Have you ever felt like you could reach your financial goals if you just buckled down and did not spend money for a certain amount of time? With travel and opportunities to dine out limited, quarantine presents an opportunity to save some extra money if you are able to do so. Those who have had their income impacted can refer to this page. For those who are still getting their regular income, you may have a little bit more cash to work with at the end of every month to help reach your goals. Here are a few steps to seize this occasion.
Reacquaint yourself with your spending plan considering the current environment
To make the most of any surplus, you need to know how much there is and for how long it will last. One of my colleagues commented that she knew that she was spending more on things like groceries but her overall cash flow was less tight. By tracking your spending, you can anticipate if this is a short-term or long-term cash flow savings.
What’s different for the foreseeable future?
- Working from home: If you are working from home for the foreseeable future, expenses on fuel, work attire, dry cleaning, dine-out lunches, and the occasional happy hour are likely curtailed. Use a spending tracker like Mint to determine just how much you are saving right now. Also, keep in mind that your utility bills may be higher from running air conditioning or heat all day when you would have normally been at work.
- Childcare: Childcare may be permanently changed from daycare to some hybrid of parents and an occasional sitter watching the kids.
- One-time savings: You may have had to scale back those summer plans. So, instead of buying plane tickets and a hotel, you may have settled for renting a van and an Airbnb. Summer camps may be canceled or significantly scaled back.
- Payment assistance or payment deferrals: Have you received any rent or debt payment deferrals as a result of the pandemic? One example would be the automatic forbearance offered to those who have federal student loans.
- Unemployment compensation: Your income may have seen a temporary bump if you were laid off because your unemployment benefit may have been more than your normal compensation.
If you find you have extra money what do you do with it?
Increase emergency savings: This situation has reaffirmed the importance of emergency savings. Even if you were not radically affected by the initial economic downturn, the long-term ramifications may reverberate through the economy for months if not years to come. Use those extra dollars to build up a cash cushion. You can start with a short-term goal of $1,000. A fully-funded emergency fund contains 3-6 months of living expenses.
401k Savings: Be sure you are contributing to your 401k up to the match. The current market volatility makes it a great time to take advantage of dollar-cost averaging.
Saving for goals: Can you use this time to accelerate the savings timeline for upcoming goals? Were you already hoping to pay off some debt or save for a home? This is your chance. If you have high-interest-rate debt (Interest greater than 6%), you can save yourself significant interest expense in the long run by paying it down now. If you are saving for a large purchase like a home, setting aside more now can help you purchase sooner and possibly position yourself to take advantage of these historically low interest rates.
Long-term goals: Once you have set aside what you need to claim your short- and medium-term goals and you still have extra cash left over, then it makes sense to think long term. Maxing out your 401k contributions can help with taxes today and build up your retirement nest egg. Are there stocks that you have your eye on given the most recent shakeup in the market? Have you considered investing in real estate as an alternative to your traditional savings? Once you have checked off the foundational principals of building up your savings and paying off debt, this can be an excellent opportunity to take a calculated risk.