The financial side effects of COVID-19, like the disease itself, have ranged from mild to devastating. Most workers who still have jobs have experienced minimal disruptions. But for millions of unemployed people and many thousands of business owners, the effects have been severe — and continue to unfold.
The CARES Act, signed into law in late March, has helped by providing direct cash payments to most Americans and expanded benefits for the unemployed. But assistance from Uncle Sam isn’t enough when a financial crisis hits home. You likely will need to take additional actions to weather the storm. These suggestions will help you batten down the hatches.
Cut spending and contact creditors
- Don’t increase your consumer debt. In response to the coronavirus pandemic, the federal government is spending scads of money it doesn’t have. Don’t follow suit. You’ll only dig a hole that will create more problems in the future. If money is tight, change your spending patterns instead. Stop buying non-essentials. Cut back on optional lifestyle spending. Review all your monthly bills, looking for opportunities to save.
- Run toward your creditors, not away from them. If you have bills you can’t pay, contact your creditors and explain your situation. They’ll probably work with you to set up a payment plan and perhaps waive any late fees. After all, millions of people are in the same boat right now.
- Find out what your mortgage lender is doing to help. Visit the company’s website to learn how your lender is working with homeowners who can’t make their full payments right now. The CARES Act mandates certain relief options for federally backed mortgages. Your lender may have other options as well.
Focus on cash flow
- If you need ready cash, turn first to your emergency savings. This is what emergency savings are for — a source of funds that you own outright that you can get to quickly and easily. You should use your savings sparingly, of course, but tap that money first if you need to.
- Sell household assets. Items such as bicycles, boats, and automobiles typically sell quickly if in good condition and priced right. You can post most such items at no cost on websites such as NextDoor, Craigslist, and Facebook Marketplace.
- Sell investments. If you have investment assets in taxable (i.e., non-retirement) accounts, consider selling any holdings in which you have losses. Investment losses can be used to offset other income and reduce income tax obligations.
- Withdraw contributions from a Roth IRA. Tapping retirement assets will undermine future growth, so it’s best to avoid such options unless absolutely necessary. That being said, a Roth IRA allows an account holder to withdraw contributions (i.e., money put in, not earnings) at any time. There will be no penalties or tax because contributions have already been taxed.
- Take a hardship withdrawal from an IRA or a company retirement plan. For people directly affected by COVID-19, the CARES Act eliminates the normal 10% early withdrawal penalty. The new law also allows 2020 withdrawal-related taxes to be spread over three years. But again, think carefully about how a withdrawal now will negatively affect your retirement income later.
Borrow if necessary
- Get a loan from your employer-sponsored retirement plan (if allowed by plan rules). The CARES Act makes it possible to borrow up to $100,000 from a retirement account (in 2020) and to defer payments for one year. Bear in mind that such borrowing will affect the growth potential of your retirement assets.
- Consider a home-equity line of credit (HELOC). A HELOC offers a revolving line of credit — similar to a credit card, but typically at much lower interest rates than credit cards charge. Essentially, you’re borrowing against the equity you’ve built up in your house. Because the house itself acts as collateral, it’s crucial to make payments on time so you don’t put your home at risk. Also be aware that HELOCs have variable rates, meaning your rate could rise.
- Borrow against your life insurance. If you have a policy that builds cash value and you meet certain requirements set by the insurance company, you may be able to borrow against that cash value (although at an interest rate likely higher than you could get elsewhere). You’re not obligated to pay back an insurance loan, but take into consideration that the death benefit paid to your beneficiary will be reduced by the loan balance.
Maintain healthcare coverage
- Don’t go without health insurance. If you’ve lost your employer-provided coverage, you have several options. If your spouse is still working and has coverage, find out if you can be added to his or her plan. A spouse becoming unemployed typically is considered a “qualifying event” that makes it possible to convert from individual to family coverage under an employer-provided plan.
A job loss also opens the door to enrollment under the Affordable Care Act. You can get details and compare costs at www.healthcare.gov. Depending on which state you live in, if you fail to apply within 60 days of your job loss, you may have to wait until an open-enrollment period begins this fall.
Another option for health coverage is through COBRA (the 1985 Consolidated Omnibus Budget Reconciliation Act). The law allows you to continue the insurance you had through your employer for up to 18 months, but you’ll have to pay the full premium, which can be pricey.
- Don’t face a personal financial crisis alone. If you’re married, pray with your spouse about which actions to take. Seek counsel from a wise parent or a trusted friend. And trust the faithful God who has said, “I will never leave you nor forsake you” (Hebrews 13:5).