In April 2020, most states are under a stay-at-home order due to the coronavirus pandemic. As a result, millions of people have become unemployed overnight. Even if you still have your job, things may feel pretty uncertain. The stock market has been on a roller coaster, and has probably taken the balance in your IRA or 401(k) for a crazy ride.
In times like this, having some cash on hand can mean the difference between paying the rent and becoming homeless, between having to sell investments at a loss to cover current expenses instead of waiting for the market to recover, and paying your bills out of your checking account versus having to take a cash advance on your credit card or getting a payday loan to pay them. In other words, not having some cash reserves right now can have serious consequences.
What can you do about it?
Here are several ways to preserve whatever cash you have and even add to your emergency fund. For today, I’m going to list out several ideas. Over the next few posts, I’ll expand on many of them in more detail.
Plan how you will use your Economic Impact Payment, aka Tax Rebate
Depending on the size of your family and your income, you will likely receive $1200 or more from the federal government. How will you use that money? Our brains do a funny thing when we get unexpected money. Our brains look at it differently from money that we worked for, or that we receive on a monthly basis. Your brain may be saying to you, Free money! Let’s have some fun with it! You deserve it!
That’s why it’s so important to plan how you will use your payment before you receive it, before your brain encourages you to splurge on some fun.
Pay the minimum.
This is really hard for me to say, because my usual recommendation is to pay as much as you possibly can each month toward your debts. But these are not normal times.
During the Great Recession in 2008-2009, I encountered a number of people who paid down credit card debt. That was admirable.
They viewed their credit line as a substitute for having a cash emergency fund. But in many cases, as they paid off their credit card debt, the bank reduced their credit line. They no longer had the cash and neither did they have that additional credit line to charge against in a pinch.
Will the same thing happen today? I don’t know. In times of uncertainty, let’s play it safe. Pay the minimum and hang onto the extra cash. You may need it for something much more important than paying down debt.
What bills and expenses are most important for you to pay? What are the the consequences of not paying? Those could range from losing your job if you don’t make a couple of car payments and the loan company repossesses your vehicle, to late fees and interest for not paying your medical bill at the hospital.
Take advantage of government assistance programs.
Fortunately, the Federal government has put a variety of temporary protections and forms of assistance in place to help us through this difficult time. (Learn more about these at Tools for Managing Your Finances During the COVID-19 Pandemic.) From enhanced unemployment benefits to suspended student loan payments, these can help you hang onto whatever cash you have.
Keep your emergency fund separate from the money you’ll use for current expenses
I got a question just last week from a women who asked if she should put the money from her Economic Impact Payment in a separate account from her checking account – perhaps even at another bank. I supported that idea, because small barriers like that can keep us from spontaneously using the money without thinking it through, or even noticing that we’re spending that money.
I think that’s enough for today. I’ll be back with more soon.