Leakage: five fundamentals of financial recovery
By Aaron Leak
The COVID-19 public health crisis has triggered a financial crisis for many individuals and families. Whether their pain was caused by time off, layoffs or pay cuts, people have been held back from meeting their monthly obligations and progressing towards their long-term financial goals.
Now that vaccines are helping the United States get closer to normal and more people are finding jobs, the recovery can be a slow process. But there are simple steps people can take to get back on track and stay on a solid financial footing.
The key to regaining lost ground and fully recovering is making sure you put the fundamental pieces in place.
One of the challenges is figuring out how to do it in a context of continued uncertainty with the economy. But the most important thing is to have the best control over all the factors in your financial situation.
Here are some steps to financial recovery:
• Find out about assistance programs.
Many eligible people did not seek out help such as unemployment benefits, credit card hardship programs, and the paycheck protection program, which is available to self-employed workers and entrepreneurs as well as to small businesses. It is important that people understand what is available to them.
Some don’t think they qualify when they do, or they feel like they are a burden, or they didn’t think the pandemic would last that long.
• Refine your budget.
Sitting in their house for much of the year forced people to take a critical and honest look at their finances and ask the question, “What am I doing that’s costing me so much money?” A complete analysis begins with a thorough analysis of all monthly expenses and bills and the elimination of bad spending habits and things they may be without.
This breakdown of costs helps to develop a reasonable budget that creates more room for savings, debt repayment and investment.
• Focus on savings.
The pandemic has revealed how many people did not have enough savings for an emergency. Having an emergency fund is essential. You need a minimum of three months of expenses saved, but ideally enough money to get you through a full year. If you return to work, take some of the money you cut from your monthly expenses each month and build your emergency fund.
• Know your 401 (k) options.
If you are laid off or laid off but leave your 401 (k) with the company, you may be able to take out a loan or withdrawal due to the pandemic. This or cashing in your 401 (k) should be a last option as it can jeopardize your retirement nest egg.
After the 2008 financial crisis, those who stayed in the market experienced a financial recovery from their losses. Another option is to transfer a 401 (k) to an IRA account. This offers many other choices for growing your money, as an IRA can be a mutual fund, an annuity, a CD, or almost any other type of financial instrument.
• Refinance your home.
The value of the house is similar to another emergency fund. The equity in your home doesn’t do anything for you unless you use it.
Whether it’s a home equity line of credit or refinancing and withdrawing money when interest rates are low, either could be a good option.
Embracing a new level of priorities and discipline will help people make better financial decisions.
Aaron Leak has 16 years of experience in the financial industry and is the founder of ECL Private Wealth Management.