The world is going through a very difficult phase. Everywhere we are hearing that we need to get adjusted to the ‘new normal’. Nothing is normal as it used to be. Children are not able to go to schools. Most people are working from home. Healthcare professionals are working day and night for the recovery of people who get COVID-19. In this situation, it’s quite natural that the economic situation is not good. Many people have lost jobs or are facing pay cuts and experts are predicting that an economic recession will set in. We don’t have any control over this situation. But, what we can do is safeguard our finances, as much as we can, and avoid financial mistakes during this COVID-19 financial emergency.
Here are a few financial mistakes you should avoid.
Satisfying Wants to Avoid Boredom
Have you been browsing online shopping websites and ordering items? Is it because you need them or just to avoid boredom?
When the lockdown started, people were stockpiling grocery items. Now focus has shifted to buying items like clothes, books, entertainment things, and so on. So, in both situations, people are overspending.
But, now is not the time to do so. Rather, you should try to save as much as you can. We will discuss how to save more later in this article.
If you are getting bored at home, nurture a hobby (hopefully an inexpensive one). Do something which you’ve always wanted but didn’t get time to do so. If you wish, you can also do some online jobs as per your liking.
Following the Same Budget
Are you following your budget? You might say that you’re following it and saving. Good! But it’s a mistake. You’ll ask why? Because it’s necessary to re-assess your budget in light of the current situation and make modifications if required. If you’ve done that, well done!
If you still have income, it is time to save as much as possible. Doing so, you can be prepared for any future rainy days. If you save more, you won’t have to worry as much about losing your job. You know that you’ll be able to sustain yourself for a few months.
You can practice frugal budgeting to save more. Frugal budgeting doesn’t mean you’ll have to compromise with eating healthy or compromise with your life; it means to cut unnecessary expenses and increase your savings.
Overspending that Doesn’t Fit in your Budget
It is better to avoid buying big-ticket items during this time. Try to delay satisfying your wants for the time being.
To illustrate the previous point, let me highlight a survey conducted in January 2020 in Nebraska by First National Bank of Omaha. It showed that about 50% of people in our country have a pay check to pay check lifestyle. So, it becomes quite tough to meet daily necessities when they face job loss, which has happened during this pandemic.
Therefore, you should try to have a good cash reserve. To do so, you need to save more and keep the amount in a high-yield savings account.
Check out how these ways to save more that you might be overlooking:
- Stop eating out and have nutritious homemade food which is healthier too
- Have a list when you go grocery shopping and don’t buy anything extra
- Switch to debit cards if that can help you reduce your expenditures
- Cancel your gym membership and work out in fresh air
- Check out your magazine subscriptions and cancel if you rarely read them
- Opt for bundling offers of television and internet
- Opt for public schooling of kids instead of private schools
- Start envelope budgeting to save more
- Set temperature of water heater to 120 degrees to save electricity
- Clip coupons and use them to save money
Using your Emergency Fund for Daily Necessities
Emergency funds are for rainy days. But, don’t touch it if you can manage without it.
Check how much you have in your emergency fund. Will you be able to sustain for about 6 months without a pay check? If not, try to have that amount in your emergency fund.
Do not touch your fund unless it’s an emergency. And, if you have to use it, try to save the required funds after the situation becomes normal and you start getting your usual pay check.
Every month, try to save a definite amount in your emergency fund. And, the account should be easily accessible so that you can withdraw funds whenever you need it.
Of course, if your emergency savings is the only thing between you and not paying your bills, you can start spending it.
Not using Available HSA funds
Instead of using your emergency fund for medical treatment, use your pre-tax HSA (Health Savings Account) funds. You can use the funds to get treated or tested for Coronavirus if required. You can even use the funds to consult a therapist if you’re anxious or depressed during this pandemic.
Delaying Filing your Taxes if You’re Eligible for a Refund
As per the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the federal tax filing deadline has been extended to July 15, 2020, including any estimated tax payments for 2020. But, if you’re eligible for a refund, file your taxes.
As per IRS, the average refund is about $2,908 this year. It can help you to cover your living expenses or even make debt payments during this pandemic.
Not Paying the Entire Amount on your Credit Cards
It is a mistake to make only the minimum payments on your credit cards. If you do so, you’ll have to pay the interest on the outstanding balance every month. Therefore, it is always better to pay the entire balance on your cards every billing cycle if you possibly can. So, before swiping your cards, check out whether or not you’ll be able to make the entire payment in the billing cycle.
Also, use your reward points if you’re ordering things online; otherwise, your reward points may expire.
If required and if the creditors agree, you can take out a balance transfer card and transfer your existing balance to the new card. Usually, a balance transfer card comes with an introductory period of zero or low-interest rate. So, repay the transferred balance within that period.
However, after making the payment, do not cancel your existing cards especially if they have a long credit history. If you cancel cards, the credit limit and the history of credit will reduce thereby affecting your credit score negatively.
Getting Panicked and Selling Stocks
Selling stocks after a stock market decline is one of the major financial mistakes that often people commit. They sell stocks when the market is down. But, have faith. The market will surely recover. Do not touch your investment portfolio at this time. The market recovered even after the economic crisis of 2009. However, it may take a bit more time. So, do not sell stocks right at this moment.
Another thing that the financial advisers always tell not to do is check your portfolio every day. It will make you stressed. Instead, if you have an additional amount after meeting your necessities, you can invest it in stocks as the prices are low.
Withdrawing from Retirement Accounts without Considering the Cons
The CARES Act has made it quite easy to withdraw funds from your retirement accounts, such as IRAs (Individual Retirement Account) and 401(k)s.
Here are a few advantages of withdrawing funds:
- You can borrow up to $100,000 from your 401(k) plan.
- You can withdraw $100,000 from any qualified retirement plan without having to pay an early withdrawal penalty.
- You have 3 years to repay the amount without paying any income tax on the withdrawn amount.
The main advantage of starting to save early in such retirement accounts is to take advantage of compound interest. However, if you withdraw, you’ll lose the benefit to some extent. So, weigh the pros and cons before opting for this.
Not Reviewing your Financial Condition with your Financial Advisor
It is not a good idea to skip reviewing your financial situation with your financial advisor. It is rather more important at this time to have a clear view of your financial situation.
Discuss with your financial advisor how you need to maintain your investment portfolio and what moves you need to take. Talk about your financial goals and how you’ll implement them.
Taking on Debts without Thinking about How to Manage
Mortgage rates are comparatively low. You may feel the urge to take out a loan to meet your daily necessities if you’re facing financial problems. However, it is better not to take out additional debts that you can’t handle.
However, if you’re already having difficulty managing your existing debts, you can consolidate your debt. You don’t have to meet with a debt consolidator in person. You can just call a good consolidation company and seek help.
Sitting in Front of a Screen
At last, I would like to mention that it is quite important to stay physically and mentally healthy during this time. So, do not be stressed. Restrict your screen timing and have some me-time. Do something which you like. Nurture a hobby. Use this opportunity to spend time with kids and family members.
Enjoy quality time and take help from your family members to manage finances efficiently. Not committing these mistakes can help you have a better financial future.
About Good Nelly
Good Nelly is a financial writer who lives in Milwaukee, Wisconsin. She has started her financial journey long back. Good Nelly has been associated with Debt Consolidation Care for a long time. Through her writings, she has helped people overcome their debt problems and has solved personal finance related queries. She has also written for some other websites and blogs. You can follow her Twitter profile.