“ We do need to prepare financially for the worst but hope for the best.”
Key Takeaways:
Cut household discretionary spending and expenses.
Pay off high interest credit card debt and payday loans.
Build your emergency fund.
By: Allan R Kirby
Make no mistake, this pandemic has been a real shocker and has caught everyone off guard. Honestly I cannot remember anytime in my life where we just shut the economy down with no assurances of when everything will return back to normal. Unfortunately this unprecedented move means a global recession will take hold, leading to job loss or reduced hours for millions of people. Except for a lucky few, most of us will be affected so we will need to prepare for the worst. First and foremost, don’t beat yourself up for not being ready, no one really knew it would happen nor did anyone know about the severity of the economic impact.
“Many experts believe this will be short lived and we will be back to normal in no time, but will it?"
What you can do to prepare
The economy will bounce back and we will return to normalcy however the degree and timelines are not known. This means we should play it safe and prepare financially for a recession. Additionally the severity of the pandemic was unexpected so there is no guarantee the recovery will be quick and seamless. As a result we need to take a few steps to prepare ourselves.
Two important steps to take:
Cut household discretionary spending and expenses.
Pay off high interest credit card debt and payday loans.
It’s somewhat laughable to say during this pandemic when almost everything is closed but cutting discretionary spending is necessary. Basically the goal is to preserve as much cash as possible for the basics. Maybe you can also do a subscription clean up or adjust your spending after experiencing how to live without restaurants and entertainment.
Secondly, pay off high interest debt such as credit cards and payday loans. The costs of carrying a balance on a high-interest rate credit card can be significant. Your monthly finance charge is based on the interest rate and your balance so the higher your interest rate, the higher your finance charge will be.
“Take advantage of any coronavirus programs the credit card companies and banks provide."
This is the perfect time to contact your credit card issuer or bank to see what your options are due to the coronavirus. You may find some programs available such as skip a payment and interest forgiveness that you can take advantage of in order to help you conserve cash and save money.
Now let's look at three additional important steps to take:
Build an emergency fund.
Develop a budget.
Scale back or stop contributing to your Retirement plan.
An emergency fund is critical during times such as this pandemic, it's a buffer that will keep you afloat for a longer period of time. This is crucial because you do not want to rely on high interest credit cards and loans to get buy. It will not only ensure you do not borrow more money but also ensure you do not have to pay interest on your borrowings. The goal is to save as much cash as possible to ensure you can continue to live until things get back to normal.
“Building a budget is a must but keep it simple."
If you have never done one or have not felt a need to do one, now is the time. You need to build a budget with a focus on cost cutting, debt reduction and preserving cash. However most importantly do not go out and buy overly expensive and complicated personal finance software. A simple excel spreadsheet or just a pen and paper will work. Budgeting takes a lot of time and effort, so it is better to just focus on the budget process then it is to spend time figuring out how to use software.
“401K will take a hit but don't panic, most panic selling has been done."
Scale back or stop contributing to your retirement if you’re short cash. As I mentioned before, it’s important to preserve as much cash as possible. Secondly it’s also best to try and not raid your retirement funds either. Many people are panic selling and pulling their money out of the markets at the worst time. The markets will recover at some point and you may regret selling later on.
“Most importantly when you are in a relationship, you need to work together to prepare."
It may be difficult but taking financial action now with a recession coming and possible job loss, will help you later on. However try not to panic, focus your energy on building a sound financial plan and sticking to it. If you’re in a relationship then it’s important that you both work together in order to prepare, so communication is key. This is a stressful time but at some point the pandemic will pass and we will get back to normal.
This is a MySmallBank.com blog written by Allan Kirby, who writes and produces Personal Finance and Money Management articles and videos along with My Success Magazine.