COVID-19 can teach us ways to enhance our personal financial management habits
The COVID-19 pandemic is having a devastating impact on the nation’s economy. More than 33 million people have lost their jobs, businesses across the nation have shuttered or declared bankruptcy, and a major drop in the stock market clobbered many people’s savings and retirement investments.
But there are opportunities to use this time to take stock of your current financial situation and establish habits that put you on a stronger financial footing once the pandemic ends and the economy recovers, or for when the next economic downturn hits.
“One of the things I try to do is look at things from a glass-half-full perspective,” said David Almonte, CPA, CGMA and member of the AICPA Financial Literacy Commission. “What have you learned through this that you can live without? Where have you found you can cut back? Use that to make sure your family comes out stronger than you went into this pandemic.”
The pandemic and associated stay-at-home orders have changed the spending habits of most Americans. Consumer spending fell 7.5 percent in March, according to the federal Bureau of Economic Analysis.
For some, it has provided an opportunity to save money in many areas, such as gas costs, travel, entertainment, dining out and any number of purchases delayed due to many stores being closed, not to mention federal student loan deferrals. But we may be spending more on groceries, take-out food or online shopping.
Some of that is only temporary; some spending habits will revert back once the pandemic ends, and people are able to begin to return to their normal lives. But there is an opportunity to establish better financial practices based upon the last couple of months.
Set a budget
The first thing Almonte recommends is taking stock of pre- and post-COVID spending to identify areas of savings and plan for expenses that will return. Then use that information to build a budget.
“Look at ‘needs’ vs. ‘wants,’” said Almonte. “Right now, there are no ‘wants’ for a lot of people, only ‘needs.’”
Once you’ve built a budget, it’s important to stick to it and avoid spending triggers – are you online shopping out of boredom? The farther we move from the pandemic, the harder sticking to a budget becomes. After the 2008-09 recession, many Americans focused more on budgeting and spending, but as time passed, those habits faded. A 2018 AICPA survey found that only 39 percent of respondents were following a budget, down from 58 percent in 2015—showing that over time many of the good habits learned from tough economic times faded.
To stay focused on the budget, Almonte suggests revisiting it quarterly or annually and adjusting as needed. And to best stick to a budget: Make it realistic. You don’t need to eliminate all “wants” from your spending, but you should consider ways to cut back spending on them.
For example, many people like to stop for a cup of coffee on their way to work each morning. And while they’ve probably been brewing at home recently, stopping for coffee is a habit that is likely to resume once offices reopen. Rather than trying to cut it out, Almonte suggests setting a budget for that coffee, such as $25 per month, that is put on a gift card. Once the card runs out, don’t refill it until the following month. Such steps allow you to indulge your “wants” to a reasonable point within what your budget allows.
Now is an ideal time to cut debt. If you have extra cash from reducing your spending, pay down high-interest credit card debt, mortgages or other loans.
Even if the loans have been deferred temporarily, that money still needs to be repaid, so use this time to get ahead of them.
For example, through the federal Coronavirus Aid, Relief and Economic Security (CARES) Act, the U.S. Department of Education has suspended payment on federal student loans until Sept. 30, 2020. For the time being, those are 0% interest loans, and any payments during this time go entirely to principle and reduce the total interest owed. That means if you continue making payments now, you can reduce the total amount you are paying as well as reduce the amount of time it takes to finish paying them off.
Build an emergency fund
Establishing a budget and cutting debt is ultimately intended to free up some money for other purposes, such as creating savings and establishing an emergency fund. The sudden onset of the pandemic, coupled with unexpected job losses and investment declines, have only highlighted the importance of having additional cash that you can tap to help cover expenses in case of emergencies. And while many people may have retirement savings, tapping those funds for emergencies is not a wise financial move.
While the CARES Act removed the 10% early-withdrawal hit, and 20% federal withholding tax, on early 401(k) withdrawals for those who need cash, it’s generally not a good use of funds.
“People are dipping into their retirement savings when they are at an all-time low,” said Almonte.” It’s going to be very hard for many to repay their 401(k) plan loans or make up for lost earnings due to early withdrawals by substantially increasing future contributions.”
Almonte compares emergency funds to seatbelts. Motorists don’t wear them because they expect to be in a car crash, but as a precaution to save their lives if they do end up in a crash. Meaning that in a perfect world, they will be there “just in case.”
Emergency fund contributions should also be included in a monthly budget. Once the fund is established, you can redirect the cash you were using to build the emergency fund to pay off debt or save for retirement.
The coronavirus pandemic is the third major financial calamity to hit the country in the past 20 years, starting with the dot.com bubble burst in 2001, followed by the housing-fueled recession in 2008-09. Many people had only recently recovered from the housing crisis, and they are now finding themselves wondering how they will recover from this.
While there will always be situations beyond our control, by implementing and maintaining good financial habits, you’ll be better positioned to weather the bad times.
“It’s human nature to go back to the way things were,” said Almonte. “These are wake up calls to remind us we need to stay on top of our money management, but we don’t have to wait for a major catastrophe. Regular quarterly or annual financial check-ins can do it too.”
And if you have trouble sticking to a plan going forward, Almonte suggests finding an accountability buddy who will hold you in check. This can be your CPA, spouse, family member or friend who will tell you, “No, don’t spend your money on that.”