The pandemic has dragged many people into uncharted financial territory. Millions of people have lost their jobs and loved ones they relied on. Others have endured more than a year of isolation and uncertainty, working from home or on the front lines. Whether your bank account has swelled or shrunk during the long months of lockdown, now is the time to take stock of your financial situation and decide on your next steps.
“We’ve had a lot of clients saying, ‘I really need to think about it now,’ said Pam Capalad, a New York-based certified financial planner and founder and CEO of financial consulting firm Brunch & Budget. . . “Either the pandemic was a wake-up call and it really messed up their finances or people have done well and now they’re saying, ‘I have to figure out what’s next for me. “”
In a Pew Research Center poll released in March, 30% said their situation had improved, 21% said it had worsened, and 49% of adults said their family’s financial situation was in trouble. about the same as a year ago.
With limited spending possibilities, savings increased during the pandemic. Last March, the personal savings rate was 27.6%, according to the Bureau of Economic Analysis. This rate, which represents personal savings as a percentage of disposable income, was 12.9% in the previous March.
Depending on your financial situation and your priorities, what you do now will vary. But there are a number of ways to put yourself in a better financial position for whatever comes next. Here’s how to get started.
First of all, don’t rush
The trauma of the past year has been extraordinary, and for many people their initial impulse may be to dive in and make travel plans and purchases to make up for lost time.
“People feel like their lives have been stolen from them, and with increased spending often comes that,” said Brian O’Leary, private wealth advisor and senior analyst at Aline Wealth in Melville, New York. .
But if there’s ever been a time to re-prioritize and align your spending and saving behaviors with your values, it’s now, experts say. Is your career on the right track? Do you love where you live? Are you happy in your relationships?
The pandemic may have helped people think about saving differently, focusing on what brings them joy, said Inga Timmerman, certified financial planner and associate professor of finance at California State University, Northridge.
If you’re thinking about changing careers, starting your own business, or making some other major life change, there may be a financial cost, at least in the short term. At a minimum, “you should have a spreadsheet with the invoices and the things you need to cover, regardless of how the business or side activity is going,” Timmerman said.
Try to get a good idea of how many months you can cover those bills with your savings, she said, or what you’ll do to pay them instead. It could mean selling a car or moving into cheaper accommodation.
Evaluate three things
Whether you dream of turning your pandemic turmoil into a new career and need to figure out how to pay it off, or you just want to feel on a solid financial footing, planners say there are generally three main financial areas to assess first. .
“If someone has an emergency fund, no high interest debt and is saving a decent amount for retirement, they are in a good position to make big changes,” said Brian Walsh, senior director of financial planning at SoFi, an online loan company. Start. “If they didn’t tick those boxes, they should be more careful.”
BUILD AN EMERGENCY FUND. In the past, planners have generally recommended that people have three to six months of spending in an emergency savings fund to get through tough times. Some now suggest that this fund should be able to keep you afloat for up to a year.
“Now the advice is even more conservative,” said Dan Herron, certified financial planner and co-founder of Elemental Wealth Advisors in San Luis Obispo, Calif. “COVID just happened, it’s still there, and what does it mean that something else isn’t happening on the road that’s even worse?”
Your emergency fund should cover basic expenses such as rent or mortgage payments, utilities, food, and transportation. You should also set aside enough to cover monthly health and auto or home (or renters) insurance premiums, as well as credit card payments or other debts.
Whether your savings are healthy or you’re trying to consolidate them, the same advice applies: Set a monthly savings goal and stick to it. Better yet, have funds automatically withdrawn from your bank account each month and deposited into your savings, retirement or brokerage account.
REDUCE CREDIT CARD DEBT. Even though credit card balances declined sharply during the pandemic, in part due to dwindling shopping opportunities as people fell back at home, the average household credit card balance still exceeds $ 8,000. , according to a study by WalletHub.
If you have a high credit card balance, now is the time to consolidate that debt by transferring balances or signing into a debt consolidation service that will allow you to make just one monthly payment. Interest rates are as low today as they likely will be in the next few years, said Tony Molina, chartered accountant and senior product manager at Wealthfront, an online investment advisory firm.
SAVE FOR RETIREMENT. If you are one of the lucky ones who increased your savings during the pandemic, don’t stop now.
Allocating some of that money for retirement can be a good strategy. Depending on how close you are to retirement and whether your projected savings will meet your expected needs, your approach may vary. A financial advisor can help you determine the best plan for you.
Capalad encourages its clients to gradually increase their retirement savings. If every six to 12 months you increase your pension contributions by 1%, you will accumulate that balance, but the extra withholding will only be a “small blow to your pay,” she said.
One way to increase savings is to reduce expenses that may have swelled during the long months of isolation. Do you really still need subscriptions to every streaming channel on your TV? Maybe it’s time to cut back on virtual yoga classes now that your gym has reopened, or to cancel your food delivery services.
For some, online retailers have become not only an essential way to order essentials, but also an easy way to buy things that weren’t necessarily needed.
Capalad suggests that customers who want to break the habit of impulse online shopping to put the items they want in their cart, but not to buy them right away. Then pick one day per week to browse the cart and re-evaluate if they really want these things.
Spending decisions aren’t just about money, of course, but how you want your life to go.
“I have customers who say they’ll never order wine from a restaurant again,” said Timmerman. They prefer to uncork a bottle at home and invite their friends to take out, she said.
Protect yourself and your family
The pandemic has exposed the fragility and unpredictability of life and provided an object lesson in the importance of estate planning.
In addition to a will, your plan should include documents that detail your wishes for medical treatment and decision making if you are unable to communicate it yourself. Depending on the state, these may be called living wills, health care powers of attorney, or medical directives.
Standardized forms may be available online, but since state rules vary, “I almost always suggest that if you want everything done right, find a local attorney who specializes in estate planning as they can walk you through it. of the process, ”said Dana Menard. , a certified financial planner and founder of Twin Cities Wealth Strategies in Maple Grove, Minnesota.
Now is also a good time to reassess your life insurance coverage, Menard advised. The amount you need will vary depending on what you have, what you want to protect, and your life circumstances.