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
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.
Deciding how to divide your estate between your children is not always as clear-cut as it seems. An equal division would have you leave each of your children the same amount, but what if one has served as your caregiver for five years? What if one is extremely wealthy, while the other two are struggling financially? If you have four children, who gets the beloved family home or their great-grandmother’s wedding ring?
Experts say that however you decide to divide up your estate, harmony should be a guiding principle. An inequitable inheritance, especially when it comes as a surprise, can cause long-lasting conflict between siblings, and no one wants to leave behind a legacy of family discord.
Here are some ways to ensure that the distribution of your estate is equitable, minimizes conflicts, and follows your wishes.
Figure out what “fair” means
When you consider how your children should share your inheritance, certain situations may call for an equal division of assets. For example, if all your children are in similar economic and life circumstances and you haven’t already given any of them substantial gifts, equal financial distribution may be appropriate.
Alternatively, you may want to factor in the total amount of financial assistance you’ve given your children over their lifetime. In other words, you may want to adjust their inheritance to reflect what you’ve already given them. For example, you may have a child who you gave $50,000 to help pay off private college student loans, while your other children attended state colleges that were much cheaper. You could adjust your financial division to give one child $100,000 and the other two $150,000 each to make the inheritance equitable.
Sometimes people want to leave more money to one child as a reward or a necessity. For example, one child may have sacrificed greatly to provide in-home care for you, or you may have a child with a disability who will need money for care for the rest of their life. You may have created a blended family later in life and want to leave more to your biological children.
These situations can become sticky, but sometimes siblings will understand and even support another sibling receiving a larger share of the inheritance. In other cases, however, perceived inequities can lead to years of sibling disputes. If you’re not sure what will happen, consider making decisions that will create harmony, not conflict, between siblings.
Large family assets
It doesn’t always make sense to divide a large family asset such as a family home or business between multiple children. For example, if one of your children has settled in another state and one has stayed in your hometown, it may make more sense to leave the house to the child who lives locally and give the other child more of your assets to offset the value of the house.
A similar situation could arise with a family business. If one child has made a career in that business while another shows no interest, it could be detrimental to the business to split ownership between the children in the interest of being “equal.” In this case, you could leave the business to the child who works there and give the other child more cash.
Conveying your wishes
While you are of sound mind, clearly define your wishes. You can do this by writing a detailed letter that explains not only what your decisions are, but why you made them. This will eliminate any conjecture about your motivations that could lead to hurt.
Talk to your children. You may find that they are much more understanding than you’ve given them credit for. For example, you may find that a child who already is well-off is more interested in a sentimental family heirloom than an equal share of the assets. Discussions about your estate will help your children understand why you made the decisions you did and stave off potential conflict after you’ve gone. It will also give your family time to accept your wishes. Many times, it is the surprise bequests that create discord.
You also may want to ask your children how they feel about sharing assets. Are they all willing to put the time and money into keeping up the family vacation home? Would one child be willing to allow a sibling to inherit the family silver if they get the grand piano? Heading off potential conflicts through pre-emptive discussion can go a long way toward long-term harmony.
In some cases, you might not want your estate to be divided equitably—however you define that term—between your children. You may feel that one child doesn’t deserve it, or you may be estranged from a son or daughter. While these situations can be unpleasant, it’s worth considering whether an equitable division may be worthwhile to avoid emotional and financial conflict between siblings. An equitable division may also avoid the risk of the “slighted” child suing the estate—a situation where some of your assets could end up in a lawyer’s bank account.
The coronavirus has upended all aspects of people’s lives, from their jobs to their finances to their relationships. Despite the economic and social turmoil, there is some good news for people with the capacity to save for retirement right now. The federal government has pushed back deadlines for taxes and individual retirement accounts (IRAs) to help the economy and allow taxpayers to focus on other expenses.
In March, as much of the United States enacted stay-at-home orders and businesses began shutting down, the Trump administration announced that the tax deadline would be moved from April 15 to July 15. The date corresponds with a previous announcement that many tax payments also would be deferred to July 15.
Additionally, the IRS has waived minimum distributions and extended the deadline for contributing to your IRA to July 15.
What does this mean for your retirement? Most importantly, it gives Americans another three months to make a 2019 contribution to their IRA—no penalties will be assessed for contributions made during the extension. While contributions can now be made until the middle of 2020, they will be considered contributions toward the 2019 taxable year.
The new deadline automatically applies to all individual taxpayers and corporations—you don’t need to apply for a tax filing extension or fill out extra paperwork for a 2019 IRA contribution before July 15.
Contribution Limits and the New Deadline
The deadline has been moved, but the limits on how much an individual can contribute to their IRA account has not changed. For people younger than 50, the contribution limit for 2019 and 2020 is $6,000. For those age 50 and older, the limit is $7,000.
There are several reasons to take advantage of the extended deadline to contribute to your IRA.
If you were not able to save enough money to meet the limit by the April 15 deadline, you now have more time to save up for a larger contribution. Additionally, the recent market decline could make it a good time to invest, as your IRA will grow, tax-free, when the market rebounds.
If you do plan to make a contribution before the new deadline, in the interest of caution some financial advisors are recommending that you note “2019” on your check so that it’s clear what year the contribution should apply.
Other Ways to Take Advantage of the Extended Deadline
The new July 15 deadline also applies to health savings account (HSA) contributions. That means you can continue making tax-deductible contributions to your 2019 HSA through July 15. Money spent from your HSA on qualified medical costs also will not be taxed.
If you owe taxes, July 15 is also now the deadline for making tax payments that were due on April 15. On July 16, penalties and interest on unpaid balances will begin accruing.
Getting a Refund?
If you believe you’ll receive a tax refund, don’t put off filing. There’s no need to delay your receipt of that money in your account.
Special Rules for Required Minimum Distributions
For 2020, the federal government also has waived required minimum distributions (RMDs) for IRAs and 401(k)s and other qualifying employer retirement plans. This waiver applies to all RMDs due on April 1 and December 31 for retirement plans that you own or have inherited.
If you’ve already taken out RMDs in 2020, they are eligible for a 60-day indirect rollover. If you choose this option, the money will be deposited back in your IRA as if you’d never taken the distribution. The IRS also is offering an option under COVID-19 rules that could allow you up to three years to repay the distribution or report it as income.
Here are some ways to take advantage of these special rules.
If you don’t need cash, don’t take an RMD. This way, you can avoid paying taxes on the RMD and will keep the money in your retirement account, where it will continue to grow tax-free.
If you do need cash because you’ve been diagnosed with COVID-19 or you’ve been laid off due to the pandemic, you can take the withdrawal without penalty. The rules allow a withdrawal from a qualified IRA or 401(k) up to $100,000 without paying the 10% penalty charged to people age 59 ½ or younger.
Consider Switching to a Roth IRA
Here’s one more potential benefit of this unprecedented financial time.
Stock values have dropped dramatically, offering additional opportunities to increase your retirement savings over the long term. One option is to convert your traditional IRA to a Roth IRA. The money you move from the IRA to a Roth account will become taxable, but the (likely) lower value of the assets you shift will mean you’ll pay less in taxes than you will after the market rebounds. And after you keep the Roth IRA for five years and reach age 59 ½, you can make tax-free withdrawals from the account forever.
While wealth managers and private bankers may seem interchangeable, these two financial services professionals are different. As you look for assistance and advice in managing your money, here’s what you need to know when deciding which one will best fit your financial needs.
What are they exactly?
One difference between wealth managers and private bankers is the way they interact with their clients. While there are many overlapping areas in their two approaches to managing money, wealth managers are more holistic; they get to know their clients individually and help them assess, manage, and plan their financial futures.
Though private bankers also provide financial guidance, they primarily work with high-net-worth individuals (HNWI) and provide access to concierge banking services that go far beyond what a typical bank customer would receive. And, unlike wealth managers, private bankers do not invest their clients’ assets—although they may provide in-house investment opportunities from time to time.
What do they do?
Wealth managers provide a long list of financial services to help you create and execute long-term plans for your finances and optimize your portfolio. Along with offering advice and recommendations on financial decisions, they can also execute investments. They bring to the job significant experience from working with other clients to provide context and seasoned advice for your financial decisions. You’ll meet in person with your wealth manager to talk extensively about your financial plans and current situation as well as your comfort level with risk.
Along with connecting clients with financial and legal specialists, wealth managers can provide services such as:
- Estate planning
- Tax strategies
- Retirement planning
- Charitable giving planning
- Risk management
- Financial planning
- Trust services
- Investment advice
- Legal planning
As with almost all financial advisors, you’ll likely be charged a fee (typically a percentage of assets under management that averages about 1 percent annually) for a wealth manager’s services. However, some may bill an hourly or fixed annual fee.
Private bankers offer similar services, including cash-flow management, investment planning, estate planning, and risk management. Banks assign HNWIs a private banker, who looks over their finances and sets up banking services that cater to their needs. Clients also are given access to perks and financial services at their bank, such as higher interest rates, prime mortgage rates, no fees or overdraft charges, and preferential pricing. Private banking clients will never have to stand in line for a teller or wait to meet with a banking specialist. They also will have access to exclusive opportunities such as private equity partnerships and hedge funds. Clients typically do not pay fees for private banking services, as private bankers are paid by the institutions that employ them.
Who do they serve?
Private bankers work with HNWIs—a client group that each bank may define a little differently. In general, however, an HNWI has at least $1 million in investible assets, although some banks will allow clients with liquid financial assets in the six figures access to private banking services.
Wealth managers typically have served a similar clientele, but in recent years, their services have become available to clients who aren’t considered HNWI but still have a considerable amount of investable assets.
Wealth managers build their practices on the relationships they have with each client. That means that you’ll do much more than fill out a survey or answer cursory questions when you first meet with your wealth manager. They will want to talk with you at length about your values, goals, and life plans. They may ask about any anxieties you have about your financial future, such as paying for your children’s college tuition or saving enough to retire comfortably. As your wealth manager gets to know you and what you value, they will be better equipped to guide you in all aspects of your financial life and build long-term strategies to help you reach your financial goals. As your relationship with your wealth manager deepens, you’ll likely find that they become an indispensable part of your financial decision-making process.
Private bankers may play a similar role in your financial life depending on the level of involvement your bank offers. However, turnover can be high—when a private banker moves to another institution, you’ll have to decide whether to stay with your bank or move with your private banker.
How do I choose one?
Deciding whether to work with a private banker or a wealth manager depends on your needs. If you are looking for financial advice along with the perks that a financial institution will offer an HNWI, you’ll likely want to work with a private banker with the financial institution that holds your money. If you are more interested in wealth management, you should research firms to find a good fit. Be sure to examine the firm’s size, services, and costs as well as any potential wealth manager’s expertise and experience.
While a college degree symbolizes another educational milestone, it may not mean that recent graduates have learned enough to manage their finances well on their own. Colleges typically don’t require students to take a personal finance course, leaving new alumni on their own to figure out budgeting, investing, and how to pay off sometimes staggering student loans.
That’s where a financial planner can step in. Working with a finance professional can help college graduates establish good habits, whether it’s designing and sticking to a budget or investing early in retirement savings. Here are some benefits of working with a financial planner after your college graduation.
Get Off to a Good Start
Figuring out how to manage your finances through trial and error can take years, and errors can be costly. You could quickly find yourself deep in high-interest debt with no savings and high student loan payments without a financial plan in place.
A financial planner can help you make good decisions from the start, which will shield you from developing bad spending and saving habits. You may make big decisions in your 20s, such as buying a car and a house, getting married, and saving for retirement, that will impact you for decades—if not your lifetime. Discussing your long-term goals with your financial planner beforehand can lead to good decisions that will build a solid financial foundation.
Make a Budget
Typically, a financial planner will first help you create a monthly budget that fits your income. If you’re a typical college graduate, you’ll likely leave school with a low bank balance, a higher income than you had while in school, lots of bills, and little inclination to stick to a budget.
That’s where trouble can seep in. Without a budget, we tend to lose track of how much we’re spending, rack up debt, and neglect savings. In the long term, this is not a good strategy for preparing for big financial outlays—such as paying for a house, a postgraduate degree, or travel—down the road.
A financial planner will work with you to create a budget, line by line. You’ll estimate how much you’ll spend monthly on recurring bills, such as your smartphone and rent, and then you’ll see how much is left over for “extras” such as eating out and entertainment. While a budget can feel limiting, getting your spending under control early in your post-college adult life will help you live within your means and avoid extra debt.
Plan for Student Debt Payments
Student debt payments typically don’t kick in until six months after graduation, and if your budget isn’t ready for it, this new monthly bill can be shocking. If your student loans are large, you may find the payment won’t fit into your new monthly budget.
This is where a financial planner can assist. Student loan repayment options can be complex, and you may be eligible to refinance your loans for a lower payment or to apply for a special payment plan or federal loan forgiveness program. Together, you can determine the best strategy for managing your student loans.
Building Your Savings
While retirement may seem a long way away, the earlier you start saving, the bigger payoff you’ll receive later, thanks to compound interest. A financial planner can talk to you about retirement savings options, such as a 401(k) plan or Roth IRA account. With a financial planner’s guidance and understanding of the level of risk you are comfortable with, you can make good investment choices that will build your savings over decades and set you up for a comfortable retirement.
If you have money left over in your monthly budget, a financial planner can help you invest it to build your savings so that you’ll have a financial cushion and a start on funds for big-ticket items such as a house. A financial planner also will work with you to draw up a long-term plan, factoring in your dreams and goals. With a financial strategy in place that includes a budget, savings plan, and retirement plan, your goals will seem more attainable, and you’ll have the tools you need to make good financial decisions.
Managing your own money right after college can be difficult, as you are suddenly juggling a (likely) higher income than you had from a college job, a myriad of financial choices, and the temptation to spend your newfound earnings at will. Enlisting the help of a financial planner will allow you to understand your financial limitations, pay down your debt, and avoid accumulating new debt through irresponsible spending. If you stick to a budget and make informed financial decisions starting in your 20s, you can enjoy decades of financial stability before you reach retirement.
With 2019 over, there’s no better time to build up your retirement savings than now. The arrival of a new year is an excellent opportunity to review your savings plan, especially if you are nearing retirement age.
While it’s always wise to start saving as early as possible, putting away money for retirement is a good move no matter when you start. You can start taking advantage of compounding interest, building your retirement nest egg as much as you can. Many financial advisors stress the importance of these savings, as Social Security will not likely provide a viable retirement income by itself. A retirement savings plan will provide the needed income to cover monthly expenses in retirement.
Here are five smart moves you can make with your retirement savings in 2020.
Save early and often
While Vanguard reports that more millennials are joining 401(k) plans (some thanks to employers’ automatic enrollment programs), many aren’t checking in on their plan’s growth after they enroll. That means they also aren’t increasing their contributions, staying educated about what they’re investing in, or making sure that they aren’t paying high management fees that are taking away from their returns.
It’s smart to open a 401(k) plan when you’re young, but it’s equally important to keep tabs on your account and commit to regular contributions and, if possible, increase your contributions. Ideally, you will save between 10 percent and 15 percent of your income and maximize your employer’s 401(k) match. However, if that’s not possible right now, try a small increase in your contribution this year and increase it by 1 percent every time you receive a raise.
Make saving a habit
Prioritizing retirement savings can be difficult, especially when you’re faced with monthly bills and a budget devoted to paying down expenses. However, to build a strong retirement fund, it’s imperative to save now so you won’t have to play catch-up later. One way to ensure that you’re putting money away each month is to treat your savings contribution as a monthly bill.
If you create a monthly budget, add a line for savings alongside your allocation for electricity, the mortgage payment, and the water bill. Your savings are equally as important, and adding this budget line will prompt you to allocate money each month toward your retirement before spending money on “extras” such as entertainment and vacations.
One way to ensure you’re saving is to set up automatic contributions to your retirement account. That way you’ll consistently contribute every month, and when you get a raise or a bonus, you can make extra or increased contributions.
Begin envisioning your retirement
While the prospect of sleeping in, not working, and having endless days off may seem blissful right now, in reality, many retirees quickly find retirement boring—and their retirement savings may not fund a revised plan that includes travel, shopping, or other expenses.
To make sure that your retirement savings match your retirement plans, think through now how you might spend your time in retirement. Do you want to travel the world? Spend part of the year visiting family and friends? Buy a cabin in the mountains? Take classes at your local community college?
Once you get an idea of what you’d like to do in retirement, you can put together a budget reflecting how much it might cost and check whether your savings are on track to match it. If not, you may want to increase your monthly allocation. Or, you can think of a more affordable way to spend retirement that still will make you happy. Either way, planning your retirement now will guarantee a more fulfilling retirement.
Invest your retirement savings well
Your investment strategies for your retirement fund should change as you age. You might consider investing less aggressively as the years go on, as there won’t be time to recover any losses if the market sinks close to the time you plan to begin withdrawals.
For example, if a lot of your money is tied up in stocks, you may want to move a larger portion of it to bonds. As a general rule to follow, about half of your stock portfolio should be invested in stocks at age 60.
Increase your accounts
While one retirement savings plan is good, more can be even better. If you plan to max out your contribution to your 401(k) plan in 2020, consider opening a Roth IRA account with your tax refund or 2019 bonus. Roth IRA contributions are made post-tax.
However, if you are in a higher tax bracket, a traditional IRA may be a better choice. This option allows you to fund the account before your income is taxed; instead, you’ll pay taxes on withdrawals, when you’ll likely be in a lower tax bracket. This option allows you to postpone—and potentially pay less—in taxes.