I need to prepare
I’m anxious about the possible future impact on my finances and want to take steps now to prepare.
Step 1: Create a crisis budget
A crisis budget is a listing of the essential monthly expenses that you can’t avoid when a crisis hits, such as housing, food and insurance premiums. Anyone who hasn’t yet reached financial independence needs a crisis budget – this can help you navigate many life scenarios, including non-crisis situations such as parental leave or a sabbatical.
Step 2: Bulk up savings
While we wait out the COVID-19 crisis, there are ample opportunities to manage cash flow in a way that can help you build up your savings. The more you have in cash if/when you experience a lay-off or income disruption, the less stressful such an event will be on your finances. Here are some ideas to fatten up your savings account.
Step 3: Pay off or refinance high-interest rate debt
This step may seem in conflict with step 2, but it’s best to think of it as both/and rather than either/or. Ideally, you’d work to pay off any credit card or other high interest (6%+) debt, but if that’s not realistic, it can make sense to refinance if possible. Since rates are near 0% right now, you may be able to refinance debt, which would decrease the total cost of any debt you may have, but could also decrease your required payments if you need to lower your obligations. If nothing else, lowering the interest on any debt you’re carrying will lower the impact of any need to pull back on accelerated pay-off plans.
Step 4: Delay large purchases if possible
Many of us have already had to adjust some of our life plans due to the COVID-19 pandemic – canceled vacations, postponed weddings and even graduation celebrations being moved online are all some of the sacrifices we’ve had to make in order to keep our social distance and help slow the spread of the virus. If our economy ends up taking a more long-lasting downturn even after the limits on large gatherings are eased, then we may need to make more of those tough choices out of a need to preserve cash.
Step 5: Look for opportunities to save for longer-term goals
Once you’ve ensured that your financial foundation is set (you have 6 months of essential expenses in savings and you’ve paid off high-interest rate debt), you will have some breathing room to continue working toward longer-term goals. Should you end up out of work or facing reduced income, you can quickly pare back these plans as needed. In the meantime, there is actually opportunity to make significant progress toward future goals if you have the financial capacity.
© 2020 Financial Finesse, Inc.
All content is for informational purposes only and should never be considered, conveyed, or shared as legal, tax, investment, or financial advice under any circumstance.