Don’t Make these Financial Mistakes

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.

Your Bills: Pay Them or Defer Them?

Your-Bills-Pay-Them--or-Defer-Them

Many of you are facing difficult financial decisions as your hours are reduced, you have to take an unpaid leave of absence or you are laid off. At the same time, some creditors are offering to help you by waiving or deferring payments. In this post, I’ll provide my thoughts on how you might decide whether to pay or defer your bills.

Key Takeaways: Pay or Defer Your Bills

Here are the key takeaways about whether to pay or defer your bills.

  • If a creditor is willing to waive some or all of your debt, accept the offer.
  • When creditors are willing to defer payments without any extra charges, accepting that offer, rather than paying from your emergency savings, is likely to make sense for most people. The same holds true when the extra interest or late fees are small.
  • The only situations in which dipping into your emergency savings is preferable for most people are those in which the fees or extra interest are expensive.
  • If you are unable to make your payments on time, whether they are from your income or emergency savings, it is very important to contact your creditors. If you do, you are less likely to incur fees and it is less likely that there will be an adverse impact on your credit score.

What are Debtholders Offering?

Before deciding whether to pay or defer your bills, you’ll want to make sure you understand what is being offered. There are generally three types of offers made by creditors:

  • Eliminate some or all of your debt.
  • Defer payments without extra interest or fees.
  • Defer payments with extra interest or fees.

I explain and provide examples of each of these three options.

Waive Some Payments or Forgive Debt

Under this option, the creditor forgives some or all of your debt. Debt can be forgiven by waiving (eliminating) some of your payments or reducing each of your payments. If all of your debt is forgiven, you will not need to make any more payments.

Clearly, you will want to accept offers from any creditors that are willing to forgive some or all of your debt. If only a portion of the debt is forgiven, you’ll want to make sure that you understand how that portion will be reflected in your payments.

  • Will you have to continue making payments as in the past, but with fewer payments?
  • Are you able to stop making payments for a certain period of time?
  • Will you have to continue making payments as in the past, but with a smaller amount?

As an example, I have seen several proposals from US Senate Democrats ranging from wiping out all education debt to cancelling between $10,000 and $50,000 per borrower of Federal student loans (but not private student loans). One description of the latter indicates that the $10,000 of forgiveness would be accomplished by having the Department of Education make monthly payments on behalf of borrowers during the course of the “emergency.” Under this proposal, you would be able to stop making payment for a certain period of time and then would continue making payments in the future as if you had been making your payments instead of the Department of Education.

Defer Payments without Interest or Fees

Under this option, you take a break from making payments. At the same time, the creditor does not charge you any fees and no interest accrues on your outstanding balance. Once the break is over, you will make the same number and amounts of payments as you would have without the break, but they will extend further into the future. That is, your payment scheduled will be shifted by the length of the break.

On March 20, 2020, US President Trump announced that this approach would apply to Federal student loan payments. Federal student loan debtors will not have to make any payments for 60 days and no interest will accrue. If you have a US Federal student loan, you should research the details of this mandate, as debtors whose student loan payments are not currently in arrears will need to apply to get their payments suspended.

Income taxes for 2019 are another example of payments that can be deferred without interest or fees as the result of the coronavirus upheaval. In the US, the Federal government and many states have extended the deadlines for filing and paying 2019 income taxes until July 15, 2020.

Defer Payments with Interest or Fees

Under this approach, the creditor allows you to take a break from making payments, but will charge you one or both of interest during the break and additional fees. Once the break is over, you will not only make the number and amounts of payments you would have without the break, but you will have to pay the additional interest and/or fees.

If you select this option, you’ll need to understand when these additional amounts will be due.

  • Will they be due immediately at the end of the break?
  • Are the extra amounts added to each payment ?
  • Will you have to make more payments?

Utility Example

An example of this option is the Enmax Relief Program. Enmax is the power utility company in Alberta. It has indicated that it will allow customers to set up payment arrangements for overdue bills, but only if current monthly charges continue to be paid. It appears (though isn’t 100% clear) that customers who miss any payments, even customers with payment plans, will need to pay late charges.

Mortgages

According to an article in Forbes, many mortgage companies are also offering flexibility. Some Federal and state mortgage programs are halting foreclosures, but aren’t necessarily waiving or deferring payments. More importantly, some private mortgage companies are allowing payments to be deferred. Not all of these companies have been clear about how interest or late fees will be treated during this period. As such, if you need to defer some mortgage payments, it is important that you get the details specific to your lender and loan.

The Forbes article contains a bit more detail from Ally. It will allow mortgage payments to be deferred for 120 days with no late fees, but interest will accrue. As such, the total amount you will pay for your mortgage will increase by an amount slightly more than your annual interest rate divided by 12 times the number of months you defer your payments times your outstanding principal at the time you started deferring your payments. The “slightly more” in the previous sentence refers to the fact that the interest will compound over the deferral period, so you’ll have to pay interest not only on the outstanding principal but also on the interest that has accumulated since you made your most recent payment.

Deciding What to Do

Once you’ve understood the options available from your creditors, you’ll want to make informed decisions about whether to pay or defer your bills. In this section, I will illustrate the analysis you can do to help support your decision.

In this illustration, you have $20,000 of emergency savings. You have a debt with $50,000 of outstanding principal, 10 years remaining on the term and a 5% interest rate.   This combination of characteristics leads to a monthly payment of $530. Although the illustration looks at payment of a debt, it is equivalent to a monthly bill of the same amount. You are able to resume your regular payments at the end of three months.

When looking at the option to take the payment out of your emergency savings, I assume that you plan to replace that money within a year. I also assume that your emergency savings is in a checking, savings or money market account that is currently paying such a low interest rate that it can be ignored.

Waive Some Payments or Forgive Debt

No analysis is needed for the option under which a creditor offers to waive some of your payments or forgive your debt completely (without any additional costs on your part). You will always be better off if you accept the offer.

Deferring Payments without Interest

For this illustration, you defer three months of payments without interest. You re-stock your emergency savings within a year.

Take Out of Emergency Savings

The table below shows the cash flows and balances if you pay the three months of payments from your emergency savings.

Take Out of Emergency Savings/No InterestTodayIn 3 MonthsIn 12 MonthsWhen Debt is Paid in 5 Years
Amount Paid to Creditor from Savings$0$1,590$0$0
Amount Paid to Creditor from Income004,77057,240
Contributions to Savings from Income001,5900
Emergency Savings20,00018,41020,00020,000
Principal50,00049,03046,0460

In the first row, you see the three months of payments, totaling $1,590, that you pay the creditor from your emergency savings. The second row shows the payments you make from your income after the initial three-month period. The amounts you put in your emergency savings to bring it to the pre-crisis level are shown in the third row.

The last two rows show the ending balances for your emergency savings and the outstanding principal on your debt. At 3 months, you can see that your emergency savings has been reduced by $1,590. It returns to its original level after 12 months. Your principal declines to $0 in five years as anticipated under the original schedule, as you have made all payments as planned.

Defer Payments

The table below shows the cash flows and balances if you defer three months of payments.

Defer Payments/No InterestTodayIn 3 MonthsIn 12 MonthsWhen Debt is Paid in 5 Years, 3 Months
Amount Paid to Creditor from Savings$0$0$0$0
Amount Paid to Creditor from Income004,77058,830
Contributions to Savings from Income0000
Emergency Savings20,00020,00020,00020,000
Principal50,00050,00047,0530

In the first and third rows, you see that there are no payments to or from your emergency savings. The second row shows the payments you make from your income after the three-month deferral period. The total of these payments is the same as the total payments from your emergency savings and income (first and second rows) under the Take Out of Emergency Savings Strategy. The difference is that the $1,590 paid from your savings in the Take Out of Emergency Savings Strategy in the first three months is added to the amount paid from your income in the last column of the Defer Payments Strategy. In addition, the header on the last column shows that your payments are extended for three months to 5 years, 3 months instead of 5 years.

The last two rows show the ending balances for your emergency savings and principal. Your emergency savings stays constant at $20,000. Your principal doesn’t decrease in the first three months when you defer your payments. After that, your principal declines to $0 in five years and three months. It is higher at 12 months than under the Take Out of Emergency Savings Strategy because you deferred three months of payments.

How I’d Make the Decision to Pay or Defer Bills

When the creditor won’t charge you extra interest or fees, the choice between whether to pay or defer your bills is one of personal preference. It depends not only on your current and anticipated future financial situations, but also any increase in your level of comfort by having more money in your emergency savings. The creditor isn’t increasing the amount you owe. As such, the financial inputs to the decision relate to the timing with which you make the payments to the creditor.

I would probably defer the payments unless I were expecting difficulty in making the extra three months of payments at the end of the loan term (because I was planning to retire in exactly five years and don’t want to change that goal, for example). I’d rather have the extra money in my emergency savings in case something else happens.

Defer Payments with Interest

For this illustration, you defer three months of payments at the loan’s interest rate with no late fees. If you tap your emergency savings, you re-stock them within a year.

Take Out of Emergency Savings

The transactions are the same under the “Take Out of Emergency Savings” Strategy regardless of whether the creditor charges interest on the deferred payments. I’ve shown the table again so it will be easier to compare it to the “Defer Payments” Strategy under this scenario.

Take Out of Emergency Savings/Wit InterestTodayIn 3 MonthsIn 12 MonthsWhen Debt is Paid in 5 Years
Amount Paid to Creditor from Savings$0$1,590$0$0
Amount Paid to Creditor from Income004,77057,240
Contributions to Savings from Income001,5900
Emergency Savings20,00018,41020,00020,000
Principal50,00049,03046,0460

 

Defer Payments

The table below shows the cash flows and balances if you defer the three months of payments during your time of reduced or no income.

Defer Payments/With InterestTodayIn 3 MonthsIn 12 MonthsWhen Debt is Paid in 5 Years, 3 Months
Amount Paid to Creditor from Savings$0$0$0$0
Amount Paid to Creditor from Income004,83359,607
Contributions to Savings from Income0000
Emergency Savings20,00020,00020,00020,000
Principal50,00050,62847,6440

In the first and third rows, you see no payments to or from your emergency savings. The second row shows the payments you make from your income after the three-month deferral period. For this illustration, the extra interest is added to each payment, increasing it from $530 to $537 a month and your payments extend for an extra three months (see header in last column). As a result, the total of the amounts paid the to creditor are $840 higher than if no interest had been charged.

The last two rows show the ending balances for your emergency savings and principal. Your emergency savings stays constant at $20,000. Your principal increases in the first three months as the additional interest is added during the deferral period. After that, your principal declines to $0 in five years and three months. It is higher at 12 months than under the Take Out of Emergency Savings Strategy because (a) you deferred three months of payments and (b) additional interest accrued.

How I’d Decide

From a financial perspective, you will be better off in this scenario if you make your payments out of your emergency savings because you will avoid paying interest or late fees. You also will have paid off your debt sooner – in five years instead of five years and three months.

Low Interest Rates

If the interest rate on your loan isn’t very high, say less than 6% a year, the additional payments may be relatively small. For example, at a 6% interest rate, the extra accumulated interest on a $200,000 loan with 10 years of payments left (such as our mortgage) is about $3,000. That may sound like a large number, but it adds only $34 to each payment.

Credit Cards

Some people are suggesting that you should make only the minimum payments on your credit cards as a way to keep as much cash in your emergency savings as possible. To date, I haven’t seen any credit card companies that are deferring interest or fees if you don’t pay your credit card in full. Credit card interest rates are generally quite high, often in excess of 10% per year, and many credit card companies charge fees if you don’t pay your balance in full. While many debts have interest rates that are low enough to justify deferring payments, most credit cards do not fall in that category. As such, I would pay off as much of my high-interest credit card balances as I could afford, even it if meant dipping into my emergency savings.

Personal Decision

Here is where the decision to pay or defer your bills becomes more personal. There is an emotional benefit to leaving the money in your emergency savings in case something else happens or your reduction in income lasts longer than you expect. You’ll need to weight that increased comfort level with the additional cost of deferring the payments under this scenario. For many people, the $34 a month increase in their mortgage payment in my illustration is a small cost to pay for the additional comfort. For other people, particularly those whose budgets are already very tight or who have a fixed amount of time until they retire, the increased payments and lengthening of the term of the loan are too expensive. As such, you’ll need to decide for yourself whether to pay or defer your bills, but now you’ll be able to make an informed decision.

Impact on Credit Rating

Another consideration in deciding whether to pay or defer your bills is your credit score. If you miss payments, there could be an adverse impact on your credit score, as timely payment is one of the important factors that drive your score. To be clear, if you make your payments from your emergency savings, there will be no adverse impact on your credit score. If you are not able to make your payments, even from your emergency savings, it is important that you communicate with your creditors and agree to a plan.

What Experian Says

I contacted Experian by e-mail and received the following quote from Rob Griffin, senior director of consumer education and awareness.

If you think you may have trouble making any of your monthly payments, contact your lender or creditor as soon as possible – try not to wait until you’ve missed your payment due date. Lenders may have several options for helping you cope with a variety of COVID-19-related financial hardships including placing your accounts in forbearance or deferment for a period of time. This means effectively suspending your payments until the crisis has passed and can help minimize the impact to the credit score if the account is in good standing and hasn’t had previous delinquencies reported.

While reported in forbearance or deferment, your accounts will have no negative affect on the most common credit scores from FICO and VantageScore. Keep in mind, lenders do not want you to fall behind on your payments any more than you do. Contacting your lenders early can help you protect your financial health in the long run.[1]

Other Credit Bureaus

I found similar statements on the web sites of the other two major credit bureaus, Equifax and Transunion.

How it Impacts You

These statements indicate that you may be able to avoid a deterioration in your credit score if you are proactive with your lenders about skipping or deferring payments.

 

[1] E-mail from Amanda Garofalo, PR Specialist, Experian, March 19, 2020.