The Best Ways to Protect Your Family Finances During the COVID-19 Crisis
From when to pay your 2020 taxes to how you should handle making changes to your 401(k) contributions, these are the smartest money choices parents can make during the pandemic.
No one knows when life will return to normal. Social distancing and school closures have been stressful, to say the least. To add to the uncertainty, your finances have gone haywire. Even if you haven’t lost your job or received a cut in hours, volatile financial markets have rendered your 2020 financial plans moot. But all is not lost. Eventually life will go back to something resembling how it was. The steps you take now to protect your wallet will determine how close to normal that will be. With a bit of care and many, many cleansing breaths, you can keep your family’s finances safe during the COVID-19 recession.
Get Your Tax Refund—Or Put Off Paying Your Taxes for a Bit
You’ll be wearing shorts on Tax Day this year. April 15 came and went as preparers and filers were granted a three-month reprieve to send their tax returns to the IRS on July 15.
File now if you’re getting a refund. There’s no sense in waiting if you’re expecting a refund. Take whatever you get back and put it directly into your emergency savings fund.
File later if you owe. The point of the extension was to effectively provide a three-month no-interest loan to those who owed the government money. Take advantage of the offer.
Manage Credit Card Debt
Scoldy personal finance personalities warn that credit card debt should be avoided at all costs. But sometimes debt is unavoidable: Many Americans lack sufficient savings in their bank account to deal with a financial disaster, and millions are currently out of work.
Have a plan to pay off credit card debt. If you can’t pay off your credit card bills, resolve to eradicate that debt once you get back on your feet. In fact, put the plan in writing: “I will borrow $10,000 on my such and such card, make minimum monthly payments, and then pay it off within 10 months after I get a new job.” It helps you actually follow through. Use a payment calculator to help.
Pick the right credit card. Most Americans have a credit card, and most own more than one. Go to your latest statements to see which of your cards charges the lowest APR. But be careful: Many lenders are lowering credit lines, and you don’t want to borrow more than 30 percent of that limit, lest your credit score suffers.
Contact your bank for leniency. Credit card issuers are working with borrowers who need a cushion, but they won’t help you if you don’t ask. Give yours a call to see what they can do for you. Apple in particular has done a good job waiving interest charges for Apple Card customers.
Keep a Roof Over Your Head
Two months ago, borrowers were doing a great job paying their mortgage on time: Just 0.25 percent of home loans were in forbearance—where payments are paused or reduced due to financial hardship—in the week of March 2. But then the world shut down to confront the pandemic and Congress passed the CARES Act, a $2.2 trillion relief package that allowed certain homeowners to request a forbearance for up to 180 days. Fast-forward to the week of April 26, and 7.54 percent of mortgages were on hold.
Call your mortgage company. Similar to credit card relief, you’re not going to get a mortgage forbearance automatically. You need to call your mortgage servicer to apply, but be prepared to wait on hold. The good news is that you won’t face additional fees, penalty costs, or interest when its granted. And make sure you insist on having your suspended payments tacked on to the end of your mortgage, rather than paying them all at once after the forbearance is over.
Save Your Retirement Fund
Families in a cash crunch might view retirement savings as the first pot of money to plunder when the bottom line tightens. But sacrificing your 401(k) contributions now only makes it that much harder to meet your goals when it comes time to stop working.
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Think carefully before making any early withdrawals from your retirement account. The trade-offs of halting contributions or taking money out of your retirement account become more complex if you’re suddenly down an income or two. The CARES Act waives the 10 percent early withdrawal fee and 20 percent tax withholding for distributions if you need to get at your money now, but consider other means to free up cash before you raid your IRA or 401(k). Tap your emergency fund, lower your spending, and consider debt relief options with your credit card or mortgage first.
Keep adding to those retirement accounts, if possible. Let’s say you have $20,000 in a retirement account and contribute $2,000 a year for the next 30 years. Assuming an 8 percent return, you’ll come away with almost $430,000. Put off contributing for two years, and you’ll have about $65,000 less over the same time period. You get the maximum benefit from compound interest if you keep adding cash to the kitty.
We know this can all seem a bit overwhelming, but if you take it step by step—and get a little bit of support along the way—you can ensure a bright future for your family for years to come.