April 13, 2020
With unemployment on the rise and many businesses unable to operate, this is a tough financial time for many people. But if you’re fortunate enough to not have your family income reduced during this pandemic, there are some opportunities to protect yourself from a future loss of income and grow your long-term wealth. As former White House Chief of Staff Rahm Emanuel famously said after 2008, “you never want a serious crisis to go to waste.” While this may seem insensitive to those who are currently struggling to pay their bills, taking advantage of this crisis to refortify your finances won’t hurt anyone suffering now but could reduce the likelihood of you and your family suffering down the road. Here are some action steps to consider taking:
1) Manage your investments for the long term. First, don’t panic and cash out of your investments as that could turn a temporary loss into a permanent one if you miss the eventual recovery. Instead, make sure you’re properly diversified according to your time frame and risk tolerance and rebalance your portfolio, which forces you to sell when your investments are priced relatively high and to buy when they’re priced relatively low. As Warren Buffett said when he was asked how to get rich through investing, “…attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Do you think most others are more fearful or greedy right now?
2) Refinance debt. Lower interest rates can provide you with an opportunity to refinance debts you may have. Be sure to do any refinancing while you’re still employed since it will be much harder, if not downright impossible, to do so after a job loss.
3) Find out how much extra money you may have. How much would you normally have spent on things like gas for commuting and dining out, travel, and forms of entertainment that aren’t available with social distancing? How much are you eligible for in stimulus checks? How much can you save each month on federal student loan payments and reduced payments on other debts due to lower interest rates? You may be surprised by how much these all add up.
4) Beef up your emergency fund. If you don’t have enough savings in cash to cover at least 3-6 months of necessary expenses, this should be your first priority. Given some studies suggesting that social distancing may need to last up to 18 months, you may want to increase the length of time your emergency fund covers.
5) Don’t neglect the future. Once you have your foundation in place, you can also save more for longer term goals and invest when most assets are relatively cheap. The extension of the tax deadline to July 15 th means you have until then to make 2019 contributions to IRAs and HSAs as well.
6) Consider converting to Roth. Speaking of retirement accounts, this can be a great time to convert to a Roth account. That’s because lower retirement balances can mean paying taxes on a smaller amount of money when you convert. (If you had or will have a loss of income this year, you may also find yourself in a lower tax bracket.) When your investments rebound, the earnings can then grow to be tax-free after age 59 ½ and 5 years.
7) Harvest Tax Losses. What about investments that are outside of tax-sheltered accounts? You can turn investment lemons into tax lemonade by selling investments at a loss to offset other taxes. Losses in excess can even reduce your ordinary income taxes by up to $3k a year with amounts over $3k carried forward to future years. Just be aware that if you want to reinvest the money, you can’t repurchase the same or an identical investment 30 days before or after you sell it so you’ll need to reinvest it in something similar (but different) at least until after the 30 day period.
You may notice that many, if not all, of these steps are things you should probably be doing anyway. Rahm Emanuel’s second sentence after talking about not wasting a crisis was “And what I mean by that is an opportunity to do things that you think you could not do before.” Whether or not you could take these steps before, now is the time to do so if you can. Don’t let this crisis go to waste.
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