When life hands you lemons, make lemonade, so the saying goes. While the coronavirus pandemic has put a strain on the finances of many Americans, and caused many worry and stress, there are things you can do right now to boost your financial situation. We’ve gathered advice from financial experts to help you make the most out of this situation.
#1. Take a hard look at your spending
Regardless of whether or not you’ve lost your income, now is a good time to look at what you’re spending. Our “new normal” has forced most of us to do things differently. We’re going longer between haircuts, eating out less, watching movies at home, ditching our morning coffee run since we’re working from home, and finding ways to workout while gyms remain closed. As businesses start to open up, now is a good time to evaluate what expenses you need and what expenses you can do without. Take an extra look at recurring monthly subscriptions and memberships. On average, Americans are spending $237 per month on these services–that’s over $2,800 a year. And if you’re saving money right now in gas, child care or by negotiating bills, sock that money away in an emergency fund, recommends Andrea Woroch, a money savings expert.
#2. Use your stimulus check wisely
If you’ve already trimmed your expenses, Matt Frankel, CFP, gives advice on how to spend your stimulus money: “If you’ve lost income due to the COVID-19 pandemic, the best move is to use your stimulus check to help pay your current bills. If you don’t need the money to cover your current expenses, the best uses of the money (in order) are getting rid of high-interest debts like credit cards, starting or adding to an emergency fund, and investing the money for your future.”
If you are still employed and have high interest debt like credit cards or payday loans, do your best to pay down as much of those as you can. Credit cards charge interest every day, and as long as you have a balance, that interest won’t stop compounding until you’ve paid it off.
If you don’t have credit card debt, use your stimulus to build an emergency fund. Building an emergency fund allows you to pay for unexpected expenses without turning to credit cards, family loans, payday loans or other options that create stress.
Experts recommend having enough savings to cover 3-6 months of expenses. If you don’t have that much in savings, you’re not alone. The Federal Reserve estimates that 39% of Americans don’t have enough to cover an unplanned $400 expense–let alone 6 months of savings. Regardless of how much you have in savings, the key to success is to start somewhere. Better to have $500 set aside for emergencies than nothing at all. Kerri Moriarty, head of Cinch Financial, agrees. “Reduce your frustration by setting milestone goals to work toward. For example, building up $500 in emergency funds, then $1,000, then $2,500 and so on until you watch yourself tracking to one month or three months or six months covered.”
If you’ve got all of the above covered, you can use your stimulus check to pay down other debt, like student loans, vehicle loans or your mortgage. Extra payments will lower your overall interest costs in the long-term, helping you pay off your loans sooner.
#3 Leverage your federal student loan forbearance
If you’re one of the 45 million Americans with federal student loan debt, your loans have been placed into forbearance as part of the CARES Act, which means your payments have been suspended for six months, beginning April 2020. You will not need to make payments during this period, and no interest will accrue on your loan.
So what should you do with this “extra” money? Experts agree you should follow the same strategy outlined above. First, use the money to cover your living expenses if you’ve lost income. After that, pay down high interest loans and establish an emergency fund.
If you’re still employed and you’ve eliminated high interest loans and established a safety net, you may want to continue making payments on your student loans to pay them down faster. If you continue making payments, the full amount of your payment will be applied to the principal balance once any interest accrued prior to March 13 has been paid. This 0% interest rate will save you money overall, even though your payment won’t be lower. Contact your loan servicer about continuing or restarting payments during the forbearance period, as most loan servicers suspended all payments.
Many lawmakers have proposed extensions to the forbearance period, as well as a myriad of additional student loan relief options. “I do think there’s going to be additional waves of relief, depending on how this pandemic plays out,” says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors. So, this will be one topic to continue to watch.
#4 Take advantage of low interest rates
The Federal Reserve announced emergency rate cuts in response to coronavirus, bringing the federal funds rate to a target range of 0-0.25%. If you’re in a position where you haven’t lost your income, taking advantage of lower interest rates can save you thousands of dollars over the long term.
Most experts agree it makes sense to refinance your home if you can reduce your interest rate by 1-2%. Interest rates hit a record low of just 3.23% for a 30-year fixed rate loan last month. If you don’t “cash out” any of your equity, refinancing your mortgage with a lower interest rate will do one of two thing: reduce your mortgage payment or reduce the number of years it will take to pay off your home. You’ll need to make that decision based on your personal circumstances, but be sure to factor in your closing costs. Refinancing only makes sense if you stay in your home long enough to recuperate those costs.
Refinancing and consolidating student loans may also improve your financial situation. “Since interest rates are at one of the lowest points we may see in our lifetime, borrowers… should seriously consider refinancing their loans to a lower interest rate,” said Randy Lupi, regional vice president at Equitable Advisors. Consolidating your loans is also an option. This streamlines your repayment process and could lower your costs, depending on your interest rates. However, be sure you understand the pros and cons of consolidation, especially if you’re consolidating a federal student loan with a private lender. Refinancing may make more sense if you’re looking to combine loans, change repayment terms, lower monthly costs or more.
#5 Unemployment benefits boon
All’s not lost if you’ve lost your income. In some cases, Americans are reporting that they are making more on unemployment than when they were employed, due to the extra $600 weekly payment as part of the CARES Act. If that’s the situation you’re in, it’s best to follow the advice above: pay your bills, pay down high interest debt, and set aside a little for emergencies. The $600 unemployment enhancement is set to expire July 31. While some lawmakers want to extend that eligibility until January 31, 2021, there’s no guarantee that law will pass.