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.

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.

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.

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.

How to Become Financially Independent

Happy Independence Day! With the coming July 4^th holiday weekend and release of the new Disney+ Hamilton movie celebrating the origins of America’s independence, I thought it might be useful this week to discuss financial independence, which is the ability to live off savings and investments without having to work.

What factors help people achieve financial independence while others who earn the same amount of money (or more) live “paycheck to paycheck”?  Below are seven strategies to help you improve your financial fitness and achieve your dreams:

¨       Set Specific Goals – Put a date and a price on each financial goal such as “save $6,000 for home improvements in 2022.”  Next, break goals down into smaller pieces, such as “save $2,000 a year for three years” and “save $167 per month.”

¨       Focus on Succeeding – Remember the old saying “when there’s a will, there’s a way.”  It is as applicable to personal finance as other areas of life.  It takes discipline and focus to postpone spending today for a goal that may be years away. 

¨       Live Below Your Means – Consider the three sustainable ways to “find” money to save for your future goals: increase income, reduce expenses, or do a little of each.  Living below your means is an intentional process of spending less than you earn and saving the amount that is left over.

¨       Automate Savings and Investments –  Save automatically through an employer 401(k) or 403(b) plan, credit union, or mutual fund automatic investment plan (AIP) that deducts periodic deposits from a bank savings or checking account.

¨       Borrow Carefully – Keep debt low and pay the least amount of interest possible for borrowing money.  Strategies to reduce credit costs include negotiating a lower interest rate from creditors, transferring outstanding balances to lower-rate credit cards, and adding the payments for repaid debts to remaining ones.

¨       Maximize Tax Breaks – Take advantage of tax deductions for contributions to tax-deferred employer retirement plans, tax-free municipal bonds, tax credits, and the long-term capital gains tax rate on investments held more than a year. 

¨       Develop Financial Resilience – Increase your resiliency resources including adequate savings and insurance, low household debt, in-demand employment skills, a social support system, and personal traits such as optimism, organization, and good health.