By Chris Ishida, Director, Financial Planning, Financial Engines
Financial relief from the federal government
The impacts from the coronavirus pandemic have been widespread. We’ve seen a new record for the highest one-week number of initial unemployment claims since the Department of Labor started tracking those figures back in 1967. More than 15 percent of the work force has lost their jobs. The $2 trillion CARES (Coronavirus Aid, Relief and Economic Security) Act stimulus package signed into law on March 27 is designed to put cash directly into the pockets of millions of Americans and businesses to alleviate some of the financial suffering.
Paying for basic needs
A recent survey from SimplyWise found that 40% of Americans’ income has been lost or reduced due to the virus response. And 43% of those who have been put out of work are not confident they will even have a job in the next three months.
The CARES Act stimulus payments will help people meet immediate needs, such as buying groceries, and paying for rent, prescriptions and utilities. A number of people say they will need the money to make late payments on loans and mortgages. While paying off debt is usually a good financial move, many banks have pledged to help customers who are having trouble making payments on bills and loans, including skipping or deferring payments. Check with your lenders to see what assistance they are offering.
Filling the income gaps
Half of U.S. households have no emergency savings, and nearly 40% would struggle to afford an unexpected expense of $400, according to a survey by the Federal Reserve. For many of the people in these households, stimulus money may not be enough to cover essential bills. What’s needed is a way to create extra income.
According to a SimplyWise survey, here are a few options Americans are considering.
Seek part-time work
While 15% of survey respondents are planning to apply for unemployment insurance, almost a third (30%) of respondents said they would look for part-time work to fill in their budget gaps.
While recruiting in your primary occupation may be down, many companies are still actively recruiting. Businesses offering essential services like Aldi, Amazon, CVS, Walmart, Kroger and FedEx are bringing on tens of thousands of new workers. New Jersey and Los Angeles have created job portals that list opportunities for those unemployed or underemployed due to the pandemic.
- Is my resumé up-to-date and are my social media accounts suitable for a potential employer to view?
- Do I have the technology in place to do video interviews and work remotely?
Online marketplaces, such as eBay, Etsy, eBid, Bonanza and others, make it easy to sell personal property for cash, and 15% of survey respondents indicated they would sell assets, including their home or car. Keep in mind buyers may be reluctant to purchase non-essential items while money is tight for so many. You can check with eBay for tips on selling goods during the pandemic.
If you’re considering selling a house, understand that the traditional spring-time real estate market will probably not operate as usual. Nearly half of realtors surveyed by the National Association of Realtors said home buyer interest has decreased due to coronavirus-related concerns.
There are many questions to answer before listing your home, including whether you have enough equity to turn a profit and whether substitute housing is available. Given the need for social distancing, the sale of real property would have to be through a video tour, which could add to the difficulty for sellers.
- Do I have items that are in demand and that I won’t regret selling later?
- Do I have the time and resources to monitor the sales process and then pack and ship sold items?
Borrow from family or a bank
The SimplyWise survey found that 16% plan to borrow from a family member or friend, while just 10% said they would get a loan from a bank.
Turning to loved ones for short-term funds may be a good way to get a better interest rate without lots of paperwork. But when borrowing from a family member, it’s important to be very clear about loan terms and expectations. Writing up a contract may help avoid misunderstandings and family tension.
Many banks are offering to help customers during the pandemic. Five federal agencies—the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of the Comptroller of the Currency— issued a joint statement issued a joint statement encouraging financial institutions to “offer responsible small-dollar loans to consumers and small businesses in response to COVID-19. Do your research to find a loan with a good interest rate that is structured to meet your needs.
- Is my credit rating high enough to get a decent interest rate on a loan?
- Could I combine a loan with other income sources to make the loan as small as possible and limit my debt?
Borrow from your retirement savings
Think very carefully before taking a loan from your 401(k) as it can have long-term impacts on your retirement readiness. The cash you take out of your account won’t have the opportunity to grow over time. This could make it harder to reach your retirement income goals. Retirement plan loans tend to offer favorable interest rates, but you will be paying yourself back—with interest—through automatic payroll deductions. Pay careful attention to whether you can still make paycheck contributions if you have an outstanding loan—if not, you’ll be losing your company matching contributions. IRS.gov has more information on coronavirus related relief for retirement plans.
- If I lose my job, will I be able to pay back the loan all at once?
- Will the loan repayments make it hard to continue making contributions to my account?
Take a retirement account withdrawal
The SimplyWise survey discovered that 14% of respondents plan on withdrawing from their retirement funds. Taking a withdrawal from your retirement account should be a last resort because it will mean you’ll likely have less money available when you hit retirement. The new stimulus package removed the 10% early withdrawal penalty, so that’s a plus. But you will still owe income taxes on the money you take out. Consider your other options first, and then consult with a financial advisor before requesting a withdrawal.
- Do I really want to sell investments in my retirement account when the market is down?
- Can I combine a small withdrawal with other income sources to minimize the negative effects on my future retirement income?
Understand your options and ask for help
This is an incredibly difficult time. Many two-income families are now trying to survive on a single wage earner. Some have the additional burden of caring for sick loved ones or worse, being sick themselves. Use the time you have while staying at home to educate yourself about all the available options to bridge the expense and income gaps through the crisis. An advisor can provide a calm and objective view to help you make smart decisions.
In Part 2 of Making Ends Meet we take a look at how personal loans may help support your finances.