It has now been a year since we first learned of a virus that appeared in China many thousands of miles from us. Who would have guessed that it would have such a drastic impact on our lives and the lives of millions around the world?
COVID-19 has impacted the way we live, spend, save and just about every aspect of our lives. From a financial perspective, depending on our station in life, it either has had a positive or a negative effect.
Millions of Americans were forced to work from home and millions have not returned to their workplace. We have created a work from home culture. This has allowed the savings rate to balloon to a high of 13.7% at the end of 2020*. The personal savings rate is the percentage of disposable income after taxes and fixed and variable expenses. It makes sense that spending has decreased during our quarantine, while we stay at home, not going to restaurants, gyms, hair appointments etc.
For many, this “excess” capital has been used to pay down debt, thus, increasing credit scores. A better credit score has many benefits such as being able to negotiate lower interest rates on loans and qualify for loans that in the past may not have been easy to obtain.
Using the Excess Capital
There are things you can do with these funds for your benefit. For starters, prioritize your debt. By that I mean credit card debt should be paid first. A missed payment can lower your credit score as much as 100 points. If you are struggling to make mortgage or other payments because of a furlough or losing your job due to the pandemic, at least make minimum payments on your credit card to avoid skipping other monthly payments such as car, mortgage payments and rent. The key is to focus on preventing your credit score from dropping.
Sheltering at home, not spending as much, has culminated in less credit card use. Of course, using less of your total credit is one of the best strategies to use to prevent a drop in your credit score.
The next strategy I would use is to make sure your reserves are in order. All of us should have different “buckets” of funds:
• First there is the “pay my bills” bucket – a checking account used to pay monthly expenses. Two months’ worth of expenses in this bucket provides a safety net.
• The second bucket is your emergency reserve savings. This reserve is strictly to use in the event of an emergency. My recommendation is to build this account to 4 to 6 months of living expenses negating the need to use a credit card to pay for unexpected expenses. You can always count on an unexpected expense.
• A fun account is the third bucket. These funds you use to go on vacation (as soon as it is safe to travel), buy things for your home, go out to dinner, etc. Again, credit card usage is on the back burner.
Finally, once you are on your way to fill those necessary pools of money, your focus should be on building wealth and planning for your future financial needs. This may mean adding to your retirement account, whether it is employer sponsored 401k or 403b plans, traditional IRAs, or a ROTH. Remember that if your employer is matching your contribution, you should at least contribute up to that amount. Adding to a non-retirement account or setting up a monthly contribution into an account that has the potential to provide higher returns than inflation and taxes will help you maintain your lifestyle. A frank discussion with your Certified Financial Planner on your time horizon and risk tolerance will enable you to receive the best recommendations on where those funds should be placed.
The pandemic has caused job losses that has threatened and disrupted health coverage for millions of Americans. Many of those who lost job-based coverage may qualify for Medicaid or have an opportunity to purchase individual market health coverage (either on or off the exchange).
If you have life insurance, the insurer cannot change your premiums or your health classifications even if you have had COVID-19 or are at higher risk of exposure. There has been an increase in life insurance applications that could be a result of the pandemic. Many insurance companies are postponing the applications of Covid survivors for a period and requesting proof that the applicant has fully recovered. In addition, some companies have restricted sales of new life policies for older adults.
Long Term Care carriers may take into consideration whether a person has tested positive for the virus or is in a higher risk group for new applicants. The effects on premiums for existing policyholders will not be known for quite a while.
The vaccines are here, states are starting to open, and people will soon resume a normal life. Hopefully, that includes maintaining our savings rate and being cautious in our spending.
If you have any questions, I may be reached at 413-736-6712 or www.grenierfinancial.com
Pat Grenier, CFP® is President and Founder of Grenier Financial Services with offices in Springfield, MA and Old Wethersfield, CT.
Securities and advisory services offered through Cadaret Grant & Co., an SEC Registered Investment Advisor and member FINRA/SIPC. Grenier Financial Advisors and Cadaret Grant are separate entities.
This post originally appeared in Western Mass Women’s Magazine.
February 16. 2021