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Thursday, August 6, 2020

COVID-19 Personal Finance Q and A

COVID-19 reached American soil six months ago and business closures and lockdowns resulting in months of reduced (or no) income have thrown the finances of millions of households into a tailspin. What to do? Develop plans (and back-up plans), get help (if needed), and focus on things you can control. In this post, I answer some frequent questions that people are asking.

Q: The extra $600 a week in unemployment benefits expired on 7/31/20. What should people do?
Marshall resources. Look for sources of monetary support including family members, government offices, and non-profit agencies in your community. Examples include food pantries, job training programs, and utility assistance programs. For information about local resources, call 211 or visit or reach out directly to local human services agencies.

Q: What about budgeting? Should people even bother to try budgeting during the pandemic?
Yes, indeed. Budgeting is more critical now than ever. Make your best estimate of current income and expenses and consider various ways to close the gap. For example, money saved by getting free food at a food pantry or by spending less on child care, gas, meals eaten out, and travel preserves income for rent or utility payments.

Q: How should people set bill-paying priorities?
Make three lists of expenses: Needs that are necessary for survival (e.g., rent, utilities, food, medication copays, transportation, phone, internet, and health insurance), Obligations (e.g., debts such as credit cards and student loans, child support, taxes, and dues), and Wants (expenses that are not required for survival or you have no obligation to pay). Next, starting with needs, put expenses in priority order and pay bills until money runs out.

Q: How do people know which needs should come before others?
One way to prioritize expenses is to consider the consequences of non-payment for each expense. What is the worst thing that could happen if a certain expense is not paid? With this “lens,” food is always the highest priority need. People need food to survive. However, food may be available from food pantries, which can fee up cash for other basic needs such as housing.

Q: What should people do to protect their credit?
Contact your creditors before you are late with a payment and discuss options for leniency and a modified repayment plan. Confirm all agreements with creditors in writing with a follow-up letter or e-mail and make note of the contact date and company representative. On-time payment is a key factor in credit scoring so make sure your credit history is not damaged. Under the CARES Act, Americans can now receive a free credit report weekly to keep tabs on their credit history.

Q: What else can people do to cope financially with COVID-19?
Assess household resources. Calculate personal or household net worth (assets minus debts) to get a “snapshot” of your finances. Pay particular attention to cash on hand, emergency fund savings, and cash value life insurance and retirement savings plan assets that could be borrowed against, if necessary.

Q: Do you have any other COVID-19 financial advice?
Take advantage of employer health insurance for as long as it lasts. After that, seek new health care coverage. Four options for laid off workers are: a spouse’s employer plan, Medicaid (if eligible), COBRA through a previous employer (if that employer still exists), and Marketplace coverage under the Affordable Care Act. ACA options are usually cheaper, especially if you qualify for subsidies with a reduced income. Check out for additional information.

Q: Is there anything else that people can do to improve their financial security?
Experts recommend “upskilling” yourself. Use newly found free time to prepare yourself for re-employment with your current employer or elsewhere. Focus on gaps in your skill set and making yourself as marketable as possible (e.g., certification program credentials and new technology skills). In addition, set a goal to learn something new about personal finance every day. Financial knowledge helps build financial preparedness, which can increase resilience in tough times.

Q: What are some of the biggest non-financial issues that people are facing related to COVID-19?
Lack of a daily schedule is a big issue for people who have been laid off or furloughed. Experts recommend planning out your days to avoid feeling “unmoored” from normal routines. Include some type of physical activity every day and one or two other big “time chunks” such as continuing education or virtual or socially-distanced socialization.

Q: What can people do to not feel so “out of control”?
Control controllable things. Get out a sheet of paper and draw a table with three columns: Control, Adapt, and Monitor. List events and actions you have control over in column 1 (e.g., scheduling daily routines, self-care activities, home organization tasks, and new spending patterns), followed by those you can adapt to in column 2 (e.g., working and school from home), and those you should pay attention to in column 3 (e.g., state COVID-19 laws and local return-to-school (or not) policies).

Thursday, July 30, 2020

20 Weeks of Living with COVID-19: Seven Useful Insights

Yes, I have been counting. This weekend completes 20 weeks of living with COVID-19 uncertainty on so many fronts. I count my blessings that I am healthy, busy with multiple work projects, and mostly financially unscathed and continue to Work, Walk, Write, and watch Webinars (and television news). Below are key take-aways from some recent programs that I attended:

¨       There May Be Silver Linings- Some people have spoken positively about “taking a pause” from their previously hectic lives, spending quality time with their family, and savoring a break from their daily commute. They may have even vowed to not go back to their previous lifestyle and consider the pandemic to be a life-changing event. Unfortunately, for many other people, COVID-19 has had few, if any, silver linings.

¨       Cash is King- The hard reality is that about half of American households do not have three months of expenses saved. Nevertheless, many experts are now saying that 3 to 6 months of expenses is not enough and that 6 to 9 months of expenses is a better goal to shoot for. My take: any savings is better than none and the more money you can save, the larger the buffer you will have.

¨       Estate Planning is Salient- With 145,000+ COVID-19 deaths, interest in getting one’s “affairs in order” is growing, especially among essential workers and teachers. A big stumbling block for parents with minor children is who to name as a guardian. If you are at an impasse, reach out to your attorney for guidance instead of delaying the preparation of a will any further.

¨       Volatility Needs a Hedge- Many financial planners recommend that retirees have at least two years of expenses that are not covered by Social Security, a pension, and/or an annuity in liquid (cash) assets (e.g., a money market fund) to avoid withdrawal from stocks during market downturns. Shop around to get the highest return on savings possible (e.g., online banks).

¨       Auto Insurance is Negotiable- Experts suggest calling your insurance company and negotiating a lower rate if you are no longer using your car to commute or if you are having trouble paying premiums. You may also want to increase policy deductibles or shop around for a new policy. Whatever you do, do not let your insurance policy lapse.

¨       Certainty is Not Possible- Experts recommend challenging your need for certainty. With many aspects of COVID-19, there are no definitive answers and irrational fears can lead to illogical thinking. Identify your “uncertainty triggers” (e.g., social media, anxious friends and family, lack of sleep), learn to embrace ambiguity, and focus on the present.

¨       Budgets Increase Financial Control- In times of reduced or volatile income, a budget can be a financial lifesaver. Aim for a “zero-based budget” where income minus expenses = 0. A budget is not a “one and done” static event. Rather, it is a living and fluid document that needs to change as the circumstances in our lives change.

One last thing… print copies of my new book, Flipping a Switch, will drop on Monday, August 3. E-books for Kindles are available right now. For further information about the content of my book and how to order it, visit the web page for Flipping a Switch on Amazon.

Thursday, July 23, 2020

How to Save Money on a New Car

After a house and a college education, a new car is one of the largest purchases that people make. Some people choose to buy a car outright and borrow money to pay for it while others “rent” a car by leasing it for a specific length of time. For each method of car purchasing, there are ways to lower the cost:

Car Loans
¨      Save up a large down payment and borrow less money
¨      Shop around for the lowest interest rate; compare at least three lenders
¨      Improve your credit score to obtain a lower interest rate loan
¨      Wait for seasonal sales to buy a car for less

Car Leases
¨      Try to negotiate seemingly fixed fees (e.g., acquisition and disposition fees) and the money factor (interest)
¨      Limit miles driven to stay under the mileage cap
¨      Take good care of the car to avoid “wear and tear” fees
¨      Do not terminate the lease early

People who lease cars and car buyers who are “upside down” and owe more than their car is worth should also consider gap insurance. Gap insurance covers the difference (gap) between the amount owed on a car loan or lease and the amount that insurance will cover if a car is totaled or stolen.

Of course, another option to buy a car is with cash, although many people cannot afford to do this. In this case, no interest is charged for a loan or as the "money factor" in a lease. For car buyers who can afford to pay cash, the better option is a matter of opportunity cost. If interest rates are very low and savings and/or investments can earn more than the interest paid to buy or lease a car, it may still make sense to use a loan or lease and keep your cash invested.

Wednesday, July 15, 2020

Four Months of COVID-19: Expert Recommendations

Monday, March 16, 2020 was the start of “the week that America shut down.” Therefore, we have been living with the impact of COVID-19 for exactly four months. I continue to collect expert recommendations on how to navigate what could be another four to 12 months (or longer) of uncertainty about health protocols, school schedules, financial impacts (e.g., income, expenses, investment volatility), travel, family gatherings, and more. Below are five insights that I have gained:

¨       Build a Bigger Buffer- Save more, if possible. Many experts are recommending larger emergency funds equaling six to nine months expenses (or more). While this certainly sounds wise, given the extent of COVID-19 related job losses, the unfortunate reality is that 3 in 10 adults are “one modest setback away from hardship” according to the Federal Reserve. Bottom line: save as much as you can when you can (e.g., tax refund, extra $600 per week unemployment benefit).

¨       Identify Budget Busters- Spend less if you are earning less. Good places to cut back include bank fees, autodraft payments for services that are not being used (e.g., gyms that are closed and satellite radio for your car when you are not commuting), multiple streaming services, and [you fill in the blanks after a careful review of household spending].

¨       Take Small Steps- Look for additional ways to make small cuts…a dollar here and $2 there. It all adds up. Even if it feels like there is no wiggle room in your family budget, there often is upon a more careful examination of expenses. Aim to have a “zero-based budget” where income and expenses are perfectly aligned (i.e., income – expenses = 0).

¨       Stop the Bleeding- Avoid incurring additional credit card or other debt if at all possible. Seek out local services in lieu of income (e.g., a food pantry). Consider contacting a non-profit credit counseling agency to help negotiate outstanding balances with creditors and arrange more favorable repayment terms (e.g., lower interest and/or smaller payments).

¨       Try to Change Negative Thought Patterns- Think about challenges that you successfully overcame in the past and identify what you learned then that you can apply now during the COVID-19 pandemic. Another key question to ask yourself is “What steps can I take now to move forward?” From there, develop a series of action steps. Studies indicate that having a “growth mindset” helps people build resilience and confront tough challenges and changed circumstances.

Wednesday, July 8, 2020

Income Taxes in a Pandemic: The Final Countdown

It’s official! Federal income taxes (and income taxes owed in many states) are due in one week on Wednesday, July 15. There are no further COVID-19 extensions. Period. In addition, we have just crossed over into the second quarter of 2020 and it is always a good idea- this year and every year- to do some mid-year income tax planning.

Why think about income taxes in July? Two reasons: 1. By July, you should have a good sense of remaining income for the year and 2. You have six months to make necessary changes (e.g., estimated tax payments or tax withholding). Here are five key things you need to know about income tax filing and tax withholding this year:

¨       July 15 is Firm- The Treasury department announced in late June that it would not be extending the tax deadline further. Despite speculation about a further delay, July 15 is the deadline to file and pay 2019 incomes taxes that were originally due on April 15. It is also the date that first and second quarter 2020 estimated tax payments (for income not subject to tax withholding, such as self-employment earnings and investment profits) are due.

¨       Extension Filing is Available- Taxpayers who need more time to complete their tax returns must file Form 4868 before July 15 to get a three-month extension to October 15. This form can be downloaded and filed online. The extension is for income tax return filing only- not for tax payments. Money owed to the IRS is still due by July 15. If tax payments are late, interest and penalties may be assessed.

¨       Tax Withholding May Need Fixing- Many people have had unexpected losses or gains in 2020 income as a result of COVID-19. Now is the time to determine whether tax withholding on income to date and expected income through December is adequate. Start by reviewing 2019 taxable income and how much tax was owed. Compare 2019 taxable income and tax with projections for 2020. Use the IRS Tax Withholding Estimator to help make calculations.

¨       There Are “Safe Harbors”- To avoid triggering an under-withholding penalty, pay (via withholding and/or estimated payments) the smaller of 90% of tax for the current (2020) tax year or 100% (110% for higher-income taxpayers, e.g., married couples filing jointly with income over $150,000) of the tax owed for the prior year (2019).

¨       Unemployment Benefits are Taxable- Be sure to include unemployment benefits in your projected 2020 income calculations and earmark a portion of each unemployment check for income taxes. Request tax withholding from each payment, if possible, or make estimated payments to the IRS by July 15, September 15, and January 15, 2021.

COVID-19 Personal Finance Q and A

COVID-19 reached American soil six months ago and business closures and lockdowns resulting in months of reduced (or no) income have throw...