by Kailey Hagen | Updated July 17, 2021 - First published on March 19, 2020
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We don't know how much worse this will get, so we need to prepare now.
I've lost count of how many times I've thought to myself, "I never expected to live through anything like this," over the last couple of weeks. Stores have been cleaned out, sport activities have shut down, schools are closed, and the whole nation -- the whole world, really -- has been whipped into a panic the likes of which most of us have never seen.
One of the most devastating impacts of the COVID-19 pandemic so far has been the tens of thousands of Americans forced out of their jobs as businesses close in the name of social distancing. It's possible we haven't seen the worst of that yet. That makes preparation all the more important, and I'm not just talking about stocking up on supplies. The most important thing you can have at your disposal right now is an emergency fund. Here's what you need and how you can start building one.
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Conventional wisdom says we should all have emergency funds containing enough money to cover three to six months' worth of living expenses. It's up to you to decide which expenses to include in your calculations. You can limit your emergency fund to essentials and ditch extras, like streaming services. But know that if you're forced to rely upon your emergency fund later, you'll have to cancel these services to make ends meet. Or you can build them into your emergency fund budget from the start.
Part of what makes the current situation so concerning is that we don't know how long it will last. Some people have already lost their incomes, and this could still go on for months. Once the COVID-19 threat has passed, it might take longer still to get the economy back on track. Given all of this uncertainty, it's best to err on the side of caution and build an emergency fund that could last you for six months, if possible.
You should also make sure that your emergency fund contains at least enough money to cover your health insurance deductible, unless you're saving for this in a health savings account (HSA). If you need to be hospitalized for COVID-19 or you have to visit the doctor for some other reason, you don't want to worry about how you're going to pay for it.
Building an emergency fund isn't easy at the best of times, and it may be especially difficult now if you've already lost your job. You might be able to jumpstart your emergency fund with your tax refund, if you're expecting one this year. Work on filing your taxes as soon as possible if you haven't done so already so you can get your refund sooner. Don't spend this money -- keep this money in your bank account in case you need it to cover your expenses over the next few months.
You should also reduce your spending to just the essentials for the time being, which may not be as difficult as you'd think because many restaurants, movie theaters, bars, and sports arenas will be closed. Put all of that extra cash into an emergency fund. You can also look for ways to reduce your essential costs, like using coupons at the grocery store and setting your thermostat a few degrees lower than normal to conserve energy costs.
If you find yourself out of the job due to COVID-19, you may be able to claim unemployment, which could reduce the blow to your finances. This won't replace all of your normal income, but it will give you some money every month so you don't need to drain your emergency fund as quickly.
The Federal Reserve has slashed interest rates, so now is also a good time to refinance your loans. This could get you a lower monthly payment, which would give you a little more breathing room in your budget. You'll have to pay new closing costs, though, so weigh these against the potential savings before deciding if it's the right move for you.
If you're out of work but don't feel the need to self-isolate at home, you can seek out a new part- or full-time job. Many grocery stores and some online retailers, like Amazon, are hiring right now to keep up with the extra demand caused by millions of people stocking up on supplies. You could also seek out other side hustles, like delivering food from takeout restaurants.
A personal loan is another option if you're struggling to make ends meet. Personal loans usually have higher interest rates than mortgages or car loans, but they are much more affordable than credit card debt or payday loans. Plus, rates are lower than normal right now since the Federal Reserve lowered its rates. Personal loans have a regular monthly payment, so you don't have to worry about your balance ballooning out of control.
We're living through an unprecedented moment in history and we don't yet know how this story is going to end. In times like these, the old adage rings true: Hope for the best, but prepare for the worst. If you don't already have an emergency fund, do your best to build one so that all you and your family have to worry about is staying safe.
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