How to Navigate the New Unemployment Benefit

How to Navigate the New Unemployment Benefit

Federal unemployment benefits prompted by pandemic job losses expired at the end of July, and a recent flurry of government activity resulted in an executive order issuing $400 a week to people who are unemployed.

The weekly benefit will help the more than 30 million Americans now claiming unemployment as well as the hundreds of thousands of new applicants each week. The details surrounding this round of benefits have not been finalized, however, and it remains unclear as to who will be eligible, exactly how much they will receive, and when the payments will begin.

Here’s what we do know.

$400 a Week Isn’t Guaranteed

While this payment program, called Lost Wages Assistance, will come on top of state unemployment benefits, it looks like not everyone eligible will receive the full $400 each week. The reason? One stipulation of this new benefit is that states must provide 25 percent, or $100 of each payment, unlike the recently expired program, which was fully federally funded.

Some states aren’t in a financial position to supplement federal unemployment and may take advantage of a loophole that will lower the payment. The federal government has noted that states can count existing benefits they pay an unemployed worker toward their share of the new supplement. That would reduce the federal payment to $300 per week.

One expert believes few states will provide the additional $100 on top of state unemployment benefits. Many states are facing budget shortfalls due to decreased tax revenue during coronavirus lockdown—the Center on Budget and Policy Priorities predicts state budget shortfalls could total $555 billion.

“They’re stretched,” Andrew Stettner, a senior fellow at the Century Foundation, recently told the New York Times. “They don’t have money for masks for the teachers in their schools. They’re probably not going to come up with an extra $100 for everyone on unemployment insurance.”

In late August, the states of Kentucky, West Virginia, and Montana announced that they would provide the $100 in matching funds so that unemployed workers will receive the full $400 weekly federal benefit. South Dakota has opted out of the program entirely, and other states have announced that they will not provide the extra money. In those states, eligible people who receive unemployment will get $300 each week.

Not Everyone Will Qualify

Unfortunately, new Labor Department guidelines for the Lost Wages Assistance program could exclude the people who need it most, including people who freelance or work part-time.

People who qualified for the Pandemic Emergency Unemployment Compensation or Pandemic Unemployment Assistance programs through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and can continue to provide self-certification that they lost their job because of COVID-19 should receive the new unemployment benefits. To ensure that they receive the new benefit, however, they should be careful to state on the application that they are unemployed or underemployed due to COVID-19.

Another loophole could be problematic as well. People who receive less than $100 a week in state unemployment benefits won’t be eligible for the federal weekly $300. Experts estimate this could exclude as many as 1 million workers, including low-wage earners and people who work part-time.

When will the benefits be paid?

Right now, there’s no clear guidance on when the first Lost Wages Assistance checks will be sent. Some estimate it could take months, as states that are already managing huge loads of unemployment filings will have to administer their portion of the program. Precedent may be helpful; some states took months to send out checks under the initial pandemic federal unemployment assistance program.

One Department of Labor official who works in Hawaii recently said in a media interview that the state’s computer system will have to be reprogrammed to meet federal requirements, a problem many states with older computer systems are facing. States with updated computer systems also may not be able to get payments out quickly, according to some estimates.

State offices are busy fielding questions about the new benefits—one New Mexico government official told a news outlet that his office received thousands of calls the first workday after the initial stimulus bill was signed into law in March.

The Upside

While much about the Lost Wages Assistance program remains up in the air, there is some good news. The program is retroactive to August 1, so qualified recipients will receive a large first payment at some point.

The benefits are scheduled to continue through the week of December 6, which means recipients will receive financial help for another four months. This will provide some certainty for families and individuals as they make decisions about budgeting and spending this year. While the money does have an endpoint, federal elected leaders may implement another round of unemployment benefits at that time if Americans still need additional financial help due to the pandemic.

How to Save During the Pandemic

How to Save During the Pandemic

While the pandemic has created many economic hardships, one silver lining has been a significant increase in personal savings.

According to data from the US Department of Commerce, personal savings totaled almost $4.7 trillion in the second quarter of 2020, an increase of more than $3 trillion over the first quarter. That translates into a personal saving as a percentage of disposable personal income rate of 25.7 percent in the second quarter compared to a rate of 9.5 percent in the first quarter. When the personal savings rate reached 33 percent in April, it was the highest since the US government began tracking it in the 1960s.

The jump in savings can be attributed to several factors related to the pandemic. People have been hoarding cash as an uncertain future looms. As a result, consumers are buying less, traveling less, and going out less.

The country’s financial outlook remains grim, however, as the United States continue to report record job losses and unemployment rates. Personal finance experts recommend that Americans continue to save as a financial safeguard. Indeed, a recent survey from Bankrate showed that about 55 percent of Americans regret not having enough emergency savings.

What is an emergency fund?

Contrary to common belief, a one-year emergency fund isn’t the equivalent of one year’s worth of earnings—a daunting savings goal. Instead, you can calculate a more realistic emergency fund goal by looking at your minimum expenses.

If you are in a position where you need to draw on emergency savings, you likely will only be paying vital bills such as your mortgage or rent, food, and utilities. Likewise, to figure out your desired emergency savings, consider how much money you need to survive. Add up only your necessary bills for a year—the total should be significantly less than your annual income. An emergency fund based on this calculation should be a much more attainable goal.

Buckling Down on Savings

As you grow your emergency fund, consider two primary strategies. The first is to spend less, and the second is to earn more. You may want to jumpstart your savings fund by getting a second job. In today’s gig economy, for example, you could earn extra money as a delivery driver or pick up shifts at a local essential business such as a grocery store.

Here are some other strategies that may help you to save more.

Automate your savings.

Researching which high-yield savings plan is best can be a waste of time, as slight differences in interest rates won’t result in a significantly higher yield. Instead, financial experts recommend setting up automatic withdrawals from your paycheck into your emergency savings account. This strategy guarantees a monthly contribution and removes the temptation to spend the money instead of having to remember to manually deposit it into your savings account.

Automation places systems over human willpower, which can be faulty and forgetful. Automated monthly deposits create a steady flow of savings into your emergency account.

Watch the news.

The federal government continues to make decisions about how to help Americans weather the financial crisis that could impact your savings. While no legislation has been passed yet, government officials have suggested that a second $1,200 stimulus check may be sent to all eligible Americans. The amount each family unit will receive depends on factors such as income and number of dependents.

If you don’t need the entire stimulus check amount to pay urgent bills, consider investing the check in your emergency savings account. This strategy won’t provide the immediate gratification of a shopping spree, but if you find yourself in a dire financial situation, the savings will pay off.

If you haven’t paid your federal taxes, be sure to do that as soon as possible, since the IRS has stated that unfiled taxes could impact your stimulus check. When you do fill out your taxes, include your direct-deposit information—this ensures that the IRS can deliver the any stimulus checks straight to you.

Watch your spending.

Adapting your budget to a stay-at-home lifestyle could reveal several areas of significant savings. For example, working from home should significantly cut fuel or commuting costs. You may even be able to reduce your auto insurance coverage.

You probably won’t need as many new clothes or shoes. If you’re avoiding indoor gatherings, you’ll no longer spend money on movies, bars, concerts, theater, or other forms of out-of-the-house entertainment.

Taking a close look at your monthly subscriptions also could uncover savings. Look at every recurring bill and examine whether you really need it. Are some subscriptions redundant, such as the four streaming services you pay for? Paring down these monthly expenditures can reap significant savings.

Reducing your spending could open up hundreds of dollars in your monthly budget that can be reallocated for savings—and you may find the pandemic pushes you into a simpler, cheaper lifestyle you’ll continue even after the world reopens.

Why You Need A Financial Plan Now

Why You Need A Financial Plan Now

While the world may feel chaotic as the coronavirus pandemic continues to disrupt daily life, there’s no better time to get a hold on your finances. The future may seem uncertain, but having a strategy for managing your finances will help navigate whatever lies ahead.

If you’ve never created a financial plan, here are some commonly asked questions to get you started.

What Is a Financial Plan?

A financial plan outlines your financial goals and how you can plan to reach them. Possible goals can be paying off debt, saving for retirement, sticking to a monthly budget, or creating an investment plan.

These kinds of financial strategies are not just for wealthy people. Anyone who’s interested in taking charge of their finances and working toward long-term goals can make a financial plan by either working with a financial planner or creating one themselves.

What’s the Benefit of a Financial Plan?

The benefits of a financial plan are many, but the most important is that you establish control over your money and grow in confidence as you stick to a budget, save, and invest wisely. Financial plans can look decades ahead while allowing for flexibility for big life events such as the loss of a job or a child’s wedding.

wedding

How Do I Get Started Creating a Financial Plan?

Whether you work with a certified financial planner or build your own financial plan, your first step should be writing down your financial goals. You’ll want to consider both short- and long-term goals, such as a short-term plan for paying for a college tuition in the next five years or retiring decades from now. The more specific you are, the more you can define your financial strategy.

Start by writing down your financial goes for the next five, 10, and 20 years. Think about how much you’d like to save, what big (expensive) life events are coming up, and how much money you’ll need to fund the retirement you dream of. The more detailed your goals, the more motivated you’ll be to prioritize and follow through with them.

What Documents Do I Need to Create a Financial Plan?

To get an accurate overview of your financial situation, you’ll need to review documents detailing everything from your mortgage to your retirement savings account. As you evaluate these documents, you’ll gain a better understanding of your spending history, income, investments, and liabilities. This information will give you a strong foundation to work from as you build a realistic financial plan and work toward your goals.

What Kinds of Goals Should I Consider Including in My Financial Plan?

While every financial plan is personalized, it’s beneficial to consider goals that will strengthen your savings and help you reach your financial goals. Here are some examples.

Preparing for emergencies. Financial experts recommend building up a savings of three to six months of expenses in case of a catastrophe such as a sudden job loss. This savings should be a priority—as COVID-19 has shown, financial situations can take a turn for the worse unexpectedly. A savings buffer will help you pay bills if you are suddenly looking for a new job or facing cutbacks at work.

Dealing with debt. If you have significant debt, your financial plan should prioritize paying it off—starting with high-interest loans or balances such as unpaid credit card debt. Paying off these balances will free you from paying interest on money you’ve borrowed and free up more cash for you to save or invest. You can approach this goal from several angles, including taking out a debt consolidation loan or directing money from a second job toward loan payments.

Retirement savings. No matter what age you are, it’s wise to save for retirement. The younger you are, the more benefit you will receive from compounding interest that will quickly build your retirement account. One way to quickly grow your retirement savings is to enroll your employer’s matching savings program.

Big purchases. If you are considering an expensive purchase, such as a second home or a new car, you’ll want to not only save for this purchase but also build up your credit so that you’ll qualify for a good loan. You can do this by paying bills on time and paying off high-interest debts.

How Do I Stay Motivated to Stick to My Financial Plan?

Financial plans can be daunting, especially if you’ve never had one before. Instead of becoming overwhelmed, focus on small goals that serve as milestones on your journey toward financial health. You’ll find that small victories can snowball—paying off a high-interest credit card balance will free up more money to invest, save, or pay toward other debts.

Once you have a plan in place and are following it, you’ll gain a new sense of control and confidence as you build savings, pay off debt, and being to shore up your finances against unforeseen circumstances.

How to Handle Your 529 Plan During Coronavirus

How to Handle Your 529 Plan During Coronavirus

The coronavirus pandemic has wreaked havoc on many aspects of people’s financial lives. Despite this, many people report that they have not stopped contributing to their children’s 529 college savings plans.

In early May, Savingforcollege.com released survey results showing the pandemic’s economic impact on families saving for college. About two-thirds of respondents reported seeing a decrease in their 529 plan’s value since January. Approximately one fourth said that someone in their household had lost a job or was making less money. However, most also said they hadn’t changed their strategy for saving for college.

As the situation developed, though, and economic hardship continued, more families (although not a majority) did report an impact on their college savings. A CollegeBacker survey in May reached out to 1,200 American adults. About 16 percent said they had paused their college savings contributions. Additionally, 17 percent planned to withdraw money from their college savings accounts, and 13 percent had decreased the amount they were contributing.

The June 2020 State of Savings report from Ascensus, which analyzed 529 plans with fewer than 500 participants between early 2019 and May 31, found about a 21 percent decrease in the amount of one-time contributions between the end of March and the end of May. However, Ascensus’ analysis showed hardly any change in automated contributions during that time period.

“There are many families facing a tougher situation so you do see some occasional monthly reductions in their contribution rates, but overall it hasn’t been as dire as you might expect,” Jordan Lee, founder and CEO of CollegeBacker, said in a press statement. Here’s what you need to know about 529 plans during the pandemic:

This Is How 529 Plans Work

The value of a 529 plan is that it allows adults, primarily parents or grandparents, to save money for a designated beneficiary. The account will grow tax-deferred, and money can be withdrawn tax-free for qualified expenses related to education.

The money can be withdrawn for other expenses (financial planners recommend this option only be used as a last resort) if times are hard. However, the plan’s earnings would then be subject to a 10 percent penalty, and the account holder would also be charged federal income tax on the withdrawal.

Extensions Were Granted to Return Money Refunded as a Result of the Pandemic

Federal regulators offered one break, however, for 529 plans during the pandemic. In some cases, families paid for college expenses for spring 2020 out of their 529 plans and may have received a refund for tuition or room and board due to schools closing their physical campuses and going online for much of the semester.

In a typical year, account holders would be required to reinvest the refund into their 529 plan quickly or be penalized. This year, the Internal Revenue Service allowed families 60 days (the deadline was July 15) to return the money without a penalty.

529 Plans Are Good Investments

The pandemic has forced many families into tough situations, as working members of families have faced layoffs, furloughs, and other economic hardships. However, 529 plans remain an excellent investment, as rules for how the money can be used have been relaxed over the years. Qualified expenses can include everything from tuition for vocational and trade schools to paying off student loans to some costs associated with K-12 education.

Federal laws restricting gifts to $15,000 each year are less stringent for 529 accounts. This means that grandparents or other adults who want to invest in a child’s education can give as much as $75,000 in a single contribution. In addition, if the account’s recipient decides not to go to college, another family member can use the money.

Your Budget May Be More Flexible Than You Think

Experts advise families to keep making contributions to their 529 plans—and even increase them if possible—during the pandemic. Some financial planners point out that typical budget items, such as eating out and vacations, may not be spent and the money could instead be allocated to college savings.

Families also should regularly review their budget and financial planning outlook. The current economic situation is changing rapidly due to ongoing questions about employment and the market. However, college will still be an expense in most cases, and a 529 college savings plan remains an excellent way to save for college even if you find yourself in financial hardship.

Plans May Be Uncertain, but 529s Are Flexible

The pandemic has forced many to change their plans, and your student may even be considering putting college off or choosing a different route all together. Restrictions on indoor gatherings have required many American colleges to remain online, an educational format that is less appealing to many students.

The good news is that 529 plans are designed for flexibility. This means you can continue saving while your student’s educational future unfolds, and the plan likely will cover other educational expenses if your student decides to pursue a nontraditional educational opportunity. And if your student foregoes education entirely to work or travel, the 529 plan can be transferred to a qualified relative whose education can benefit from the savings.

Retirement Advice You Don’t Have to Take

Retirement Advice You Don’t Have to Take

Retirement planning advice—which is not in short supply—can linger long past its time. Advice that may have worked 20 years ago, for example, may not be as applicable today, when the economy is different and people are making different choices about their retirement. It may be time to reconsider the following common retirement advice.

You Must Pay Off Your Debts, Including Your Mortgage

In reality, this advice is unachievable for many Americans. Becoming debt-free for many may be impossible or so difficult that it pushes retirement back many years. Following this guideline, then, would mean trading enjoyment in your senior years for more years of work.

In some cases, it’s OK to carry debt into your retirement; the key is determining which debt is manageable. Paying off high-interest debt, such as credit card balances, is important—interest rates on credit card debt can be 15% or higher, which means your debt can quickly build. Growing debt and a fixed retirement income aren’t compatible, and in this case, it’s a good idea to pay off all high-interest debt before retirement.

Other debt, however, may be tolerable—and even beneficial—during retirement. If you can comfortably make the payments on low-interest debt with your retirement income, there’s no reason to postpone retirement. In other situations, your money may be better spent on investments rather than paying off low-interest debt. For example, if your mortgage interest rate is 4% and your investments are generating a 6.5% rate of return, it makes more sense to invest your money rather than use it to make additional mortgage payments.

house payments

The 4% Retirement Withdrawal Rule

This rule was developed in the 1990s. It essentially says that you’re ready to retire when your savings will last for 30 years if you plan to withdraw 4% of your retirement savings the first year and a similar amount, adjusted to inflation, over the remaining 29 years.

However, many financial planners say this formula doesn’t fit all retirement situations and doesn’t take into account a fluctuating market. Retirees also don’t spend consistently over the course of their retirement—they tend to spend more in the early years when they are traveling and marking off experiences on their “bucket list.” Spending may drop as retirees settle down or increase if health issues arise.

A better strategy is to consult with a financial planner about a safe withdrawal strategy based on your circumstances and plans for your senior years. For example, a plan could be built around your required minimum distributions, or you could calculate what you need to cover basic living expenses and then factor additional money into your budget for travel and other expenses.

You Need $1 Million in Savings

Saving $1 million has been the longtime gold standard for retirement, but more recent estimates from the Bureau of Labor Statistics have increased that estimate to $1.5 million per family. Reasons for the increase include a drop in pensions, which previously could be relied upon to supplement retirement savings; inflation; and longer lifespans. Many people are in retirement for three decades or more.

Retirees Spend Less

Retirement doesn’t necessarily cause your spending to decrease. Traditional guidelines state that retirees should plan to spend between 75% and 85% of their current budget, but that estimate doesn’t always hold true.

The best way to map out retirement spending is to make a retirement budget, estimating what you’ll spend each month when you stop working. You may delete some budget items, like commuting costs, but you may take on new expenses with more travel or new hobbies. Creating a retirement budget will help you avoid an unexpected surprise if your spending in retirement doesn’t drop.

Social Security Withdrawals Should Begin at a Certain Age

Conventional wisdom has advised everything from withdrawing benefits immediately when you become eligible at 62 to delaying until you reach 70. In reality, the ideal age to begin claiming Social Security benefits depends on your individual situation.

The best time for you to claim benefits will depend on your retirement budget. For example, if you begin withdrawing at age 62, your monthly benefits will be reduced because you haven’t reached your full retirement age, which will range between 66 and 67, depending on your birth year. If you wait until your full retirement age, your monthly check will include a bonus.

Retirees with comfortable savings may choose to withdraw early for extra spending cash, while people who know they will need help with income later in retirement may want to hold off so their monthly check is larger. Your health may also be an issue—people in good health who think they will live a long time may want to delay claiming benefits, while those who are in declining health may benefit more from larger checks now.

Regardless of your situation, it’s wise to consult with a financial planner about your retirement plan to make the most of the options available.

Financial Planning in the Time of Covid

Financial Planning in the Time of Covid

During economic crises, it can be instinctive to change course with your finances as uncertainty and perhaps even panic set in. However, it will benefit you financially to avoid making quick decisions about your money, particularly during a recession. Financial stability, especially during the COVID-19 pandemic, will reduce stress on your family and keep you moving toward your financial goals.

Here are some sound options for managing your finances during the pandemic.

 

Pad your emergency savings

emergency

While the pandemic has hurt many aspects of the American economy, personal savings rates have soared. CNBC recently reported that the US Bureau of Economic Analysis showed a personal savings rate (the percentage of disposable income that people save) of 33 percent in April, the highest it’s been since the 1960s, when the agency began keeping track. Nationwide stay-at-home orders have encouraged savings, as people have drastically reduced their spending on travel, shopping, and entertainment and eating out.

If you continue to have a steady income, this is an excellent time to build an emergency fund for situations ranging from job loss to an unexpected medical bill. Financial experts recommend saving between three and six months of living expenses to make sure that you can weather unforeseen hardships, including the pandemic if it stretches out.

A good place to start would be saving any lump sum of money you receive, such as a tax refund, work bonus, or a commission. You could also decrease the amount you contribute to your 401(k) temporarily and move the difference into your emergency fund.

 

Adjust your budget

Millions of Americans have been affected by COVID-19 shutdowns, whether they have been furloughed, laid off, or experiencing a reduction in wages. The economic fallout is far from over, so even those who have yet to be impacted by COVID-19 could as companies examine their long-term revenue and adjust their plans in the coming months.

Regardless of your job situation, this is a good time to make adjustments to protect yourself against job loss or wage reduction. You can think through your long-term income potential and job security and consider ways to insulate your family from income loss as the impact of COVID-19 unfolds over the coming months and years. You may also want to make your budget more conservative, increase your savings, and reduce non-essential spending.

 

Look at payment reduction options

While your income may seem stable now, that may not be true a few months down the road as the economic crisis stretches out. To be prepared for financial difficulties, familiarize yourself now with programs that allow for payment deferment or reduction on key debts.

Mortgage payments: If a time comes when you can’t make your mortgage payment, call your bank. Many states will allow property owners to take a “holiday” from mortgage payments if their cash flow has been impacted by COVID-19. Lending institutions may allow you to postpone payments without incurring late fees, extra interest, or a negative impact on your credit score.

Credit card payments: In the wake of COVID-19 financial hardship, many credit card companies are offering relief to their clients in the form of lower interest rates, reduced fees, and delayed monthly payments. Contact your credit card company for details about their COVID-19 relief plan.

Federal student loan payments: The US Department of Education currently has reduced the interest rates on federally-backed student loans to 0 percent for a minimum of 60 days, and graduates can also take a break from payments for at least two months if they call 1-800-4FED-AID and request it.

 

Reconsider your real estate

Your biggest monthly budget item is likely your rent or mortgage. Financial setbacks, such as a job loss, can become severe if you can’t pay it. If you’re a renter and you’re anticipating or experiencing a financial hardship, ask your landlord for a temporary reduction in your monthly payment or if you can apply your security deposit toward rent. In a more extreme scenario, you may need to get out of your lease early and move to a more affordable rental.

If you’re a homeowner, call your bank and ask for mortgage relief, such as deferred payments or temporarily paying interest only on your mortgage. With interest rates extremely low, this may be an ideal time to refinance your mortgage to decrease your payments or shorten your loan terms so that you can pay it off more quickly.

 

Is it time for more investments?

While your inclination may be to save right now, you may be missing out on excellent investment opportunities. Many stock prices are low, making it a good time to enter the long-term investment market or temporarily increase contributions to your 401(k). Bear markets have rebounded above average for several years, a historic trend that could play out again when the COVID-19 recovery begins.

As with any risk, however, caution is always advised. Before you step further into the market, make sure you have a generous emergency savings fund, stable expenses, and job security.