The coronavirus pandemic hasn’t hit its peak yet, but it’s already cost a record number of Americans their jobs, with 16.8 million people filing unemployment claims in the last month.
Many stared down the first of the month with a scary question on their minds: How will I pay my bills?
Unfortunately, many households were unprepared for the swift financial blow: four in 10 don’t have enough cash savings to cover a $400 emergency expense, according to the Federal Reserve’s 2019 report on Americans’ economic well-being.
If you’re in a tight spot and trying to come up with cash fast, keep your future financial health in mind as you weigh your options, said Kelley Long, a Chicago-based certified financial planner and CPA. Long is a consumer financial education advocate for the American Institute of CPAs.
““You want to try to protect your credit and make it as easy as possible to recover once things get back to normal,” Long said. That can mean selling possessions you don’t need instead of taking out a payday loan, or using a zero-percent credit card instead of withdrawing from your retirement account, she said.
Luis Rosa, a CFP and founder of Build a Better Financial Future in Henderson, Nev., says to prioritize action this way: “try to reduce expenses first, increase income second, borrow as a last resort.”
But these are unprecedented times, and some traditional financial advice has been “turned on its ear,” Long said. For example, ordinarily she wouldn’t advise a client to stop paying off a student loan, but the $2.2 trillion economic stimulus package makes that a viable — although temporary — option for some borrowers.
MarketWatch talked to Long and other financial planners on the best and worst ways to free up money as the nation enters an economic downturn.
Apply for unemployment
Do this right away if you’ve been laid off — but be prepared for long hold times. The federal stimulus bill expanded unemployment assistance and will give laid off workers an extra $600 a week on top of whatever state-level unemployment benefits they get. The bill also makes freelancers, self-employed people, and gig workers eligible for half of state-level benefits, in addition to the extra $600.
Watch for your stimulus check — and watch out for scams
Some Americans will get as much as $1,200, others will get smaller amounts if they make over a certain income level. If you don’t need the money right away to pay bills, consider using it to refill a depleted emergency savings account, or invest it. But be on the lookout for scams: the government will not call you about the check, and no one should ask you to hand over personal information like your Social Security number to get your check.
Payday loans are generally not a good idea — most financial advisers say to avoid them at all costs. Payday loans are short-term loans, often of $500 or less, that are designed to be repaid in a single payment, usually by a consumer’s next payday.
‘Try to make your decisions on where to get cash around minimizing the impact on your long-term financial picture.’
Their speed makes them appealing, but the loans typically come with very high fees and interest. Payday loan interest rates in some states can reach as high as 662%, according to a 2016 report from the Center for Responsible Lending. (For comparison, the average APR on a credit card as of April 1 was 16.27%, according to CreditCards.com.)
Because of the high interest rates, consumers often find themselves unable to pay off the loan when it comes due, forcing them to borrow more to settle those debts. This can draw people into a harmful debt spiral.
Consumers who need a loan of a small amount could turn to credit unions instead. Many credit unions offer so-called payday alternative loans that are similar to traditional payday loans in that they can range in size from $200 to $1,000. Also like payday loans, these credit-union loans are meant to be paid off over a short period of time between one and six months. However, the interest rate and fees are much lower — the maximum APR is 28%, and credit unions can charge an application fee of no more than $20.
Credit-card cash advance
These are not the best option, but could be worth exploring if you’re desperate, Long said. Like payday loans, these typically come with high interest and high fees, and could negatively affect your credit score if you max out your card. “Ideally you would only use this if you had a credit card with a low or 0% promo rate,” Long said.
Home equity lines of credit and refinancing
Home equity lines of credit and refinancing can provide a lifeline to homeowners. Homeowners are sitting on historically high levels of home equity right now, which is good news for those who may have lost work or income in recent weeks. “Homeowners today have very high levels of tappable home equity, providing a cushion to withstand potential price declines,” Mark Fleming, chief economist at title insurance company First American Financial Corp. FAF, -7.80%, wrote in a recent report.
Home equity lines of credit tend to offer very low rates compared to products like credit cards. The average HELOC rate as of April 1 was 5.07%, according to Bankrate. HELOC rates range depending on a borrower’s creditworthiness and other factors. The rates are variable, so they could rise and fall depending on what actions the Federal Reserve takes in the future.
But borrowers may be better served by refinancing their home loans and cashing out some of their home equity in the process. Mortgage rates are near historic lows, meaning that many homeowners who bought their homes in recent years could stand to save thousands of dollars by refinancing even before factoring in the benefit of cashing out some equity.
“If your mortgage rate is around 5% or higher, it’s at least a good idea to evaluate refinancing,” said Shon Anderson, president of Anderson Financial Strategies in Dayton, Ohio. “If you’re going to have debt, mortgages tend to make the most sense by allowing the longest terms and lowest rates, especially with today’s rates. Refinancing may significantly lower mortgage payments.”
But people considering a refinance should be aware that mortgage lenders have been swamped with applications in recent weeks, meaning the turnaround time for a refinance could be longer than usual. It could also be harder to get certain types of loans, including jumbo mortgages, currently because of volatility in the markets for mortgage-backed securities.
Consider a 0% APR credit card
Call up any existing credit card companies and ask what they can do to help you get through these difficult times, suggested Anderson. “Many credit card companies are offering 0% APR periods of one year for new purchases when cardholders call to ask for help,” Anderson said. “This is normally not a recommended option, but given that an individual doesn’t have to open new credit lines, and 0% APR for a year might be enough to get someone through three to six months of unemployment or emergency expenses, it can be right for some folks.”
Turn to your local community for help
Churches and other religious organizations, food banks and community foundations are among the local resources people can turn to during this crisis. Community foundations in all 50 states have set up emergency relief funds. That money is being given out to on-the-ground nonprofits providing basic resources including food, rent assistance, electronic tablets for children doing remote learning, and in some cases, direct emergency financial assistance to individuals. National philanthropies and corporations are also handing out grants to nonprofits. To get connected with local resources in your area, try calling 211. To find a food bank, check the Feeding America website.
Temporarily stop paying student loans or mortgage
Halting payments on a student loan isn’t something financial planners would typically advise, but the $2.2 trillion stimulus bill lets borrowers with federally-backed loans suspend payments for six months without accruing interest.
“If you don’t have cash and you’re worried, that’s the perfect place to go,” Long said. “Stop paying that loan.” Borrowers with federally-backed loans can simply log onto their account online and click the “forbearance” option, Long said. It’s an easy step that doesn’t involve fees or penalties. If you have private student loans, call your lender and tell them you’ve been financially harmed by the coronavirus pandemic.
‘If your mortgage rate is around 5% or higher, it’s at least a good idea to evaluate refinancing. Refinancing may significantly lower mortgage payments.’
Many mortgage borrowers have a similar option. Borrowers with federally-backed loans can pause payments for up to year if their finances have been affected by the pandemic. To take advantage of this, call your mortgage servicer and tell them you want to go into forbearance — but also make sure you say you want a loan modification, so the payments get tacked onto the end of your mortgage, Long said.
If you’re a renter, call your landlord to request deferring rent payments. Some cities and states have temporarily blocked landlords from evicting tenants, and there is financial help available to renters in some areas: Delaware is providing direct payments of up to $1,500 to struggling renters, USA Today reported, and the city of Boston has a similar program providing up to $4,000 to renters below certain income levels.
Take money out of retirement accounts
The $2.2 trillion stimulus bill, known as the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), lets retirement account holders take up to $100,000 out of their account and put the money back in with no penalty and no adverse tax consequences, as long as they repay the money within three years. But, ‘it comes with a huge caution sign,” Long says. The good news is, you could take $5,000 out of your IRA to get you through the next couple of months, she said. But you should only exercise this option if you’re sure you can pay the money back and if you can handle doing the paperwork required by the Internal Revenue Service, Long cautioned.
Another important point: liquidating retirement assets now — when the Dow Jones Industrial Average DJIA, -2.44% has lost 18% of its value and the S&P 500 Index SPX, -1.78% has declined 14% over the past three months — means you’re locking in those losses. “Recognize you are selling assets (which are likely down) to get the money and you pay yourself back the interest (and eventually pay tax on the interest you paid yourself), but this is a good way to not tap other sources, and still participate in your 401(k),” said Leon LaBrecque, a CFP with Sequoia Financial Group in Troy, Mich.
Cut your spending
Shelter-in-place orders are forcing people to stay indoors, and for some that’s providing an opportunity to re-evaluate which expenses they can live without. Restaurant meals, gym workouts, and manicures are out of the question for many at the moment. “Think through what you might spend in a typical month on appearance maintenance and recognize that’s money you could set aside in a savings account,” Long said.
During this national emergency, many service providers are waiving late fees and penalties for people who need to defer payments because they’ve been affected by the coronavirus pandemic.
Another step to take: Examine your checking account. Are there charges for apps or other services that you forgot you signed up for? Are there subscriptions you don’t use anymore that are set to auto-renew? Their monthly prices are often low, leading people to underestimate how much they spend on subscriptions. Subscription-tracking apps and some budgeting apps will audit your accounts for recurring charges and can even help you cancel unwanted subscriptions with a click.
Another possible area to save money: your cell phone data plan — do you need as much if you’re mostly on your home wifi now? And don’t forget about redeeming credit-card points for cash, using old gift cards (or selling them), and using your Flexible Spending Account or Health Savings Account, if you have one, to pay for medical and health care expenses.
Contact your service providers and ask for help
Under normal circumstances, companies that bill you monthly will generally let you defer payments if you lose your job or suffer financial hardship — but typically you have to pay a convenience fee or late charge. During this national emergency, many service providers are waiving those penalties for people who have been affected by the coronavirus pandemic. Many are not requiring extensive proof of that hardship, which can slow the process — customers can just tell their bill collectors that they’ve suffered financial hardship, Long said. Even people who haven’t completely lost their jobs but have had their hours or income reduced have this option, she noted.
This probably won’t last, so take advantage of the opportunity now: “This is a time of flexibility in terms of our obligations that’s going to be short-lived,” Long said.
Sell possessions or stock you own
Whether it’s something valuable around your house or stock you’ve accumulated in your stock purchase plan at work (or any stocks or mutual funds you hold outside of a retirement account), “this is definitely a place to look for quick cash,” Long said. The upsides: there’s nothing to pay back and it can help with decluttering. (Consignment shops will buy gently used clothes, and sites like AptDeco, Letgo, Decluttr and ThredUp can help you sell stuff online.) Downsides: You may have to sell an item for less than it’s actually worth, especially stocks during a down market, or you could incur capital gains taxes if you sell for more than you paid.
Get a gig job
For the 10 million Americans who filed for unemployment benefits last month, taking on a gig job could temporarily help pay the bills until they land another full-time job. Typically, side-hustlers earn an average of $1,122 per month from their part-time work, a 2019 Bankrate survey found. But many gig jobs — like driving for a ride-hailing app — involve close interaction with other people and go against public-health officials’ orders to practice social distancing.
However, earning extra money doesn’t necessarily have to mean putting yourself at risk of contracting the coronavirus. Jobs such as tutoring can be performed online, and so can gigs helping businesses set up online stores. Keep in mind that if you’re receiving unemployment benefits after being laid off from your full-time job, you may have to report income you make from gig work, which could affect the amount of unemployment benefits you receive.
Borrow money from a friend or family member
Taking out a loan from a friend or family member can mean much more flexibility than there would be with a formal loan, said Mariel Beasley, a co-founder of Duke University’s Common Cents Lab, a financial-behavior research lab. There’s potential for lower or nonexistent interest rates, and greater leeway on repayment, “which is really important because of the amount of uncertainty that’s happening in the world,” she said.
But informal loan agreements among friends and family can also be fraught with challenges, as many personal-finance columnists will tell you, and you may want to exhaust other options first. For instance, 46% of respondents to a 2019 Bankrate survey who said they had lent money to a loved one reported having a negative outcome.
“It can easily slide from a reciprocal relationship between friends and family into a transactional relationship, which can really tax the relationship,” Beasley said. This can happen when borrowers’ and lenders’ expectations are misaligned, she said, “and if everyone is planning for the most optimistic scenario rather than a more conservative, realistic and even pessimistic repayment plan.”
Relationships can take a hit “when the lender has an expectation and a need to be paid back on this certain time frame, and then it doesn’t happen,” Beasley added.
If you do choose to borrow from a friend or family member, transparency and planning from the outset are key, she said. Think about all possible contingencies and talk through them: How will you communicate about repayment? How much can you realistically pay back, and on what time frame? If your income decreases or you encounter an unexpected expense, how will that impact your repayment? Are partial payments OK? Are there opportunities for you to make payments in things other than cash, like dropping off a meal or performing a service? What happens if you can’t make a payment?
“Don’t overpromise the time frame on paying it back,” Beasley said. “Plan for a worst-case scenario.”
Originally Published on MarketWatch
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