By: Tony Robinson, Financial Professional
During a crisis, such as a job loss or a Covid-19 lockdown, you probably will have extra time on your hands. Use some of this time to methodically think about your financial situation without interruption.
Control and Curtail Expenses
The easiest way to control your expenses is by budgeting. Budgeting in a financial crisis may seem, shall we say, a little counter-intuitive. I can hear some of you now saying “I don’t have anything to budget with”. If you don’t have a budget, now is the perfect time to develop one. Budgeting is one of the foundations for financial success. Without one, you can easily be on the path to financial ruin and not know it. So take a deep breath, and go get the following:
- Paper, Pencil, Calculator
- Checking Account Statements
- Savings / 401k / 403(b) / Pension Account Statements
- Pay Statement(s) (for all in your household)
- Bill Statements (light, gas, water, etc.)
For some, gathering the bill statements will be the hardest part of this exercise. You only need the most recent monthly statements. If using your most recent month, annualize your expenses by multiplying them by 12. Let’s focus on getting a handle on the expense side of the income statement. Review your expenses and break them down into categories. The 10 most popular categories are:
- Medical & Healthcare
- Savings & Investing
- Debt Payments (i.e. credit card, car note, etc.)
- Personal (i.e. personal care, grooming, gifts, dry cleaning, etc.)
- Recreation & Entertainment
Anything not fitting into these categories can be listed as Miscellaneous. You can also define your own categories with more detail. Once you realize what you are actually spending you can then sit down and review what you can and cannot live without. You may be shocked at what you are spending your money on.
Maintain Your Retirement Plan
The sacrifice of your retirement plan should be your very last resort. Your retirement plan is your long-term, working money. If managed right, a retirement plan can make low C students look like geniuses and, if managed wrong, make valedictorians look like D students. Spending it now can derail your endgame.
Think about this: if a 36-year-old were to take $10,000 out of her 401k to keep up her image during a three-month layoff she would be sacrificing over $66,000 in future value, assuming a 6.5% rate of return and she retires when she’s age 66. So think about it like this, that $8,000 in hand after taxes ($10,000 - $2,000, 20%, tax withholding) is just like taking out and spending $66,000 ($52,000, after taxes). Now, are you willing to blow $66,000 in Three months!!! Really? Marinate on that for a moment. And note we didn’t factor in the 10% penalty for early withdrawal. Bottom line - try at all costs not to do an early withdrawal. Review and cut your expenses first.
Access Public Resources
I was recently on a Tele-townhall Conference call that had a Q&A regarding the Covid-19 Crisis. One person asked how to file for unemployment insurance. This person stated that she had never in her life been laid off or without a job and did not know how to access her unemployment insurance. She was currently operating as a 1099 Independent Contractor and didn’t have a large HR department to walk her through the process. Another person on the line had a similar question. He had a regular employer but also derived a good portion of his income as a 1099 Independent Contractor.
This made me wonder, how many people out there in similar situations go without accessing lifeline resources just because they are unaware they exist? The best place for you to tap into available community and governmental resources is to contact one of your local representatives. These are your representatives. Their office can assist you or they will know who you can contact for more information. Just call their office and say something like this:
Hello, my name is [your name]. I live in [your county or city]. I’m trying to access resources that will help me [state your problem (i.e. unemployment, find a job, health,etc.)]. Would you be able to assist me or direct me to an agency or person within my area who could?
You may be surprised at how many resources are in your community that you have the ability to access. Don’t be ashamed or intimidated to access them. I lived in Saint Louis in the mid-90s and had a friend who worked for the unemployment office. She told me she would see professional sports players coming in to file for their unemployment benefits as soon as they got released from their contracts. If they’re not ashamed, driving a new Benz, to file for unemployment, you shouldn’t be either.
Communicate With Creditors
Now that you have taken a deep breath, reviewed your expenses and stayed away from your retirement plan here comes one of the most overlooked aspects of personal finance: communication with those who you owe. It’s easy to think that your creditors will just understand your situation. Even in dire financial situations when it seems like everyone is affected, some will not be and many may not be affected to the same extent. If you feel you may have to miss a scheduled payment(s), reach out to your creditors and explain your situation.
Now before you get on the phone, have an open mind to questions like “when will you be able to make regular payments?” The creditor is not being callous. Remember they are in the lending business (selling money) and you bought their product and they would like to be paid for it. Have a mental game plan of when you think you will be able to resume with regular payments. Some creditors may have specific departments set up just for these types of conversations where you can work out a new payment schedule. But it is important to make contact before you are in dire straits financially. You are more likely to get flexibility if you are perceived as a good credit vs a bad one. Again communication is the key.
Do Not Panic
Let’s consider a hypothetical situation. You’ve just lost your job, your benefits, and your retirement has been cut in half. You know that things will get better, but like so many people you live in the now, and right now things don’t look so good. Don’t panic. Try to stick to your long-term financial plan.
Reach out to a financially savvy friend, a financial advisor, or a financial coach. During these times these individuals earn their money and/or solidify their reputation. A good financial relationship will give you access to frontline macroeconomic reviews and a good financial professional can talk you down off the ledge by keeping you calm and focused. So, before you break the glass and start liquidating the family jewels and furniture, speak to someone first. Some financial professionals will speak with you for free, but you have to ask and define what the conversation will be. Be upfront. If you’re not in the market to purchase any product let them know. Tell them you’re just shopping around for financial guidance and would like to set up a brief conversation to address your overall financial situation. Anything over a 15 to 20 minute conversation, like an attorney, may require a contract and an exchange of funds to proceed further. If you decide to proceed further, make sure you get the following questions clarified:
- What is your experience in the financial services business?
- Do you have specific industry credentials?
- What is your approach to financial planning?
- Will I be working with you personally or with a member of your team?
- How do you charge for your services?
Running your financial plans by a financial professional before you implement them could save you thousands (if not more) and keep you on track to hit your future financial targets.
About the Author
Tony Robinson is a Chartered Retirement Planning Counselor, a Chartered Retirement Plans Specialist, and a financial professional who works for a large US financial services firm. His writing interest includes personal finance, exponential technology, and stock market history.