By: Kelley Long, CPA financial planner, Consumer Financial Education Advocate for the American Institute of CPAs.
The COVID-19 pandemic is first and foremost a public health crisis, and people’s safety and wellbeing should be their primary concern.
However, as the strain from COVID-19 is felt on the American economy, an increasing number of workers are feeling a financial squeeze and it appears as if the long-term effect could be a personal finance crisis as well. All told, in the past five weeks, 26+ million Americans have filed for unemployment aid. If you find yourself struggling to come up with cash to pay for everyday items, it can be easy to make money moves to help you today that you end up regretting down the road.
For those who have found themselves in a financial pinch where they need money ASAP, here are some available options, along with their pros and cons.
The situation is fluid, so continue to check for Federal, State and Local as well as community options for financial relief during these difficult times.
1. If you’ve lost your job - apply for unemployment benefits.
Do this immediately, since it may take a while before you start receiving benefits depending on your state. The Department of Labor’s site offers links to unemployment agencies in each state, where you can learn more about the application process.
Keep in mind that you can’t receive unemployment benefits if you quit or were fired due to a performance or other problem. Your unemployment benefits usually last 26 weeks in most states but check out your state laws to see if it’s possible to get an extension.
Many states are extending eligibility for those who have been temporarily laid off due to their employer being temporarily closed or if you are unable to work due to exposure to COVID-19, but you do have to apply and most eligibility requirements are still in place (for example, you can't have quit because you were worried about getting infected).
Note that due to the closure of public schools, many states are considering leaving a job to care for your child(ren) to be unemployment through no fault of your own, so check your state's rules before you rule this out.
- Nothing to pay back.
- Temporary relief may be available even if you plan to return to your same job.
- Available to parents who had to stop working in order to care for children in many cases.
- It can take more than a week to receive your first payment.
- Higher volumes may potentially cause delays.
- Unemployment is generally taxable, so if you don’t withhold correctly, you’ll owe the IRS next year.
2. Free up cash flow
When every dollar counts, it’s essential evaluate your spending habits and all your monthly bills. What could you reduce or get rid of? Look at all bills being charged to your bank account or credit card and see which ones you can eliminate or scale back.
Don’t hesitate to call all your credit and loan providers and ask for hardship provisions. You don’t have to enact them, but you have to call if you want any flexibility in working out a payment plan and many providers are easing requirements to allow customers flexibility. Consider putting your federal student loans in forbearance and using the money to pay other essential bills.
- Frees up money immediately.
- Payments may be suspended temporarily which means you will owe the money at a later date.
- You must take action to qualify for late payments or payment holidays.
- Long wait times on phone lines.
3. Check with your community
Many religious and other communities maintain funds to help out those in need, so check there as well to see if you qualify for assistance. Your workplace may also have a program to help out employees in need, so be sure to ask HR.
- Typically, no payback required.
- Often comes with emotional support as well.
- Application process could be in-depth and feel intrusive.
- There may be restrictions that require funds be paid directly to providers like car mechanics, landlords, medical facility, etc.
4. Sell things you own
Whether it’s something valuable around your house or stock you’ve accumulated in your stock purchase plan at work (or any stocks or mutual funds you hold outside of a retirement account), this is definitely a place to look for quick cash.
- Nothing to pay back.
- Can help with de-cluttering.
- Could be the least painful option.
- May have to sell item for less than it’s actually worth, especially stocks during a down market.
- Might be something you wanted to keep.
- Capital gains taxes if you sell for more than you paid.
5. Get a side gig
Grocery stores and delivery companies are adding tens of thousands of temporary jobs due to increased demand, as are distribution warehouses and call centers for essential businesses. Look into becoming a shopper for a grocery delivery service or a stock person for your local grocery store - think of the places that are still open and hiring and look for a temporary job while you are home. Be creative and ask around in your community as well.
- You don’t have to give up anything but your time.
- The more you work, the more you make.
- It may take a while to accumulate the amount of cash you need right now.
- Time is limited — if you have kids who need care while you’re working, it may not be worth it.
Carefully Weigh Pros vs. Cons
6. Borrow from family or friends
You have to be careful not to take advantage of people but asking around in your inner circle could be the relief you need. It's definitely a good idea to put any agreements in writing to ensure that you're all on the same page about payback terms, if any. Crowd sourcing for help is also more socially acceptable these days, especially if you're asking for common items like food rather than just cash.
- No credit check.
- Lower or no interest.
- Possible flexibility with re-payment, if even necessary.
- Could put important relationships at risk — be careful about any spending on items that are not necessities if you haven’t yet paid the money back to avoid possible resentment.
7. Retirement account withdrawal
Avoid withdrawing funds from your retirement plan unless it is absolutely a last resort. If you're seeking funds from your 401(k) or 403(b) at your current job, check to see if you qualify for a “hardship withdrawal," which is defined as an immediate and heavy financial need, and the distribution must be necessary to satisfy the financial need.
Generally, a distribution will be deemed to be for an immediate and heavy financial need if it is used for: medical expenses, costs to purchase a principal residence, payment of tuition, payments necessary to prevent eviction or foreclosure, burial/funeral expenses or repairs to a home as a result of a casualty. Not all plans permit these withdrawals, so you need to check with your company for their specific rules.
Keep in mind that even if laws are implemented relaxing the rules for these types of withdrawals due to the Coronavirus, it's up to your employer's discretion whether to enact it at your company.
If your funds are in an IRA the hardship rules do not apply, but the early withdrawal penalties and tax consequences still exist.
- Ability to use your own money to cover a financial hardship.
- No credit check.
- If withdrawing contributions from your Roth IRA (not the growth), there are no taxes or penalties.
- Subject to ordinary income taxes unless you're withdrawing Roth contributions. If you are under the age of 59 1/2, you may also be required to pay a 10% penalty in addition to the income taxes.
- The amount withdrawn cannot be repaid to the plan.
- Could compromise your retirement.
- If withdrawing from your 401(k) or 403(b), you must demonstrate your need and can only withdraw that amount (for example, a medical bill).
8. Retirement account loan
Most companies require you to take a loan from your account before you are allowed to apply for a hardship withdrawal. Depending on your plan, you can sometimes get a check in hand within a day or two or a direct deposit the next day if you've already set that up. At least you will be borrowing from and paying interest to yourself.
- Pay yourself back.
- No credit check.
- Relatively low interest rate.
- Need to have enough in your account to borrow (you’re typically limited to 50% of your balance up to $50,000 and most loans have a $1,000 minimum, so you must have at least $2,000 in your account to qualify).
- May have to pay back lump sum if you lose your job or quit, or risk possible tax issues.
- Could compromise your retirement.
- There are usually administrative fees when you enact the loan and there could be ongoing maintenance fees for outstanding loans.
- Most companies limit the number of outstanding loans you can have at a time.
- Not dischargeable in bankruptcy, so it's generally advised not to borrow from your retirement if you could be heading that way anyway.
Only as a last resort
9. Credit card cash advance
Not the best option, but worth exploring if you’re desperate. Ideally, you’d only use this if you had a card with a low or 0% promo rate.
- No credit check, assuming the card is already open.
- Can often write a check.
- Super high fees and often high interest.
- Could have a negative effect on your credit score if you’re maxing out.
10. Payday loan
This may be the least attractive option out there due to the high risk of getting caught in a never-ending cycle of borrowing against future pay, along with high fees and interest.
- Usually instant and you have cash in hand.
- High fees and interest rates bordering on criminal.
- Can quickly snowball out of control.
- Little to no flexibility with payback.
- One of the main reasons people end up in bankruptcy.
It can be very stressful to weigh your short-term cash needs against your financial future. However, understanding the implications of the decisions you make will better position you to get back on your feet.
In these unprecedented times, one of the primary concerns of governments and citizens is enabling people to continue paying their bills, so as you look at your options, try to stick to those that will have the shortest recovery period as many providers and financial companies are doing what they can to allow you temporary relief in order to minimize the long-term fall-out of our attempts to flatten the curve.