How To Handle A Sudden Drop In Household Income
/The COVID-19 pandemic has changed our world.
Employees are working from home. Students are attending school online. Face masks have become best-sellers on Amazon. And stores with everyday items like hand sanitizer, toilet paper and eggs in stock have replaced bars and restaurants as the hot spots in town.
While these changes have altered the way we live—at least for now—the biggest financial impact has stemmed from the closure of non-essential businesses.
As a result, more than 40 million American workers have been either laid off or furloughed by their employers1, driving the U.S. to its highest unemployment rate since the Great Depression2.
It’s an unnerving turn of events, considering we were at a 50-year-low unemployment rate of 3.5% a few months ago2. With the unemployment rate now up to 24.9%, experts predict it could soar even higher in the near future3.
Nine ways to take charge of your finances
Even when businesses reopen, it could be months, if not years, before the economy fully recovers. For those affected, a sudden drop in monthly household income adds more tension to an already stressful situation.
If you’re among the laid off or furloughed employees dealing with a sudden drop in your monthly household income, you may have a flurry of questions racing through your mind: What will I do for income? How will I pay my bills? What do I do about benefits? What if I get sick with COVID-19 ... or one of my loved ones? With so many businesses closed, how will I find work?
First, take a deep breath. The pandemic will end, the economy will recover, and life will return to normal. In the meantime, there are many steps you can take right away to put yourself in a better financial position in the short term.
1 - Negotiate your severance package
If your employer provided you with a severance package, don’t be afraid to negotiate for a better offer, especially if you’ve been a loyal employee for many years and have a solid work record. Here are a few items to discuss with your employer if you decide to negotiate their original offer:
· Ask for more money – Request an increase to the payout amount, a planned bonus you were expecting, or unused paid time off or sick leave.
· Keep equipment – If your company gave you equipment to use while employed, ask if you can keep it or buy it at a discount. Items like cell phones, computers and printers will be helpful as you hunt for your next job.
· Use company office space – Ask to use your employer’s office space and equipment as you seek new employment. This could be extremely helpful if you lack a printer at home to produce copies of your resume.
· Request outplacement services – Your company may be willing to pay for outplacement services. This resource could reduce the time it takes you to find a new job.
· Extend insurance benefits – Find out if your company can extend your benefits for a few months. This will provide some peace of mind as you seek new employment. It may also save you money since you won’t have to start paying expensive insurance premiums right away.
· Seek a recommendation – Ask if your employer would be willing to write a favorable recommendation for you, which could help you get your next job.
Throughout the process, strive to remain professional. This will allow you to preserve your reputation in case you cross paths with colleagues in the future. You may also want to use your employer as a reference when you start job hunting, so staying on good terms is a smart move.
2 - Stop discretionary spending
Take a look at your budget and separate essential from non-essential spending. Then work through your non-essential list to see where you can make cuts. Some areas to look at include:
· Dining - Were you eating out three nights a week at $20 a meal? Hit the grocery store instead and start cooking at home.
· Phone service - Are you spending $100 or more on cell phone service? Move down to a cheaper plan with less data. Or call around to find out who offers a better deal.
· Entertainment – Do you hold season tickets to your local theater, opera house or sports team? Are you a member of a country club? Consider suspending your payments for the time being.
You may also want to reduce your spending on magazine subscriptions, cable TV service, landscaping fees, travel and other expenses that aren’t critical.
3 - Apply for unemployment
As soon as you’re let go, you can apply for unemployment. With new government assistance programs, you may even be eligible to receive an extra $600 on top of your regular weekly benefits through the end of July. In addition, the California’s normal weekly income-based payout will be extended from 26 weeks to 39 weeks of pay.
If you’ve never applied for unemployment benefits before, it can be a confusing process. You can get started here: https://www.edd.ca.gov/Unemployment/UI_Online.htm.
4 – Gauge your current financial situation
One of the most important steps is to get a handle on where you stand financially. Add up all your income sources and expenses from now until the end of the year. Then schedule a video conference or phone call with your financial advisor to review this, along with your current investments and financial holdings. This exercise can help you identify ways to stay afloat until you find your next job.
To help you get started, here’s a list of items to consider as you assess your budgetary needs:
Income
Calculate all your direct sources of potential income that you can count on this year.
· Vacation / sick time paid out
· Severance package
· Bonuses and stock options
· Tax refunds
· Unemployment
· Spouse’s income
· CARES Act government bonus of $1,200 per person, plus $500 per dependent (under 17)
o Check out this Forbes article to learn more about CARES Act stimulus checks: https://www.forbes.com/sites/zackfriedman/2020/04/13/stimulus-check-everything-need-know/#4fce8385254f
Emergency funds
Tally all your savings and investments to identify income sources you could tap if your unemployment becomes long term.
· Checking and savings accounts
· Money in taxable brokerage accounts
· Roth IRAs-amounts contributed (the basis)can be drawn out before age 59 ½ penalty-free
· 401(k) – in certain situations, you can withdraw $100,000 for hardship and pay it back in 2021-2022
Debts
As you compile these, be sure to note what rate you’re currently paying and how many years remain on your loans.
· Mortgage and car loans
· School loans
· Credit cards
o Credit card debt should be handled like your “hair is on fire”.
o Consider 0% balance transfer options if unable to pay off cards in the near term.
5 - Assess your insurance options
Being without health insurance during a pandemic is a scary notion. Make it a priority to transfer your coverage as soon as possible, so you’re covered should you or a loved one become sick. Be sure to assess all your options before signing up with an insurance provider. For Californians, two of the most popular options to consider are:
· COBRA health coverage – This allows you to continue on your current health care plan, and you can apply up to 60 days after the day of termination. Premiums will likely be higher than those you paid through your company plan, so take that into account as you create your budget.
· Covered California marketplace – In California, Covered California lets you shop for private, brand-name health insurance. For families of four making less than $94,000 per year, you may be able to get significant government help to pay for it. Coverage options include medical, vision, dental and prescriptions. Learn more here: https://www.coveredca.com/.
6 - Shrink your spending and monthly cashflow needs
When you track your spending, it’s easier to see where you can make cuts. Use credit card and checking statements, a spreadsheet or online services like mint.com to get organized. Then take action to lower your spending, based on your individual needs. Here are some examples
· Reduce or end car payments - If you have monthly car loan payments, you may be able to save money by selling your current car and replacing it with a used, but reliable model that costs less. To determine if this move makes sense for you, assess the vehicle type and number of loan payments you have left.
· Shop smarter - Save money on groceries by shopping at low-cost stores like Walmart or buying in bulk at Costco. Err on the side of healthier items, staying away from costly meat and alcohol products. Extend your savings by loading up your pantry, cooking from scratch, planning meals, and shopping from a list versus splurge buying.
· Avoid major purchases - Now is probably not the best time to buy a new home or car. Back burner these purchases until you’re in a stronger financial position.
· Rebid service providers - When money is tight, call your service providers—cell phone, cable, car insurance, internet channels—to see what they can do to help. They may be able to give you a promotional discount or offer an alternate plan that will reduce your monthly bill.
· Review tax payments - Work with your CPA to assess quarterly estimated payments to see if there are ways to reduce or eliminate them.
7 - Earn money without affecting your unemployment
You can make a few extra dollars without sacrificing your unemployment benefits by selling unused items, applying for credit card bonuses, and going on a “treasure hunt” at home. (You never know what you’ll find in those couch cushions!)
Some of my clients have added up to $4,000 to their savings in a single year with the following ideas. See below for an estimate of possible earnings.
· Sell unused items at garage sales or on eBay / Craigslist .............................................. $1,000
· Search for your unclaimed property on unclaimed.org, Credit Karma .......................$450
o Unclaimed property may come in the form of dormant bank accounts, old stock certificates, uncollected insurance checks, etc.
· Get cash back bonuses on your credit cards.................................................................……. $720
o Citi Double Cash Card – 2% back
o Capital One® Spark® Business Card – 2% cash back on purchases
· Apply for credit card bonuses and spend required amount in early months ...........$450
o Capital One Quicksilver® Card - $150 bonus with $0 annual fee
o American Express Blue Cash Everyday® card - $150 bonus with no annual fee
o Chase Ink Business Card - $500 – no annual fee
o Bank of America Cash Rewards card - $200 – no annual fee
· Search your house for cash and coins (couch, coat pockets, drawers)........................$100
· Sell gold or silver jewelry you no longer wear or need to Cash for Gold USA..........…$200
· Put cash savings in a high-yielding money market account............................................ $1,200
o Target one that yields at least 1.5% (Example: 1.5% x $80,000 = $1,200 per year)
o Shop best money market accounts here: https://www.bankrate.com/banking/money-market/rates/
8 – Apply for a home equity line of credit
When you’re short on funds, securing a home equity line of credit gives you access to money to cover expenses. It acts like a credit card with a much lower interest rate, and you withdraw money as you need it. The downside is that it uses your home as collateral, so if you default, the lender can foreclose on your home. Learn more here: https://www.debt.org/real-estate/mortgages/home-equity-line-of-credit/
9 - Avoid dipping into retirement savings
While losing your job is a “qualifying financial hardship” that would allow you to withdraw your 401(k) funds without penalty, it’s not recommended. If you dip into your retirement savings early, you might not have enough money to live on in your golden years. That’s because you’ll lose out on the compounded interest and earnings you could have had if you’d left the money in your account.
Strengthen your financial position now
None of us know how long the current economic decline will last. So don’t wait! Place yourself in a stronger financial position now, so you’ll be able to survive the downturn if recovery takes longer than expected.
To do that, follow the steps outlined above, taking the time to assess how much you truly need to survive. You may think you can’t live without Netflix, your unlimited cell phone service or weekly meals from your favorite restaurant, but you may have to if you want to safeguard your savings until you’re once again gainfully employed.
In the meantime, feel free to reach out to me if you have any questions or would like to schedule a financial review. I’m here for you!
Capital One, Savor and Spark are the trademarks of Capital One Financial Corporation.
References:
1 – Lambert, Lance. (May 7, 2020.) Fortune.com. “Real unemployment rate soars past 24.9%—and the U.S. has now lost 33.5 million jobs.” Retrieved from https://fortune.com/2020/05/07/unemployment-33-million-coronavirus/.
2 – Kelly, Jack. (May 8, 2020.) Forbes.com. “U.S. Unemployment Is At Its Highest Rate Since The Great Depression At 14.7%—With 20.5 Million More Jobs Lost In April.” Retrieved from https://www.forbes.com/sites/jackkelly/2020/05/08/us-unemployment-is-at-its-highest-rate-since-the-great-depression-at-147-with-205-million-more-jobs-lost-in-april/#2eb8fee6656d.
3 – Soergel, Andrew. (March 23, 2020.) U.S. News and World Report. “Fed Official Warns of 30% Unemployment.” Retrieved from https://www.usnews.com/news/economy/articles/2020-03-23/fed-official-unemployment-could-hit-30-as-coronavirus-slams-economy.
