By: Vanessa McElwrath, CFP®, Wealth Management Partner
Sometimes the best thing to do in the midst of high market volatility is nothing at all. As tempting as it may be, we should avoid changing investment plans simply because stocks are down sharply. It’s nearly impossible to correctly time buying and selling stock and countless studies show that those who try it often end up making far less in the long run. However, that doesn’t mean there are no positive actions you can take to shore up your finances. Now is a great time to kick off your financial contingency plans. Here’s what you need to know and what you need to do now.
Build up your emergency fund
It’s times like these that highlight the importance of why everyone should have an emergency fund. An emergency fund is a stash of money set aside to help you weather the storm due to unforeseen circumstances- whether it’s an unexpected car repair, an unexpected job loss, or a global health pandemic. As a rule of thumb, it’s ideal to maintain an amount equal to 3-6 months’ worth of your living expenses.
If you haven’t started an emergency fund, you may wonder where to begin. Granted, it’s not necessarily easy to build up an emergency reserve under normal circumstances (and even harder to do in the middle of an emergency). However, there are ways to get started. For instance, if you are expecting any sort of lump sum- whether a bonus or commission, or an income tax refund- set aside as much of it as you can. And if your situation is extremely dire, you could consider temporarily reducing your 401k contributions or stopping them entirely and redirecting the money until you have built up a sufficient emergency reserve. Just make sure that you don’t let this become your new long-term plan. Set a calendar reminder on your phone to resume contributions once you have an adequate reserve in place.
Revisit and adjust your budget as necessary
During these times, many are finding that their incomes are greatly impacted by the current economic crisis and market pullback. If you find yourself in this situation, now is a good time to review monthly and annual spending and look for ways to cut back on non-essential spending. If you do have an emergency fund, consider using it if money is tight. Remember that this is what the money is there for. And if you expect a tax refund, be sure to file your taxes as soon as possible to get the cash sooner.
Get relief on your bills
If you find that your budget is tight, consider reducing and/or temporarily eliminating payments that don’t have to be made. There are various relief options that you may be able to take advantage of.
- Student Loan Relief Options – If you have a federal student loan, you will automatically qualify for some relief. As a result of the recently passed CARES Act, borrowers will be placed in “administrative forbearance” which allows borrowers to temporarily defer making payments until September 30th. No interest will accrue during this time period, but by default, payments will continue unless individuals take proactive measures to contact their loan provider and pause payments. It’s also important to take note that this only applies to federal student loans. Loans issued through the state or other private lenders are not covered. Some private lenders are offering relief programs so it’s certainly worthwhile to inquire about any offers or flexibility they may be willing to provide. If you have more questions, you can check out the Education Department’s Q&A here.
- Mortgage/Rent – If you have been financially impacted by Covid-19 and are worried about how you will make mortgage or rent payments, both Federal and State laws have been recently passed to provide some relief. First, if you can make your mortgage or rent payment, then make your payment. If you can’t make your payment, contact your lender or landlord immediately. The most important action you can take is to be proactive in reaching out to lenders and landlords to work out a payment plan together. There are some protections that have also been passed by state and local governments. For example, the City of Austin is aiming to help renters by giving them a 60-day grace period before the landlord can start eviction proceedings. The Federal government has also passed special laws through the CARES Act that allows property owners to defer mortgage payments backed by the Federal government for 6-12 months and a temporary eviction and foreclosure moratorium for borrows of these Federal loans. This includes borrowers of Fannie or Freddie mortgages or borrowers whose loans are backed by the Federal Housing Administration. Unfortunately, that relief doesn’t apply to other kinds of mortgages though a coalition of mortgage industry groups have indicated that they plan to provide some flexibility and grant payment suspension for a period of time.
- Credit Cards – Many credit card providers have indicated willingness to work with customers who are struggling to pay their bills as a result of the coronavirus. It’s worth reaching out to your providers to see if they can provide any flexibility to skip or defer any payments without accruing interest.
Take advantage of relief from Uncle Sam
On March 27th, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is a major piece of legislation passed by Congress to provide liquidity to the US economy due to the effects of COVID-19. This is the largest stimulus or aid package in modern history, totaling $2 trillion in funds for individuals and businesses.
- Cash Payments – One of the biggest headlines stemming from the CARES Act is the $290 billion of direct payments that are being directly routed to individuals and families. The base levels are $1,200 per taxpayer ($2,400 for married filing joint couples) and $500 per child. For a single filer, the $1,200 starts to phase out when AGI exceeds $75,000 and for married couples, the $2,400 starts to phase out when AGI exceeds $150,000. More details on the recovery rebates can found here.
- Tax Deadline Extension – The IRS announced that taxpayers who owe money on their 2019 returns will get a 90-day reprieve on payment, if needed, without incurring any interest or penalties. You now will also have until July 15 to file your return. If you still need more time, you can get an extension on filing until October 15 but would still need to pay any taxes due.
- Expanded Unemployment Benefits – The CARES Act has expanded unemployment benefits. The plan provides a 13-week extension of unemployment insurance provided by the states while also providing an additional benefit of $600 per week for up to 4 months, though the program ends on July 31st at the latest. The new legislation also covers workers not typically eligible to receive benefits such as self-employed individuals and independent contractors.
- Small Business Loans – In addition to support for individuals, there are also provisions of the Cares Act that provide loans and relief to small businesses. Under one specific program, the Paycheck Protection Program, certain small businesses can qualify for small business loans up to a maximum of the lesser of $10 million or 2.5X average of payroll costs. These loans are eligible for full or partial forgiveness as long as eligible amounts are spent during the first 8 weeks after the loan is made. In addition, at least 75% must be spent on payroll costs, and remaining amounts could be allocated to expenses such as rent, utilities, and group health insurance premiums. Another caveat is that the business must generally maintain the same number of employees and cannot reduce wages below certain thresholds. Although the initial funds allocated to the Paycheck Protection Program through the CARES Act have been exhausted as of April 16th, it is expected that additional funds will be appropriated to the program. Please check this resource page for updates related to the program.
- 401k Withdrawals – The new law waives the 10% early withdrawal penalty on retirement account distributions for account owners facing Covid-19 related financial hardships. Though the distributions are still taxable, the taxes due can be spread over three years. Account owners can also choose to repay the distributions within a three-year window in which the distribution is not taxable and does not impact regular contribution limits.
- Deferral of RMDs in 2020 – The recent relief also includes a waiver of required minimum distributions for the calendar year 2020. For account owners who currently don’t need required distributions to cover living expenses, it likely makes may sense to skip the 2020 withdrawal to allow the funds to continue to grow tax-deferred.
Continue contributing to your 401k if you can
Watching your account balance go up and down can be nerve-racking for even the most seasoned investor. You may have even considered ceasing or decreasing your contributions until this all “blows over” but don’t! In fact, if your employer matches any part of your contribution, make sure you’re at least saving as much as you can to take advantage of the “free money” offered by your employer. Despite the recent pullback in the market, this can be a good time to ramp up long-term savings. The recurring retirement contributions provide an opportunity to take advantage of dollar-cost averaging or the process in which you spread out your investment over regular time periods to reduce the volatility of your overall purchase. When markets are low, you can acquire a larger number of shares at fire-sale prices.
Consider refinancing your mortgage
When mortgage rates fall to record lows, refinancing can be a good way to reduce your monthly payments or to shorten your loan term and pay it off faster. That said, be sure to consider the closing costs to refinance. You will want to make sure that you plan to be in your home long enough to make refinancing worth it. Also, because of the increase in demand, lenders are being overwhelmed by refinancing applications. Expect the process of shopping and closing to take longer than normal.
Consider Roth conversions
In light of the recent market pullback, Roth conversions may be a particularly appealing tactic for 2020. Ultimately though, the decision of whether to make a Roth conversion- or not- is primarily a tax decision. You must still consider whether you would rather pay tax on the conversion amount at your income tax rate today or at your expected income tax rate in the future. But if you expect to be paying taxes at a higher rate in the future or if you find yourself in a lower tax bracket today (perhaps because of the financial impact of the Covid-19 pandemic), the timing of the Roth conversion could have a big impact, especially while account values are lower.
We are always here to help you with these topics and any other financial questions you that and your family may have. Please contact us to schedule a complimentary consultation.
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