by Dana George | Updated July 17, 2021 - First published on April 17, 2020
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It's impossible to go through something like a pandemic without being changed. Here's how COVID-19 may change your finances.
It may feel as though COVID-19 has knocked the world off its axis. And though we know the pandemic will pass and life will return to a facsimile of routine, it's safe to say that the pandemic will alter us. That's not a bad thing. Some of the best lessons in life are learned in a crisis, as we are challenged by new and anxiety-inducing experiences.
For those who have lost loved ones due to the novel coronavirus, "lessons learned" are cold comfort. Similarly, if you've suffered a job loss or are overwhelmed by financial concerns, it may not be the best time to look for silver linings as it's enough of a struggle to get through each day.
But for millions of others fortunate enough to have recovered or remained healthy and lucky enough to still be working, perhaps we can move forward with a bit more wisdom than we possessed before.
In his book A Walk With Prudence, author Jason Versey writes, "The best education we can ever receive is from the University of Adversity. It's the only institute of learning that rewards us when we fail."
So what will you learn from this semester at the University of Adversity? What changes will you make based upon your experience?
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Winnie Sun is a financial advisor and founding partner of Sun Group Wealth Partners in Southern California. According to Sun, "The people who are going to thrive are proactive right now. They're not going into a cave and getting depressed."
She explained that some business owners are already planning for the next economic downturn, whether it's a recession, another pandemic, or some other crisis.
"It's giving them perspective," she said. "They want to create businesses that are crisis-proof, to create an infrastructure where people can work from home and one that allows them to reduce the amount of space they rent."
Further, Sun advises that we should be doing the same. "We all should be looking at what we're going to cut."
In sharp contrast to the advice given by many of her colleagues, Sun believes that financial planners should focus less on planning for college tuition and retirement -- at least until a family has an emergency fund in place. She recommends having enough money to cover six months' worth of bills, with an extra three months' worth per child. She calls the plan "ambitious" and knows that it's an unrealistic goal for many people. Still, her focus -- particularly during this pandemic -- is on storing away as much as possible.
That's not to say that anyone should take money out of their current investments or stop making regular investments (after all, it's when the market is at its lowest that investors capture the most significant gains). What Sun wants us to do is find ways to build an emergency fund -- either now or before the next crisis arises.
"I heard this morning that there is likely a second wave of coronavirus coming in the fall and winter. As families, we need to prepare ourselves to be sustainable," Sun said.
Sun advises those still working to regularly put a portion of income into an emergency fund -- and anyone receiving a stimulus check to do the same, if possible. The best place for emergency savings, especially during times of economic turmoil, is a savings account.
For those who need to borrow from their retirement accounts, The CARES Act, passed by Congress in response to COVID-19, has made it easier to do. Among the benefits, CARES allows individuals to take up to $100,000 in distributions from an IRA or qualified retirement plan without having to pay the 10% early distribution penalty (normally imposed on those under the age of 59 ½) and giving the borrower three years to pay associated taxes. Still, in order to reap the full benefits of "buying and holding" and avoid falling short when you do retire, borrowing from your retirement fund should be considered only as a last resort.
Sun sees this time as an opportunity for us all to get our priorities in order. "It will show people what they're comfortable living without and what they really need," she said. "We don't need a lot of things we thought we needed in the past. We don't need a bigger cell phone plan, and we don't need Netflix. If we embrace the situation, this is a great opportunity to reduce spending, then add things back as you need them vs. when you want them."
An excellent way to take inventory of "needs" vs. "wants" is to create a monthly budget. First, list only the bills that are necessary, like mortgage, rent, medications, groceries, and utility bills. Add them together. This number is your "bottom line," the minimum amount of money you need. On another sheet of paper, list the extra expenses that have become part of your life, like cable and cell phone plans with all the bells and whistles, eating out, alcohol, streaming services, and unnecessary online purchases. Add those expenses up and decide if the luxuries are worth sleepless nights concerned about whether you can pay your bills during times of economic hardship. Finally, ask yourself if you can wait until you have a fully funded emergency fund before you add some of those extras back into your life.
There is no doubt that COVID-19 has been a humbling experience that left many of us feeling unprepared. For those fortunate enough to get through the pandemic relatively unscathed, the experience may make us recalibrate how we look at life and money. It may remind us of what truly matters and nudge us to appreciate each moment. If nothing else, COVID-19 has jolted us with the realization that bad things do happen. It's up to us to prepare for them.
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