Financial Tips for Three COVID Categories

 Virtually every American has been impacted by COVID-19 in at least one way. I recently presented a webinar for Rutgers University employees titled COVID-19 and Your Finances. In it, I noted that Americans can be grouped into three broad categories with respect to the financial impact of the COVID-19 pandemic on their lives:

¨      Reduced income and struggling

¨      Stable income, but anxious

¨      Increased income with opportunities

No matter what category you fall into, there are actions steps you can take to improve your personal finances. Below is a description of key action steps for all Americans and for those in each of the above categories:

All Americans

¨      Get Your Financial Affairs in Order- Over 285,000 deaths and counting due to COVID-19 and tens of thousands more “long-haul” cases with health complications are a major wake-up call. Key legal documents to prepare are a will, living will, and durable power of attorney. Also take the time to prepare a list of your digital assets and beneficiary designations on retirement savings plans and/or life insurance policies.

 

¨      Anticipate Income Tax Implications- Tax rules that affect many Americans include tax on unemployment benefits, a $300 charitable donation deduction for non-itemizers, tax credits (e.g., EITC and savers credit) for workers who experienced a reduced income in 2020, suspension of required minimum distributions for 2020, changes in tax liability as a result of changes in income (versus 2019), and possible new state income tax bills and non-resident tax return filing required for workers who decamped to other states to work remotely.

 

Group #1: Reduced Income and Struggling Tips

¨      Prioritize needs, obligations, and wants and reduce spending accordingly

¨      Get help from local human services or government agencies by calling 211 or visiting www.211.0rg

¨      Eliminate subscription services (satellite radio, gym membership, streaming)

¨      Assess financial resources (e.g., emergency savings, cash value life insurance, retirement plan)

¨      Remain insured (health, life, property) but inquire about possible ways to reduce policy premiums

¨      Protect your credit by contacting creditors and negotiating leniency provisions that are not reported

Group #2: Stable Income, But Anxious Tips (in addition to tips for Group #1)

¨      Develop a “furlough preparation plan” by calculating the after-tax value of a day’s pay and equivalent expense reduction strategies to offset the loss of income.

¨      Increase your emergency fund via increased income, reduced expenses, or both

¨      Accelerate debt repayment using the snowball or avalanche methods to repay more than minimum payments

¨      Invest in your human capital with training, certifications, degrees, and good health habits

¨      Start a “side hustle” to earn additional income and have fallback work, if needed

¨      Consider refinancing your mortgage if the math makes sense

¨      Rebalance your investment portfolio to your target asset allocation weights

Group #3: Increased Income with Opportunities Tips (in addition to tips for Group #1 and Group #2)

¨      Save/invest positive cash flow resulting from working at home and/or reduced spending opportunities

¨      Make prudent home improvements with a high return-on-investment (ROI)

¨      Use caution about requests for cosigning and “loans” that become permanent gifts

¨      Withhold sufficient income tax on additional income earned in 2020

¨      Get serious about philanthropy to help individuals and organizations (e.g., start a donor advised fund or make qualified charitable distributions from an IRA)

In summary, everyone reading this post is in one of the three categories described above. Find the one that best describes you and your family and consider taking one or more of the suggested action steps to shore up your finances.