The COVID-19 public health crisis triggered a financial crisis for many individuals and families. Whether their pain was caused by furloughs, layoffs or pay reductions, people were thrown off track from meeting monthly obligations and from progressing toward their long-term money goals.
Now as vaccines help the U.S. edge closer to normalcy and more people regain employment, recovery can be a slow process. But there are simple steps people can take to get back on track and stay on solid financial ground.
The key to gaining back lost ground and full recovery is making sure you put the fundamental pieces in place.
One of the challenges is figuring out how to do it amid continued uncertainty with the economy. But the most important thing is to take control of all the factors of your financial situation as best you can.
Here are some steps to financial recovery:
• Learn about assistance programs.
Many people who are eligible have not pursued avenues of aid such as unemployment benefits, credit card hardship programs, and the Paycheck Protection Program, which is available to the self-employed and contractors as well as small businesses. It’s important for people to understand what’s available to them.
Some don’t think they qualify when in fact they do, or they feel they’re being a burden, or they didn’t think the pandemic would last this long.
• Refine your budget.
Sitting in their house much of the year forced people to take a hard, honest look at their finances and ask the question, ‘What is it that I do that costs me so much money?’ A comprehensive analysis starts with doing a deep dive on all expenses and monthly bills and weeding out poor spending habits and things they can do without.
That breakdown of costs enables one to hammer out a sensible budget that creates more room for savings, paying down debt and investing.
• Prioritize savings.
The pandemic exposed how many people lacked a sufficient amount of savings for an emergency. Having an emergency fund is essential. You need a minimum of three months’ worth of expenses saved up, but ideally enough money to get you through a full year. If you’re back to work, each month take a portion of the money you’ve trimmed out of your monthly expenses and build your emergency fund.
• Know your 401(k) options.
If you are furloughed or laid off but leaving your 401(k) with the company, you may be able to take a loan or a withdrawal from it due to the pandemic. This or cashing out your 401(k) should be a last option because it can jeopardize your retirement nest egg.
After the 2008 financial crisis, people who stayed in the market experienced financial recovery from their losses. Another option is rolling over a 401(k) into an IRA account. This offers many other choices to grow your money since an IRA can be a mutual fund, annuity, CD or almost any other type of financial instrument.
• Refinance your home.
Home value is akin to having another emergency fund. Your home equity is sitting there doing nothing for you unless you tap into it.
Whether it be a home equity line of credit or doing a refinance and taking cash out while the interest rates are low, either could be a good option.
Embracing a new level of priorities and discipline will serve people well in making better money decisions.
Aaron Leak has 16 years of experience in the financial industry and is the founder of ECL Private Wealth Management.