Underlying Conditions Make Crisis Events Worse

There is no doubt that the COVID-19 global pandemic has been a sudden and unprecedented assault on the health and personal finances of people around the world. As someone who has studied connections between health and wealth for two decades, I’ve recently noticed one additional thing that these two aspects of our lives have in common.

Underlying conditions make crisis events worse. It happened with the Great Recession in 2007-2009, which was an economic crisis, and it is happening again in 2020 with COVID-19, which is both a public health and a financial disruptor.

On the health side, health experts frequently note that age and “underlying conditions” increase a person’s risk of contracting and dying from COVID-19. Specifically, they are referring to people age 65 and over and those with medical conditions such as asthma, obesity, chronic kidney and liver disease, and diabetes. People with these risk factors may be more likely than others to develop a severe illness, need hospitalization if they contract COVID-19, and have poor outcomes.

Similarly, on the financial side, there are underlying conditions that increase the odds of poor outcomes as a result of COVID-19-related income losses. These conditions include no or low emergency fund savings, overspending, high outstanding debt (i.e., a consumer debt ratio of 15% or higher), income volatility, and a lack of social support to help in the event of an emergency. Like underlying health conditions, these underlying financial issues make COVID-19 even worse.

What to do? Develop an action plan to address your personal underlying conditions. I will leave it to health experts to suggest ways to address underlying health issues (except age, which, of course, cannot be changed). Below are six ways to address underlying financial issues and boost your “immunity” to negative economic fallout from COVID-19:

¨       Change What You Can- Do what you can with what you have. For example, prepare or update a budget that reflects your new economic reality and change your shopping habits (e.g., buying store brand foods). All small steps matter.

¨       Save the Extra- Save part of your federal government stimulus payment to hedge future economic uncertainty. Ditto for part of the extra $600 per week in unemployment benefits that is available to laid off workers through the end of July.

¨       Make Double Minimum Payments- Pay 6% of the outstanding balance on credit cards, instead of the typical 3% minimum payment, to get out of debt faster and pay less interest. Pay even more when you have additional income.

¨       Create Multiple Income Streams- Consider ways to earn money from a “side hustle” that can be performed at home. Update your profile and resume on LinkedIn so they can easily be accessed by potential employers.

¨       Review Your Insurance and Estate Plans- With over 60,000 Americans dead as a result of COVID-19, this is a good time to review your health and life insurance coverage and have a will in place to dictate how your assets will be divided.

¨       Assess Your Resiliency Resources- Take this online quiz from Rutgers Cooperative Extension to identify your resiliency strengths and weaknesses. Develop plans to shore up your resilience on items that you answered “no.”

How to Handle a Furlough: Develop a Plan

Sometimes, just as people are making progress to improve their finances one small step at a time, something happens to set them back. For some people in today’s difficult economic climate, that setback is a furlough. Furloughs (also known as “temporary layoffs”) have been in the news a lot lately and are being used by both public and private sector employers. 

Full furloughs involve a complete work stoppage when an employer shuts down completely. Partial furloughs require workers to take a certain number of unpaid days off, resulting in a pay cut, while they continue to work for pay on non-furlough days. The remainder of this post will primarily discuss partial furloughs.

In some cases, furloughs are voluntary and employers ask for volunteers to take unpaid leave in exchange for more time off. In most cases, however, furloughs are mandatory and every worker is told to work less, and therefore, earns less. If you are facing a furlough, you need a plan for both the income loss and your use of the unpaid time. Consider the following seven suggestions:

¨      Start Calculating- Start by figuring out what you earn in a day. For example, if you earn a $40,000 gross income (i.e., your salary before taxes), divide this number by 260 (the average number of workdays in a year). The result ($154) is your gross daily pay. Then multiply this number by your federal marginal tax rate for your tax filing status and subtract it from gross daily pay to determine your daily after-tax (net) pay.  For example, $154 – ($154 x .22 or $34) = $120. This is a rough estimate of income lost for each furlough day. If you have 20 unpaid furlough days, you will lose approximately $2,400. It will actually be somewhat less when FICA and state income, unemployment, and/or disability taxes on lost income are also subtracted.

¨      Seek Information- Find out when and how your pay will be reduced and the procedures that your employer has established for taking time off. This will affect your financial and time use plans. Some employers are giving workers a choice of days off while others are mandating specific time periods. Many employers are developing furlough policies for the first time and workers will need to learn the rules as they are developed.

¨      Save a Surplus- If you have enough advance notice about a furlough, try to gradually save up the amount of money that you will lose (e.g., six days of daily after-tax pay) by reducing expenses. Put this money in a money market fund or short-term CD until it is needed. Then draw down this savings as a replacement for lost income. If there is not enough time to do this, consider earmarking a portion of each “full” future paycheck to supplement each “lean” one. Any amount of saving is better than none.

¨      Spend Less- Try to reduce monthly expenses by the amount of lost monthly income. Start with variable expenses (e.g., food, clothing, and entertainment) and make cuts there. Track your spending for an entire month to identify expenses that can be reduced during the furlough period.

¨      Suspend Voluntary Deductions- If you cannot close the gap between your reduced income and household expenses entirely through spending reductions alone, consider temporarily suspending (or reducing) voluntary payroll deductions, such a charitable donations and retirement savings plan contributions, until the furlough period ends. Contact your employer’s HR department to complete the necessary paperwork.

¨      Seek Self-Employment- If you already “moonlight” in addition to the “day job” from which you are being furloughed, try to ramp up your workload to recoup the income being lost with earnings from self-employment. The furlough days will give you extra time to take on additional work assignments. If you do not currently do work on the side, consider doing so on the unpaid days off if opportunities are available.

¨      Savor the Time- Granted, a furlough is not something most workers would choose. Nevertheless, it does provide something valuable that many Americans have in short supply…time. Resist the urge to work (e.g., check business e-mails) on furlough days and spend the unpaid time doing enjoyable or necessary activities. Ideas include visiting family and friends, inexpensive day trips, taking a, online adult education class, walking or other physical activity, watching a movie, and home maintenance and repairs.

Later Life Milestone Ages

Going COVID-19 stir crazy? Got 3 to 5 minutes to do some simple math? I created a worksheet this week for my forthcoming book, Flipping a Switch, to help readers think about their financial future in later life. All you need to do is write down your birthday year and identify the year that you will reach six milestone ages. Having that information can help you firm up your future financial plans. 

Below is a brief description of each milestone event age and why it is so important:

Age 50- Workers become eligible to make catch-up contributions for individual retirement accounts (IRAs) and tax-deferred employer retirement savings plans (e.g., 401(k), 403(b), and 457 plans and the thrift savings plan or TSP).

Age 59½- No penalty for early withdrawals from IRAs and tax-deferred employer retirement savings plans. Of course, income taxes on the withdrawn amount are taxed as ordinary income in the year that a plan withdrawal is made.

Age 62- The earliest age to receive a Social Security benefit that will be permanently reduced if received between age 62 and full retirement age (FRA). If your FRA is 66, the benefit reduction is 25% and if FRA is 67, the benefit is reduced by 30%.

Age 65- Medicare eligibility begins. Medicare Part B premiums can be delayed if someone is still employed and receiving employer health insurance benefits. People already receiving Social Security at age 65 are automatically enrolled.

Age 66 to 67- Workers reach FRA and eligibility for full Social Security benefits according to year of birth. For example, age 66 if you were born between 1943 and 1954, age 67 if you were born in 1960 or later, and a pro-rated time in between.

Age 72- Age at which required minimum distributions (RMDs) from tax-deferred retirement savings plans must begin (although they were suspended for 2020 as part of the CARES Act). The required beginning date to take your first RMD is April 1 of the year following the year that you reach age 72 (note: doing this will result in two RMD withdrawals that year).

COVID-19 Shutdown Week #5: Insights from Webinars

For the past five weeks of social distancing, my life has revolved around six Ws: Walking (10,000+ steps a day), Working (on client financial education projects), Watching (television news), Writing (my new book and this blog), Wondering (what comes next with COVID-19), and Webinars (to learn and see colleagues). 

I am not complaining, however. I have a steady income, a beautiful new Florida home, a stash of food, good health, and financial security. So many others have it so very much worse. I recently attended five webinars related to COVID-19 and the CARES Act. Below are some key take-aways: 

No Quick Fixes- Economist Mark Zandi of Moody’s Analytics predicted economic uncertainty well into next year. Some 50 million workers (one-third of the workforce) will be affected by income shocks such as unemployment, furloughs, and reduced work hours. The economy will be “stuck in the mud” until there is an effective COVID-19 vaccine or therapy. Life will be different over the course of the next year. The script on COVID-19 and its impacts is still being written.

Major Changes Are Coming- Zandi predicted that some businesses will not return to their pre-COVID-19 level. People may not be traveling as much or attending conferences or ball games. Companies may cut their travel budgets. Office space may have less demand as employees get comfortable working at home and don’t want to return to long commutes. Events will start out with small groups instead of packed stadiums and we will all have to get used to physical distancing measures. Educational programs may also look different in the future after “the largest distance learning experiment in history” (a phrase used by Next Gen Personal Finance founder Tim Ranzetta, who is helping thousands of educators teach virtually).

Financial Wake-Up Call- Medical doctor/certified Financial planner® Carolyn McClanahan called COVID-19 a wake-up call to always be prepared financially for life events. Two actions that she recommends to clients are having 5 to 10 years of cash flow in cash equivalent assets to ride out stock market downturns and preparing advance directive documents such as a living will. Also, have difficult, but necessary, conversations with loved ones about end-of-life medical care preferences.

Breathing Room- One third of Americans did not pay their rent or made only partial payments this month. Podcaster Elle Martinez and Utah Valley University professor Ryan Law advised taking advantage of all available relief programs. For example, policies related to utility shutoffs, delayed payments, and moratoriums on foreclosures and evictions. Borrowers with federal student loans are permitted to defer payments penalty free until September 30, 2020. Forbearances and eviction moratoriums are not “free money,” however. The amount of debt paused or reduced will still be owed in the future.

Expense Juggling- If you can’t pay your bills in the short term, put money you would have spent on now-deferred payments toward other essential bills. Rework your budget and reallocate any money you are not currently spending (e.g., commuting costs and child care). Suspend voluntary retirement savings plan deposits, if necessary. For older adults age 72+, required minimum distributions (RMDs) originally scheduled to be taken in 2020 can be skipped this year. Free financial counseling assistance is available to Americans through the Association for Financial Counseling and Planning Education (AFCPE).

Getting Help Takes Time- Despite crashed websites and jammed phone lines, try to get all relief program money that you qualify for. Pace yourself and make just one contact per day because the process of getting through can be exhausting. Contact creditors before you can’t pay to let them know what you can realistically afford. Many are willing to work with their clients because it is better to get something than nothing. Get all agreements with creditors and landlords in writing.

Tax Considerations- Be aware that unemployment income remains fully taxable so set some money aside for quarterly estimated taxes. First quarter payments originally due April 15, 2020 are now due July 15. Make sure your address and bank account direct deposit information are up to date with the IRS to prevent snags with recovery rebates (stimulus). Stimulus benefits (up to $1,200 per individual taxpayer and $500 per child under 17, phased out by income level) are not taxable. People who worked “off the books” are ineligible.

Individual Impacts Vary- Some people are doing fine, at least if they don’t look at investment losses, panic, and convert a paper loss into an actual one. If you still have a steady (or even rising) income (or defined benefit pension) and your discretionary expenses have decreased due to physical distancing measures, consider increased savings or gifting the cash flow increase. Another option is to spend money from cancelled travel/activities on human capital or home improvements.

Common Investing Error- Florida wealth manager Colby Winslow, speaking for University of Florida IFAS Extension, warned investors not to succumb to “action bias.” This is the tendency to think “I should do something” (e.g., sell stock) when a crisis event occurs. Short-term emotional reactions can lead to long-term mistakes and cause irreparable damage. Financial markets always run in an “S” shaped curve pattern. We don’t know where we are on the curve now but, at some point, markets will recover and people will say “That COVID-19 was something” like they did about the Great Recession.

I hope that you found this webinar summary useful. I enjoyed writing it. Stay home, stay safe, and stay healthy.

Financial Management Activities: Mental Bandwidth vs. Productivity

If the week of March 16 was when America started to shut down en masse, we are now concluding week #4 of holing up at home. It has not been pretty. Virtually every American has been negatively impacted by COVID-19 in one or more ways:

¨       Illness and death (medical and funeral bills)

¨       Job loss, furlough, or fewer work hours (reduced income)

¨       Investment account losses

¨       Social distancing measures (work/school at home and fewer family visits)

¨       Work-life balance issues (e.g., overseeing home schooling while working at home)

¨       Cancelled trips and activities (e.g., requesting refunds)

¨       Logistical challenges (e.g., shopping and banking)

Conversely, there have been some positives including savings from reduced driving, childcare, auto insurance premiums, eating out, and other expenses. Extra time for exercise, family activities, and a slower pace of life have also been a plus.

Originally, I just planned to describe long-postponed financial tasks that we can do at home with extra time on our hands. I’ll get to those in a minute. However, I realized something. Despite media exhortations to use our extra time productively and evidence that bored people often become very creative with time to think, plan, and act, other research indicates that mental bandwidth gets sapped when people are challenged by poverty and/or economic concerns such as loss of income and juggling bills. As New York Times writer Taylor Lorenz noted, “we have much less attention, because we’re living through so much.”

The fact is…some people will be unable to put the following suggestions into practice right now and that is understandable. Your mental bandwidth is fried coping with COVID-19 impacts. Tuck this list away and do what you can, when you can. For those with extra time and a stable income who are riding out paper losses on investments and saving money by staying home, consider this 10-item “to do list” that I compiled with the help of social media friends who are acknowledged below:

¨       Prepare Financial Statements- Update (or prepare for the first time) a spending plan (budget), calculate your net worth (assets - debts), and complete a financial inventory to record important personal finance information.

¨       Compile Medical Data- Prepare a medical information binder with data (e.g., lab test results) for each family member. Also prepare a spreadsheet of medical bills, health insurance payments, and out-of-pocket expenses.

¨       Inventory Digital Assets- Use this Digital Assets Inventory Worksheet to record passwords, PINS, and such. If you haven’t done so in a while, consider changing your passwords or setting up a password manager program.

¨       Prepare a “Grab and Go” Box- Visit this Texas A&M AgriLife Extension website for instructions on steps to take and what to include. Also consider flash drives and/or cloud storage for digital copies of documents.

¨       Use Up Gift Cards- Shop now to support favorite retailers and restaurants and to hedge the possibility that they don’t reopen. Gift cards can be used online for retail goods and some restaurants are offering take-out.

¨       Repurpose Refunds- Document how much you are saving while working at home and save all or part of it. Spend refunds for event tickets and travel in other ways. Examples include home improvements and charitable contributions.

¨       Plug Spending Leaks- Review subscription services and cancel automatic payments for items that you are not using. Examples include magazines, satellite radio, and gym memberships.

¨       Shop Around- Take the time for legwork required for a “Rule of 3” comparison. Get price and service data for at least 3 insurance companies and cell phone, cable, and internet providers. Also consider tweaks to your investment portfolio.

¨       Plan Your Estate- Prepare or review and/or update your will, living will, and durable power of attorney. With almost 18,000 deaths (to date) from COVID-19, act on the current attention being paid to death and dying to provide for heirs.

¨       Plan a “Good Ending”- Do prudent things that are rarely done. Write your own obituary (to say what you want), plan your memorial service, and make a list of people and organizations to contact when you pass. Your heirs will thank you.

Special thanks to: Sarah Baughman, Robin Brumfield, Jenny Carleo, Julie Giglia, Michele Godfrey, Elizabeth Goldsmith, Laura Hendrix, MJ Kabaci, Kenny Lee, Terri Mayhew, Debbie Nelson, Brian Page, Laura Schneider Scot, and Linda Wilson.

COVID-19 Pandemic Week #3: Financial Implications

On January 15, 2020, the Dow Jones Industrial Average index crossed 29,000 for the first time. In February, the first American died of COVID-19 and, on March 11, COVID-19 was officially declared a pandemic by the WHO (World Health Organization). The Dow closed out Q1 on March 31 at 21,917.16 and over 5,000 Americans to date have died from COVID-19. Congress passed, and the president signed, a $2 trillion emergency stimulus package called the CARES Act.

It is at times like this that numbers can become overwhelming. In addition, nobody knows the duration, severity, and lethality of the pandemic virus. Let’s step back and focus on six things that we do know financially to guide our decisions and actions:

¨       Most Americans Will Get Cash- According to the Tax Foundation, over 90% of tax filers (singles with a 2018 or 2019 adjusted gross income less than $99,000 and married couples with an AGI less than $198,000) will receive at least some stimulus payment (technically called a recovery rebate) based on a sliding scale. Singles earning up to $75,000 and couples earning up to $150,000 will receive full $1,200 and $2,400 payments, respectively. Use this calculator from the Washington Post to see what your payment will be. Good uses of stimulus money (as well as income tax refunds) in tough times are paying bills, reducing debt, and setting aside savings for emergencies.

¨       COVID-19 Scams Are Rampant- Scams always follow current events. Among those related to COVID-19 are fake cures, vaccines, and treatments; fake charities; phishing scams purporting to come from the WHO or Centers for Disease Control; and malicious apps and websites that use COVID-19 “click bait” to install malware or access victims’ devices.

¨       Tax Deadlines are Delayed- The new deadline for filing 2019 tax returns is July 15, 2020. Estimated tax payments that were due on April 15 are also delayed until July 15. State income tax deadlines vary; some states have pushed back their deadlines also. In addition, required minimum distributions (RMDs) for older taxpayers are suspended during 2020.

¨       Financial Breathing Room is Now Available- Student loan borrowers can stop making monthly payments without any penalties through September 30 and investors can withdraw money from retirement savings accounts penalty-free. For homeowners with FHA mortgages, there is also a 60-day foreclosure and eviction freeze. Some landlords, utilities, and credit card companies are also offering some leniency provisions or may do so if their clients reach out and ask.

¨       Investments Are Volatile- History never repeats itself exactly, but it rhymes. COVID-19 has been described as a cross between the Spanish Flu of 1918 and the Great Recession. While the cause of market volatility is a pandemic, rather than a housing bubble, we have evidence from history (93 years of Ibbotson SBBI(R) asset class performance data) to suggest that investment values will eventually bounce back. While past performance is no guarantee of future results, we can only project from past data because that is all that we have. The alternative (that financial markets will never recover) is unthinkable.  

¨       Estate Planning is Important- Many people have more time on their hands now and death and dying are more salient topics with the death of 5,000+ fellow citizens (more people than died from 9-11). This is a good time to reach out to an attorney (maybe virtually) to prepare a will, health care advance directives, and a power of attorney for financial matters. It is also a good idea to periodically review and update a list of your beneficiary designations and digital assets.