The last year has been odd for many of us and maybe your finances have seen drastic changes too. Whether you had to dip into your savings, lost a job, or maybe even saved up extra income due to canceling travel and vacations, it could be time to do a financial tune up. A financial plan isn’t something that you set and forget. Life changes and if you don’t adjust your money habits you could end up with some unpleasant surprises, or even miss out on opportunities and gains.
Below are some ideas for how to get back on track regardless of what you have experienced.
What’s the best way to budget money during the coronavirus?
If your paycheck or business income dried up due to a layoff, furlough, reduction in hours or lack of business revenue, you need a realistic crisis budget. It’s critical to take stock of your savings, income sources and ongoing expenses so you can spend less than you make. The first course of action is to redraft the household budget. You don’t need to cut all of your spending, but it’s probably a good idea to follow a more conservative lifestyle and try to avoid some unnecessary spending.
What if I had to take a loan from my retirement accounts?
If you’ve tapped into your retirement savings to help make ends meet, you should also do everything you can to repay that amount.
Under the CARES Act, the federal government temporarily raised the limit for 2020 on retirement account loans from a 401(k), 403(b), 401(a), and other qualified government plans. But you must still repay the retirement account loan on time. Failure to do so will convert the unpaid balance to an early distribution, which would be taxed as ordinary income.
The CARES Act also relaxed the rules for retirement account withdrawals, allowing those age 59½ and younger who have been financially harmed by the coronavirus to withdraw funds from their retirement account in 2020 without incurring the standard 10% early distribution penalty. They would still owe ordinary income tax on the amount withdrawn. That tax, however, can be avoided if the withdrawn amount is replaced within three years.
Should I continue investing money during the pandemic or keep it in savings?
Some households have ended up with extra cash on hand due to not traveling or going out much over the last year (except to stock up on toilet paper of course)! Should you keep that extra money in savings or investing? It will depend on how your other finances look. If you lack a full emergency fund then you may want to replenish that. But if you are over your recommended cash savings, you may be better off investing.
With so much economic uncertainty, the stock market is likely to continue giving investors a rollercoaster ride of emotions. Instead of focusing on the day-to-day volatility, look at the big picture, and remember your financial goals. For long-term investment goals, such as retirement or buying a home, you generally would want to keep investing.
Generally, the sooner you get started investing, the more time your money has to grow. As you earn interest, it gains even more interest, which is known as compounding. Compound interest can have a colossal impact on long-term savings, which you won’t want to miss out on.
Meeting with a financial advisor can get you a detailed analysis of your assets and help you map what your next steps in your financial journey should be.
How can I protect myself for the future?
No one knows yet the full extent of economic effect as a result of COVID-19, but we can safely assume it will not be the last financial crisis we face. When there are periods of volatility or uncertainty, many investors look for ways to protect themselves from future risks.
If you don’t already have one, start putting money away for an emergency fund to pay bills during bouts with unemployment, or when unexpected expenses crop up such as home repairs or medical bills. Having savings set aside prevents you from having to rely on credit cards or drain your retirement account in a pinch.
You should also review insurance coverage to be sure that your family is protected no matter what happens. Beyond basic health insurance, you may want to consider life insurance to protect your loved ones in the event that you should pass away prematurely, and disability income insurance to help replace a portion of your income if you should become injured or too ill to work.
You may have found out this year that you aren’t as risk tolerant as you used to be, or thought you were. It may be time to adjust how your assets are allocated if your needs or risk assessment has changed. We have access to technology that can pinpoint your personalized risk tolerance number.
So, what’s the bottom line?
Are you still on track to achieve goals you initially established? Does your plan require adjustments? Given all of the events of recent months, this is the right time to review your plan and make sure you’re still on track.