COVID-19 is reshaping financial landscapes for many individuals. With 36 million Americans filing for unemployment due to the pandemic, unexpected financial hurdles are prompting significant changes in money management strategies.
People are now forced to rethink how to cover emergency expenses without tapping into 401(k)s, adjust to sudden childcare issues, and navigate delays in retirement planning. Additionally, many are exploring new avenues for income, including potential career shifts they've pondered for years. This situation is compelling individuals to take charge of their finances more than ever. Here's how you can adapt to these changes.
If you lose your job…
Unemployment benefits can provide a cushion if you lose your job. It's also an opportune moment to reevaluate your career path. Consider alternative income sources, whether temporary or long-term. If your finances allow, this could be the ideal time to explore a new profession or even start a business. Taking online courses can facilitate this transition. Establishing a side hustle can diversify your income, making you less reliant on a single paycheck. If you launch your own venture, consider retirement savings options like a SEP or solo 401(k) for tax-efficient growth.
If you lose your health insurance…
Job loss typically results in losing employer-sponsored health coverage. However, you have various options during this critical time. If your spouse has insurance, you might join their plan mid-year. Alternatively, you could continue your employer's plan under COBRA, which can be costly as you'll cover both employer and employee shares. You also have 60 days post-job loss to secure an individual policy through your state marketplace or Healthcare.gov. If your income falls below $49,960 for singles, $67,640 for couples, or $103,000 for a family of four in 2020, you may qualify for significant subsidies. Additionally, if your deductible is at least $1,400 for an individual or $2,800 for a family, consider a health savings account (HSA), offering triple tax advantages.
If your employer stops matching your 401(k) contributions…
In light of COVID-19, many companies are cutting costs by halting matching contributions to 401(k) plans. Regardless, your 401(k) remains a vital component of your financial strategy. Regular contributions can mitigate emotional decision-making and can be advantageous during market fluctuations. If you're in the 22% tax bracket, a $200 contribution only reduces your take-home pay by $156. Without an employer match, consider balancing contributions between a 401(k) and an HSA, especially if you have a high-deductible health plan.
If you need to access cash…
Experiencing job loss or unexpected expenses can be overwhelming. However, options for quick loans or emergency cash are available, especially with new pandemic-related legislation. Ideally, maintain an emergency fund covering at least one year of essential costs to avoid high-interest debt. The CARES Act permits eligible individuals to withdraw up to $100,000 from retirement accounts without incurring a 10% early withdrawal penalty. If tapping into your 401(k), aim to repay the funds to safeguard your retirement savings. Other alternatives include low-interest loans from credit unions or home-equity lines of credit.
If you have childcare challenges…
Jobholders may also face childcare disruptions. With schools and daycare facilities closed, it's crucial to explore tax-efficient ways to cover childcare costs. If your employer offers a dependent-care flexible spending account, consider contributing pre-tax dollars for expenses related to children under 13. Alternatively, claim the child-care tax credit for various expenses incurred while working or searching for work.
If you're worried about investment volatility…
Ensure your investments align with your risk tolerance and timeframe. Avoid knee-jerk reactions by selling stocks during downturns; markets can rebound quickly.
If you need to get back on track for retirement…
If your retirement savings have taken a hit, reconsider your retirement timeline. Working additional years, even part-time or freelance, allows you to delay tapping savings and potentially increase your retirement contributions. This can also postpone Social Security benefits, affecting lifetime payouts.
If you need help with financial planning…
Consider consulting with a qualified financial planner. Opt for a fiduciary advisor who prioritizes your interests without earning commissions on specific products.
