Nearly three-quarters of people have experienced at least one major financial setback, according to a new study by Ameriprise Financial, but a majority of respondents were able to stage a comeback and put their finances back in order. Have you experienced your own financial setback recently? Whether because of job loss, stock market performance, pay cuts, dependent family members, or other reasons, you’re not alone in finding yourself in a tight spot. Here’s how you can dig out!
What caused your financial distress?
Identifying the root of the problem is the first step towards solving it. There may be one glaring cause, such as a lost job, illness, divorce, or other big life event. Or the root may be less obvious but if you look hard enough you can find the pattern. For example, maybe your childcare costs rose unexpectedly during the pandemic, leading you to chronically spend more than you make and rely on credit cards to cover the difference.
Whatever the answer is, be gentle on yourself during this process. Money can be a big source of shame for people, especially debt and/or an inability to get by. Remember that you’re not alone in facing financial distress, especially after 2020. Whether your financial problems directly resulted from COVID-19 or not, you’re already moving in the right direction by acknowledging the issue and making a plan to resolve it. So take a deep breath and move on to the next step.
Take stock of your current situation.
This step may also trigger feelings of anxiety and shame. To make the process as painless as possible, visit your favorite coffee shop or choose a comfortable place in your home, play feel-good music, etc. You can also choose an inexpensive or free “reward” for yourself afterward such as a favorite meal or guilt-free hour to engage in an activity you enjoy. When you’re ready, assess your finances as follows:
How much cash do you have on hand? This includes current balances from deposit accounts such as checking and savings, as well as any funds in a Health Savings Account or Flexible Spending Account that could be used “like cash” for qualified expenses.
Non-retirement brokerage accounts
Do you have any funds in this type of account? If so, you can make withdrawals without incurring the same penalties that apply to early withdrawals from a retirement account. However, your withdrawal may be subject to a capital gains tax.
While there is typically a penalty on early withdrawals from retirement plans, the CARES Act permitted “expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans … also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan.”
The window for distributions related to COVID-19 closed on December 30, 2020, but keep an eye on the news to see if Congress extends the window.
Additionally, if you have a Roth IRA you can withdraw your contributions tax and penalty-free at any time. Just be careful that you don’t withdraw more than you’ve contributed—if you get into the account’s earnings, you may have to pay income tax on that amount as well as any early withdrawal penalties.
If you have questions about making withdrawals from a retirement account, contact a member of our team for help.
Make note of the value of any physical assets you own such as a house or other properties, cars, antiques, jewelry, etc.
Now we’ll switch from looking at what you have to assessing what you owe. Make a list of your credit accounts and current balances, including any credit cards and lines of credit you have. You may also want to note the interest rate associated with each account if you wish to prioritize paying off your credit balances accordingly. Another option is to consolidate high interest and/or multiple credit accounts with a personal loan or a balance transfer credit card.
Finally, make a list of your loans with the current outstanding balance. This could include student loans, a mortgage loan, car loan, unsecured personal loan, and more. Also, check your credit score to see if you could qualify for a new loan, such as a refinance. For example:
- If you have a federal student loan, the temporary 0% interest and suspension of payments has been extended through at least September 30, 2021.
- If you’re having trouble making payments on any of your loan accounts, consider refinancing or contacting your lender for other options.
- If you have enough equity in your home, you may be able to do a cash out refinance in order to lock in a lower interest rate while also enjoying a lump sum (the difference between what you currently owe and the new loan amount) to help you weather your current financial setback. Contact our mortgage lenders to learn more about refinancing.
Update your budget.
Chances are, whatever financial setback you experienced also crashed your old budget. Take a fresh look at the following questions:
- How much income do you bring in each month?
- What are your monthly bills and essential expenses (such as groceries)?
- How much is left over for discretionary spending, savings, and debt payoff?
- If there is nothing left over or not enough, can you find additional income streams such as a part-time job, selling possessions, etc.?
Write your recovery plan.
Now that you have the basic facts, it’s time to look to the future and plot your financial comeback. Follow these steps to create your own recovery plan:
- Take into account any long-term effects from the financial disaster such as a new alimony or child support bill, ongoing health issues, tax liens, and more.
- Start with a small goal, such as paying off your lowest balance credit card or growing a $1,000 emergency fund.
- Establish a realistic timeline for meeting this goal, based on how much you carve out of your budget to put toward it each month.
- If you want to prioritize debt payoff, start with one account (while making minimum payments on the others) and throw as much extra as you can at the balance each month.
- Don’t forget to contribute to your emergency savings account to prepare for future issues.
- Look for ways to cut back on discretionary spending, such as less eating out.
The First is here to help you recover from a financial setback!
For more than 155 years, The First has been a rock of financial stability in Bucks County–reinvesting all our deposits in local businesses, local mortgages, and local people. Our experienced and friendly team is here to help with personal banking services and a complete menu of Wealth Management Services including financial planning. Let us know how we can help you! Find your nearest location in Warminster, Richboro, Jamison, Langhorne, Levittown, Doylestown, Newtown, Fairless Hills, Wrightstown, Washington Crossing, or New Hope.