You are no doubt reeling from the recent events attributed to COVID-19. Stress and fear weigh on all of us and the uncertainty is unnerving. The Coronavirus has caused significant disruption in nearly every facet of our lives. Between working from home, balancing work with homeschooling, cancelled sports, travel, and school, closed stores, and the constant feeling of vulnerability, our lives have changed. This disruption is cause for action on several fronts to make sure you maintain financial stability. At WealthChoice we are working on five key financial steps with clients right now that we believe can help address some of the financial uncertainty many are experiencing, and we are sharing them so that you can take these steps, too.
Check in on your financial plan to see if you are still on track, or if you need to make some changes
Each client we work with has different life and financial goals, some of which may be happening in the not too distant future. Now is the time to take stock of where you are given the market decline, to see if you are still on track, and if not, to determine the impact of recent events and steps you can take. You will want to re-run your plan so you know what you are dealing with and can determine any options you have if there are gaps that need to be addressed.
Revisit your budget to find places to cut
If your plan is not on track, you will want to revisit where money is currently being spent to see where you have options to cut. Spend a few minutes penciling out your expenses so you know what you must pay for versus what you’d like to spend money on. The must haves are your fixed expenses, and everything else is considered discretionary expenses you truly don’t need. For most of us our discretionary spending has been cut back with the elimination of big expenses like travel, but online shopping and take-out can be a financial drain.
The CARES Act that was enacted last week to provide financial support allows for the deferral of Federal Student loan payments through 9/30/20, as well as mortgage forbearance. Many credit card companies are also offering relief. You will need to speak to the lender for deferral on payments here, but these actions can free up much needed cash.
This may also be the time when you cut back on retirement contributions temporarily, if it makes the difference between covering living expenses or not.
Find capital to replace lost income
If your income is impacted as a result of events, once you’ve revisited your budget and know how much you need to cover costs, you will want to look to replace the lost income. First, we suggest using that emergency fund that you have saved for over time. Ideally you will have the equivalent of 3-6 months fixed expenses in a savings account for just this purpose. If that isn’t the case, or if you have depleted your savings, look to what is most people’s biggest asset for cash-your house. Rates have been bouncing around quite a bit, but if they drop again, you might consider refinancing.
Another option to tap into your house is a Home Equity Loan (HELOC). While you may not need to draw on it, having access to a HELOC could help bridge the temporary income gap.
If needed, you could consider withdrawing money from your taxable brokerage account but know that you’ll have to pay capital gains taxes on any gains from the account.
Lastly, The CARES Act provides for exceptions to rules for taking withdrawals and loans from retirement accounts before the age of 59 ½. The Act allows for a maximum of $100,000 loan from employer retirement plans, as well as a withdrawal of up to 100% of your vested balance. Payments to the loan will be delayed one year. Keep in mind, though, that you are still required to pay taxes on any withdrawals, but no penalties are charged. You can also take a withdrawal of up to $100,000 from an IRA, employer plan, or combination of both. This withdrawal must take place in 2020, and taxes paid over a 3-year period.
Apply for an Economic Injury Disaster Loan (EIDL) or the Payroll Protection Program (PPP)
These are two separate programs created by CARES Act that apply to small businesses affected by the COVID-19 pandemic. Both are available to businesses with 500 or fewer employees, though the PPP is forgivable. EIDL is a low interest rate loan specific to payroll and other business expenses with up to a 30-year repayment period. PPP is financial relief that is forgivable if it is used on qualified expenses within 8 weeks of receipt.
You may want to speak with your bookkeeper or CPA for guidance here. Both applications are now live and you can learn more by going to sba.gov.
Rebalance your portfolio
With the big decline in the market your investment accounts may no longer be in line with your appetite for risk. Typically, when stocks decline, bonds increase in value. With the market pull back, your accounts may have less stock value relative to bonds than you would ideally like. This is a good time to review what your allocation is, and to rebalance back to where your ideal risk tolerance is.
Many 401k plans allow you to choose frequency of rebalancing. Now would be the time to choose to rebalance given the big swings in investments to get your portfolio back on target.
We strongly suggest you resist the temptation to move your accounts to cash. We have been here in the market before and we have always recovered. Locking in losses does not get you closer to your financial goals. Avoid the media and stay with your strategy. Get your portfolio back on track with rebalancing, and let it not only recover, but grow over time.
These are challenging times and we know there is a lot on everyone’s mind. By taking a few minutes to get your arms around your current financial situation, and by acting, you can weather this storm and be okay now, and in the future.
If you’d like our feedback on whether you are still on track financially, please reach out to us.
