Coronavirus and your finances: here’s how to react
Here are some smart moves to do – and some not-so-smart moves to avoid.
The stock market has fallen over the past month and many workers have been forced to stay at home, sometimes with their children whose schools have closed, due to the outbreak of COVID-19, also known as the new coronavirus. With so many uncertainties still surrounding this pandemic, it is natural to have major financial problems.
Some aspects of your personal financial life are beyond your control. You can’t really control how much paid sick leave your employer is willing to give you, or how much medical treatment your health insurance will cover. Estimates indicate that uninsured patients can expect to pay $ 500 to $ 1,000 or even more to be tested for the COVID-19 virus, and the cost of actually treating a confirmed case can be astronomical.
However, there are smart financial measures you can take during the novel coronavirus outbreak and containment efforts. Here are some of the most important steps you can take right now.
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Don’t sell investments out of fear
We’ll start with the things you should not To do. If you’ve been following the news, you know the stock market has fallen like a rock and is threatening to continue to soar. As of March 13, the stock market was more than 20% lower than it was a month ago. Even if you don’t own stocks directly in a brokerage account, it likely caused your 401 (k) or other retirement account to lose a significant percentage of its value.
It can be extremely stressful to see the value of your retirement nest egg plummet to tens or even hundreds of thousands of dollars. I have also seen a significant portion of my account value evaporate recently.
However, one thing you absolutely don’t want to do is sell stocks or equity-based investments because of this panic – above all in retirement accounts that you won’t need for several years. As long as your immediate financial needs are met, selling stocks after a massive market sell-off is the worst thing you can do for your long-term financial health. The goal of investing is to buy low and sell high. By selling panic, you are doing the exact opposite.
Inventories experience declines of 20% or more every few years on average, but they have consistently increased over the decades. In fact, many people had better not even look at their 401 (k) or brokerage account when the market is so volatile, as this often leads to irrational and instinctive decisions.
Most retail investors (like you and me) underperform the stock market over time, and the main reason is that we are prone to making decisions based on emotions. Just stay invested for the long term. This isn’t the first time the market has fallen so much, and it sure won’t be the last.
Don’t buy too many items in preparation
By this point we’ve all heard stories about stores running out of toilet paper (from all panicky things to buy …) and other essentials. While it’s certainly reasonable to stock up on basics in anticipation of needing to isolate yourself for a while, be careful not to over-prepare. Ask yourself questions like, “If I had to stay home for a month, would I use close to 10 cases of toilet paper?” »Buy what you need, but be reasonable.
I would particularly advise readers to avoid purchasing anything with credit cards. You are probably reading this because you are concerned about your personal finances. Well, buying a ton of disaster preparedness products with credit cards can do a lot more harm than good because you’ll be racking up high interest debt.
Set up contingency plans
Now is a good time to figure out what to do if you have to stay home for an extended period of time, especially if your children’s school is closed and they are home with you. As a working parent with two young children, I certainly share this concern.
One idea is to talk to other parents who are in a similar situation. Maybe you can alternate watching other people’s children so that you can all have some time to do the job. Or you can let relatives who are not working know that you might need their help and assess their willingness to participate. My parents live a few miles from my house, and I can assure you that Grandma and Grandpa are part of our contingency plan if preschool is closed (sorry, mom).
Benefit from low interest rates
Interest rates fell during the coronavirus outbreak, resulting in some of the lowest borrowing costs in history.
The most significant example is mortgages. The 30-year fixed-rate mortgage rate is at an all-time high of 3.47% as of this writing, and borrowers with excellent credit scores can probably find even better rates. If the mortgage rate you are currently paying is significantly higher than the current national average, it might be a good idea to consider refinancing your mortgage, which can lower your monthly payment and help you build capital faster by putting more of your mortgage payment towards your principal balance.
If you choose to turn to refinancing, here are some suggestions:
- Be sure to pay attention to the Annual Percentage Rate (APR) of any mortgage offer, and not just the interest rate. The APR tells you the total cost of borrowing, including some fees.
- Compare the prices. Although mortgage rates are at historically low levels, you will continue to receive different offers from different lenders. You might be surprised at what a seemingly small difference in APR can do to the repayment term of a 30-year mortgage. Additionally, there is a provision in the FICO® credit scoring formula that ensures that your credit score will not be affected by multiple difficult requests if you complete all your rate purchases within two weeks.
- Know your FICO® score and what it means. Your credit score has a big impact on the mortgage APRs available to you. There are several places where you can view your FICO® score – many credit card companies give customers free access to one of their FICO® scores – or you can pay for a more comprehensive service such as myFICO. com. To get an idea of what to expect, you can view the current average mortgage rates by FICO® score at myFICO.com.
The downward trend in interest rates that accompanied the COVID-19 epidemic is expected to extend beyond mortgages. If you have a lot of high-interest debt, you might consider taking out a personal loan to consolidate your debt, for example. Other forms of borrowing, such as home equity loans and auto loans, are also likely to be cheaper than they were just a few weeks ago.
Boost your emergency fund
Experts suggest that you should have three to six months of spending somewhere easily accessible, like a savings account. While this is certainly a good goal, the reality is that the majority of Americans do not have this amount.
Times like this are why emergency funds are so important. Imagine the peace of mind of knowing that if you were forced to take a month of unpaid leave, you would be fine financially.
If you don’t have a comfortable emergency fund, this might be a good time to start building your own. You don’t need tens of thousands of dollars, but some cushion is definitely better than nothing. If you’re one of the lucky people whose earnings and work schedules haven’t been disrupted yet, consider saving more aggressively in your emergency account. And if you haven’t received or allocated your tax refund yet, pumping up your emergency fund could be a great way to use it.
Keep cash on hand
If the COVID-19 epidemic worsens significantly, it is not inconceivable that we have large-scale closures in some parts of the country. As of this writing, virtually all businesses in Italy, with the exception of grocery stores and a few others, are closed. This could be happening on a local scale here.
This can make it harder to get cash if you need it, especially if bank branches are closing. It might be a good idea to get a reasonable amount of money and keep it in a safe place in your home.
Look for opportunities to reduce expenses
If you don’t have emergency funds, or are just worried about your general cash flow level during the outbreak, it’s a good idea to look for ways to cut spending. Some of the usual suspects might not be practical – for example, I can’t in good conscience suggest that you get rid of your Netflix subscription when you might be stuck at home indefinitely.
Fortunately, there are plenty of ways to keep your spending under control without going too far. And if you’ve been thinking about cutting down on your outings to eat or shop because of the virus, considering how much money you would save doing that might give you extra motivation.
One of my favorite tactics is to print out my most recent bank and credit card statements and highlight expenses that I didn’t really need. I usually suggest this as a New Years Solve method, but it works well anytime you need to cut back.
Remember that too will pass
One final thought: the most important thing to do now is to take a deep breath and resist the urge to panic. Panic leads to irrational thinking, which leads to bad financial decisions.
The COVID-19 pandemic is a terrible and frightening situation. There is uncertainty about the duration of the outbreak, its severity, and many other variables. But we’ll get through it. Your 401 (k) will be too. So make smart and rational financial decisions and focus on what is really important – your health and the health of those you care about.