Wednesday, August 26, 2020

Personal Finance Trends in the Age of COVID-19


I recently attended a webinar for financial educators about Trends in Personal Finance by Next Gen Personal Finance (NGPF) founder Tim Ranzetta. The majority of the trends that were presented were informed by effects of the ongoing COVID-19 pandemic. 

Below are eleven of my key take-aways from the webinar about how the pandemic is affecting different aspects of personal finance. More trend summaries will follow in subsequent blog posts.

¨       Record Savings Rate- Americans are sitting on record cash savings amid uncertainty related to COVID-19 and the economy. The U.S. savings rate hit a record 33.5% in April and was 19% in June versus about 7.5% before the pandemic. Reasons for increased savings include reduced spending opportunities (e.g., eating out, travel, and entertainment) in a shutdown economy and precautionary savings because people do not know what the future holds.

¨       “Contactless” Credit Cards- Visa distributed 80 million contactless-enabled credit cards during the first half of 2020 in response to concerns about virus transmission. These cards allow people to make quick “tap and go” payments by tapping a card in close proximity (about 3 inches) to a contactless-enabled terminal, thereby eliminating the need for swiping a strip or dipping a chip. The front of contactless cards has an icon that looks similar to a wi-fi symbol.

¨       Lower Credit Card Limits- Banks are issuing credit cards with lower limits as they re-evaluate their lending standards in light of financial stress caused by high unemployment and other COVID-19 impacts. The average credit line fell 9% to $5,257 according the credit bureau TransUnion. Another action that many credit card companies have taken is to close inactive accounts “to avoid being a borrower’s lender of last resort” after borrowers “max out” their other credit lines.

¨       Less Credit Card Fraud- Fraud related to credit cards was down 40% during the first half of 2020 compared to the last six months of 2019. Possible reasons include less shopping traffic in physical retail stores and less information obtained through skimming (attaching a device to card readers to steal personal information, e.g., at gas station terminals) and shimming (attaching a thin microchip enabled reader into slots for chip-enabled cards) devices as people stayed home.

¨       New FICO Score- The Fair Isaac Corporation (a.k.a. FICO) introduced a new credit score called the FICO Resilience Index as an alternative measure of creditworthiness. It is intended is be a “tiebreaker” for borderline credit decisions involving borrowers with low credit scores who are still likely to repay their debt in full. Scored from 1 to 99 (1 for the most resilient borrowers), the index puts more weight on a long credit history, low credit utilization, and few credit lines.

¨       New Mortgage Refinancing Fee- With mortgage interest rates at near record lows, many homeowners are refinancing their existing mortgages. The federal agencies Fannie Mae and Freddie Mac, which hold two-thirds of all U.S. mortgages, will soon impose a 0.5% fee on refinanced loans of $125,000 or more after December 1. For example, the fee on a $300,000 refinanced mortgage will be $1,500 ($300,000 x .005), which will be added to the loan closing costs.

¨       Home Sales Spike- Sales of existing homes increased 24.7% in July from June according to the National Association of Realtors. This is a record increase. As sales increased and housing supply fell, home prices rose, with a median price of $304,100.  Reasons for the increase in home-buying include people with stable jobs gaining increased purchasing power from low interest rates and buyers relocating from cities to less densely populated suburban areas for social distancing.

¨       Surge in Online Auto Insurance Quotes- Quote requests for auto insurance increased 147% from March-August 2019 to that same time period in 2020. While people were driving less due to pandemic restrictions, they also had more time on their hands to conduct online searches and were motivated to find ways to cut household expenses.

¨       Coin Shortages- Just like toilet paper early in the pandemic, supplies of U.S. coins (all denominations) have been running low. As a result, the Federal Reserve has been forced to ration supplies to banks, which makes it difficult for banks to supply retailers to use in their cash registers. Reasons for the shortage include fewer coins produced at the U.S. mint to protect workers from COVID-19 and lockdowns at bank lobbies where coin counting machines are located.

¨       High Profile Stock Splits- Both Tesla and Apple announced upcoming stock splits in mid-August in an effort to attract a larger base of investors with a smaller amount of money to invest, by decreasing the price of their shares. Tesla’s stock split will be 5:1 and Apple’s will be 4:1 effective August 31. The value of an investor’s stock holdings remains the same after a stock split. As an example, one share of stock worth $2,000 becomes four shares worth $500 after a 4:1 split.

¨       Increased Investment Day Trading- The Robinhood investing app, which provides investors with free stock trades, experienced a record number of trades in June. It has been criticized as akin to gambling (versus long-term investing) when used by day traders who buy and sell stocks daily. Reasons for the day-trading trend include people stuck at home who are bored and/or trying to replace lost income, the stock market’s recent volatility, and a reduced number of sporting events available for online sports betting.

Thursday, August 20, 2020

How to Qualify for a Mortgage During a Pandemic


Thinking about buying a house? You are not alone. With record-low interest rates right now, many people who have not lost a job, or have even experienced an increase in income related to COVID-19, are in the housing market. Earlier this week, Bankrate.com reported an average interest rate of 3.14% for a 30-year purchase mortgage (vs. 3.39% for loan refinancing).

Unless you have a big bank account or substantial profit from a previously-owned home, you will need a mortgage to become a homeowner. Before shopping around for a mortgage and a house or condo, prepare to put your best financial foot forward.

Below is a list of items that mortgage lenders are looking for:

Good Credit Score- Applicants in the mid-700s up to the maximum FICO credit score of 850 will receive the lowest available interest rates. The two most important things that someone can do to build and maintain a good credit score are making debt repayments on time and borrowing a small (30% or lower) percentage of their available credit line.

Low Debt Ratios- Ratios are calculated using a borrower’s anticipated PITI: Principal, Interest, [property] Taxes, and [homeowners] Insurance. A good front-end ratio [PITI ÷ gross monthly income] is 28% or less and a good back-end ratio [PITI + monthly consumer debt payments ÷ gross monthly income] is 36% or less. Each lender has its own % guidelines.

Stable Income and Assets- Lenders want to see a stable work history or net income from a business, if self-employed. Expect them to request documents such as income tax returns and/or W-2 forms. They may also call your employer to verify your job status and request details about bank account balances, investment accounts, and other financial assets.

Adequate Savings- Lenders like to see money set aside by home buyers for a down payment and closing costs. Ideally 20% of a home’s purchase price is recommended as a down payment. Lenders like buyers to have some “skin in the game” and buyers do not have to purchase private mortgage insurance (PMI). Many borrowers put down less than 20%, however.

If home buyers have all of the above qualifications, they should apply to be pre-approved for a mortgage before shopping for a house. Pre-approved loan limits will inform the house selection process and sellers will view pre-approved buyers more favorably than others because no mortgage approval contingency is required. Some realtors will also not take the time to show houses to potential buyers who are not pre-approved.


A strong word of caution: if you are pre-approved for a mortgage, do not do anything to jeopardize it (e.g., new lines of credit and late payments). Last year, the buyer for my New Jersey house had his pre-approved conventional mortgage revoked six days before the closing because his lender re-checked his credit history and found new negative information. Fortunately, he was able to quickly qualify for a FHA mortgage with a lower down payment (and more total debt) and the sale was saved.

Thursday, August 13, 2020

Ten Tips for Vacationing on a Shoestring During a Pandemic


Even amidst the COVID-19 pandemic, some people who have not lost income and are not struggling financially are taking summer vacations. Do you want to get away this month or next and minimize travel costs and practice social distancing? 

An enjoyable vacation may still be within reach with some advance planning and attention to hygiene (i.e., mask-wearing and avoiding crowds) and costs. Consider one or more of the following ten tips:
¨      Eat Contact-Free- Stay at hotels with a refrigerator, microwave, and mini-kitchen. Steer clear of any type of buffet style meal service and stick with take-out meals or a drive-up window at restaurants.
¨      Stay Somewhere Safe- Use wipes and/or disinfectant sprays in hotel rooms and pass on daily room cleaning services. Non-hotel lodging options include staying in a RV, campground, or short-term rental property.
¨      Save on Restaurant Meals- Aim to eat only one restaurant meal a day. Take leftovers with you for another meal. Consider dining outdoors at lunchtime (it is usually cheaper than dinner) and sharing an entrĂ©e or dessert.
¨      Bring Your Own Food- Pack foods such as granola bars and fruit and beverages such as bottled water and canned juices for breakfast and snacks. Perishable foods for short-haul trips can be packed on ice in a cooler.
¨      Use Coupons- Look for tourist guidebooks at visitor information centers on major highways that contain coupons for meals, hotels, and attractions. These coupons can result in big savings over the course of a week.
¨      Use Membership Discounts- Always ask about discounts or special travel packages for military families and members of AAA, AARP, and other groups with membership benefits.
¨      Shop Around- Compare at least three competing product and service providers (e.g., car rental companies and hotels). Many vendors are offering great deals now in light of reduced demand for travel-related  services.
¨      Find Free Pet Care- Trade pet-sitting services with “pet-friendly” neighbors to eliminate the cost of kenneling a pet from your vacation budget.
¨      Vacation Locally- Consider staying home and plan “daycations” (i.e., inexpensive one-day trips) and “staycations” (i.e., vacations at or near your home) in lieu of traveling to distant areas. 
¨      Be Creative- Think outside the box. Virtual overseas trips and backyard “camp” experiences for kids are two examples. Some people are using their “travel budget” for home improvements, games, and sports equipment.

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 www.211.org 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 www.healthcare.gov 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).

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