some point it will need to be paid back. During the Great Depression and WWII (a common comparison to today’s events) everyday items were rationed because of limited supply or the war effort. While people weren’t happy about it, they lived with it and most survived. Today’s crisis is also temporary, but for the moment it’s important and prudent to live within our means.
What questions should you ask before deferring a major payment (mortgage/student loans)?
Find out exactly what the terms of this new deferral will be. It’s almost like you’re restarting the loan, so you need to know any adjusted terms and conditions going forward. Ask the loan company if they’ll be charging you interest during this relief period, how long the relief period is, and if there’s any penalty once the government relief orders end. If you have a student loan, and your income has been compromised so you can’t make payments, ask if they’ll be adding the payments on the back end of your loan or if they’ll realign your payments (paying more per month). Under the current government relief provisions, loan companies aren’t allowed to report missed payments to credit bureaus; ask when this protection ends. You need to know all this information upfront. Knowing what you’re facing going forward when it comes to your finances is very empowering and will keep you from feeling helpless or blindsided later.
Is there a goal amount of savings a person/family should aim to have in case of emergency?
It depends on the stability of your income. If you’re in sales or a seasonal job where your income or cash inflow fluctuates, you’ll need to have more savings set aside in case of a downturn. In that case, you’ll want maybe five to six months of living expenses. If you’re in a stable occupation like a government job or you know your position is very secure, you might be able to get away with three or four months. Other resources like retirement or other investment accounts, or a home equity line of credit, can help although ideally you wouldn’t have to resort to dipping into your retirement accounts unless absolutely necessary. Ultimately, it depends on how much risk you can handle. It’s a personal choice, but as a general rule of thumb, you should have at least several months worth of living expenses and resources set aside, depending on your income.
Everyone’s talking about investing and the financial markets. Is now a good time to invest, or no?
It depends. Ask yourself a big question first—can you handle the volatility? The recent market decline of this crisis has shown us that some people aren’t really as risk averse as they claim to be. If you’re younger and are thinking about your long-term future, it may not be a bad time to invest. If you’re older and are depending on your investment earnings to retire you’ll potentially want to be more conservative. How you invest may depend upon how you handle the potentially bumpy environment and volatility down the road. We’ve gone through these bad periods before. Talk to a professional to get solid advice about what your next moves should be for you personally.
Is there anything else we should be thinking about right now?
There’s a lot of talk about the stay-at-home orders as an opportunity for a “personal reset.” Now can be a good time to think about your life and what you truly want for yourself. Do you want to go back to your old job, or should you retrain for a different career? Would you like new financial goals and objectives? How can you be a different or better person? Think hard about your spending and debt and other changes you’d like to make. Take the time to figure out what kind of person you want to emerge from this unique situation.
The last global pandemic was in 1918 and few saw this one coming. Unfortunately, catastrophes like this can and will happen (again) in some form, so it’s good to have a plan B. Good financial planning, with or without an advisor, can help take some of the stress and unknowns out of a situation.
See Jess’s previous interview with Kevin about saving and investing your money.
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