Brace yourself - the time to save is now
Whenever I speak with loved ones on the phone, we lament the Covid crisis and come back to the same basic problem: we just don't know what's going to happen. We can't make any plans for the next year of our lives. Should I be booking flights for Thanksgiving? Should I be increasing or decreasing the amount I put into retirement? Will my job become permanently remote? Will I have a job in four months? I was going to move but is now the right time?
The World Bank recently released a deeply concerning publication forecasting a 5.2% global contraction of GDP in 2020. To put this into context, during the great recession, it contracted by 1.678%. Hopefully there will be a vaccine or cure soon, but until then, brace yourself. No matter what the health situation is in a year from now, chances are, our economic situation will be drastically different.
We simply don't know what's going to happen but we should prepare for the (economic) worst. What will your life look like if you have to live on unemployment? What if you have no job and no unemployment? Will you be able to afford your current residence? Will you have to sell your car for a cheaper one? Will you have to take from your retirement savings, potentially at a serious loss? Will you have to move? Where would you go?
The good news is, it doesn’t have to be so dire. You have the opportunity to make yourself a cushion should the (economic) worst happen. With a cushion, you can absorb the economic impact of a major loss of income without having to make drastic changes to your living situation. You can stay in your current home. You won’t have to sell your assets.
Covid has created a crazy, upside-down world, but there are a few economic benefits. Rarely leaving the house means far fewer chances for our money to leave our pockets, to be spent on drinks, lunches, or dinners. It means we aren’t paying for concert or sports tickets. It means we aren’t paying for dry-cleaning for any of our work clothes. We have the time to learn cooking skills. We can learn how to fix items around our house instead of hiring in a stranger. Our capacity to spend is so diminished, we have a tremendous opportunity to create our cushion for lean times.
What should you be doing now to prepare? Here are some general rules.
(Of course, everyone’s situation is different. Your household income, family size, cost of living, health expenses, debt burden, interest rate of debt, etc, create variations that make it impossible to come up with one formula for preparing that is best for everyone. What's best for you will depend on your situation, consult a financial professional to get customized help).
Overall, if you now have a steady income, whether that be from your job or unemployment, that meets household needs, here’s what you should be doing:
1. Recognize that this time of social isolation does have some upsides. Reduced purchasing, traveling, and going out is an opportunity to shove money into your own pocket unlike any we've known.
2. Use this opportunity to pour money into your savings.
Normally I recommend people save 1/4 their yearly take-home income in an emergency fund as this is about the amount you need to survive for 4-6 months. However, your new aim, due to this crisis, is to build your savings to between 1/4 and 1/2 your regular yearly take-home income. For example: if you take home $80,000 a year, aim to build your emergency savings to a minimum of $20,000 and maximum of $40,000.
Ask your employer to deposit 25% (or whatever you can manage) of your check into your savings account so you can save without doing anything yourself.
This will take a while - it won't happen overnight. You know what else is going to take a while? Getting rid of Covid. Don't worry that it'll take couple years to save so much- if you have your job that long, you're lucky. If you lose it, you'll be glad you put so much away. Come up with your milestones and celebrate them when you hit them
Normally I prefer for people to get their savings to $1,000 then get rid of high-interest debt. However, given the precarious nature of all of our incomes for the foreseeable future, you’ll need lots of cash on hand. If you work from home and have a very dependable income, then it would make sense to still focus on getting rid of this debt. But if your employment isn’t so secure, you’ll want to focus on savings first. Depending on your balance, interest rate, income, current savings, etc., it may or may not be best to put all your money towards this first. So, as a very general rule, if you have high-interest debt, split the money you're setting aside in half. Put half towards the debt and half into savings.
Your mileage will vary - if you have $10,000 in debt at 19%, you're paying $158 a month in interest alone. $25,000 at 19% is almost $400 a month in interest. You need this money, credit card companies don't. Get rid of the debt and stop paying them!
3. Contact your debt lenders
For credit cards, there are many programs going on now - but beware! Even if your minimum payments go down, if interest is accruing, you're increasing your debt. Follow the CFPB's advice on talking to credit card companies.
Mortgages - Here are your options
Car loans - There are payment relief options - see here.
You got this! Keep climbing!
If you have any particular questions, please ask! I want to send you content that you can use to save money and live better.
Cheers,
Ms. Moody