The Pros And Cons of Credit Cards

The Pros And Cons of Credit Cards

“Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying eighteen percent.”

Charlie Munger, Vice-Chairman, Berkshire Hathaway

 

For me, credit cards have always been a double-edged sword, a fight between good and evil, or in Biblical terms, a blessing and a curse. Growing up, my parents predominantly used cash, using their retail business’s checking account to pay bills. I was the first in my family to go to college and the first to have a credit card. My parents celebrated the former, and not so much the latter. They only accepted cash from their customers, refusing to believe in the benefits of the credit card. That’s where I probably get my reluctance to use credit cards instead of cash at times.

They may have been onto something though it may have been something else altogether. My mom, I still believe, may have been irked by the fact that women, on their own, could not get their own cards until the Equal Credit Opportunity Act of 1974  was passed. Before that, women needed to have a man (husband or father) cosign for a credit card. How was it fair that my Dad, not my Mom, the brains behind all our finances, could get a credit card? Just saying why I think my Mom, until the day she died in 2000, never had any interest in a credit card (pardon the pun!).

The Credit Card Landscape

Credit cards are a financial tool. But like buying a new buzz saw, you need to use it with care. Some people collected credit cards like baseball cards when I was growing up. That seems like a formula for disaster to me. Clearly we are not yet a cashless society with nearly 1 in 4 people unable to get approval for a credit card due to lack of credit history or discipline. Roughly 33 million people in the US are unbanked or underbanked, meaning they largely use financial products outside the banking system.

When COVID hit our shores in March 2020, new card applications dropped 40%  from the first week of that March to the last week of the month as compared to the previous month. Inquiries for all kinds of loans–auto and mortgages–dropped substantially as our priorities were shaken to their core.  The irony is that the use of credit cards increased out of necessity due to fear of touching cash on the risk of getting a coronavirus-related infection. That behavior is just another example in an already rich year of strange happenings.

Credit Card Statistics:

 

Advantages of Credit Cards

 

1. Convenience

Compared to cash, credit cards are a convenient financial product. Before COVID, retail businesses were increasingly not accepting cash from customers. Credit cards provide fast payments, transfers between accounts, and withdrawals.

There are far more shopping options with a card. It is easier to make, change, and cancel travel, hotel, and car rental arrangements.  When traveling overseas, credit cards allow you to realize currency conversions automatically.  Let’s face it, it is hard to carry a lot of cash–bills and change– around in your pockets jingling around. That said, I do like window shopping without my wallet so I don’t feel tempted to spend money unnecessarily.

2. Build Up Your Credit

For those who lack credit history, like young people, becoming an authorized user on your parents’ credit card is a rite of passage. This is a good way to build up a credit history so long as your parents’ credit scores are strong. Otherwise, it won’t help your credit situation at all.  Most states do not have minimum ages for your child to become an authorized user. I’d suggest you teach your kids about responsibility in using a card safely and responsibly first.

Getting a new card may be a second chance to improve your credit score. You have missed payments, hurting your credit score in the past. If you are ready to be responsible, you should consider getting a secured card, putting some cash on account. You don’t need a massive number of cards to strengthen your payment history and length of credit history. Understand common credit mistakes and how to avoid them.

Related Post: 6 Ways To Raise Your Credit Score

3. Easy To Track Spending

Reviewing your credit card bills regularly helps you track your spending. It is easy to do (except when you know you spent a lot of money) and an excellent way to improve your financial discipline. Although spending cash is the best way to feel pain immediately, regular examination of the amounts you are spending is a realistic way to correct yourself. The credit bills serve as a receipt or a record of the purchase in the event of making a return.

One particular month, I recall seeing a very high bill with a number of items that seemed uncharacteristic of me. It was a posh store with a great salesperson.  Looking around,  I realized that the dress  “I had to have” was still in the bag with the tags still on along with new shoes. Who did I buy that for? Not me apparently so I returned those things and stayed clear of that salesperson.

4. Automate Your Payments

Paying your bills, especially credit cards, are so much easier when you use the automation feature. Most cards have this feature that you can set on or before the due date so you are not late on your bill payments. Also, consider paying more than once a month if the lower amounts feel better to digest. As payment history accounts for 35% of your credit scores, automating payments is one way to help you not miss the due date.

5. So Many Perks

Having a credit card may entitle you to a host of perks. Typically, use of the card may allow you to earn a percentage of cashback, rewards, airline miles or points, discounts at eligible merchants, restaurants, theaters, hotels, travel insurance, welcome bonuses, early access to tough-to-get tickets, and free museum passes. Before signing up a certain perk, make sure it aligns with your needs. One time I ordered four tickets for Hamilton on Broadway for my family, only to realize they were preview tickets for the opening in LA, 3000 miles away. The issuer reimbursed us and waived the fees.

6. Protections For Consumers, Not Necessarily For Businesses

Credit cards offer several features for consumers. When you lose cash, it is gone forever. The good news is that cash is typically not attached to your personal information like the loss or theft of your credit cards. Some cards provide zero-liability fraud protection. In a fraud situation, just notify your issuer to cancel your card. Alternatively, the issuer can get you a new account number at no charge. Safety is important.

Typically, when you lose your credit card, your losses are capped at $50 so long as you let the issuer know promptly. There may be a higher fee and responsibility for any charges that aren’t yours if you delay reporting it. I once thought I lost my card so I called the card company quickly only to find that my card fell out of my wallet into a nook in my bag. Paying the fee was a fine for a lesson learned to at least look for your card first.

Cards often have spending limits. Occasionally, you may want to lift the limit if you know you may be spending more for an overseas trip, for example, where you plan to shop for jewelry. A cardholder can let their issuer know that they want to “opt-in” to allow for transactions that may put you over your credit limit. You can let them know the specific dates you’ll be traveling. Spending limits are a good feature, especially if you’re prone to overspending.

The Credit CARD Act of 2009 enhanced more protections for consumers that do no apply for businesses. With this law, issuers are required to notify consumers of significant interest rate hikes at least 45 days beforehand. Also, fees and charges, previously hidden, must be better disclosed clearly. There are some other practices that were improved with the CARD Act discussed here. Still, it is always important to read the tiny fine print, especially when it comes to credit cards.

Disadvantages of Credit Cards

 

 

1. Overspending Leads To Higher Debt

Spending beyond your means can be the root of all evil related to your finances. Credit cards enable people to shop impulsively.  Having a card rather than a finite amount of cash gives you the ability to borrow more than you should. This leads to carrying high-cost debt on your balances. This can be overwhelming.

The convenience of using credit cards as compared to cash may encourage higher spending according to studies. In the now-classic MIT study by Drazen Prelec and Duncan Simester, MBA students held an auction to tickets to sporting events. One event was a desirable basketball playoff game and the other was a regularly scheduled baseball game. Those participants encouraged to buy tickets using credit cards spent up to 100% more than those who paid in cash. They called this the credit card premium.

Other studies seem to validate the MIT findings that we tend to spend more with a credit card than cash. For me, spending cash gives me an immediate pain as opposed to a nearly month delay of having to pay my credit card balance.  to me mental accounting bias and overspending

2. Irresponsible Use of Your Credit Card

When you pay your card bill in full each and every month, you are not charged any interest. Your credit card provides a lot of benefits without the pain of paying high-interest costs. Unfortunately, many people just pay the minimum amount due at the end of the month, carrying a balance forward. That is all that is required by the issuers who prefer their cardholders to carry balances that feed these companies.

At an average balance of $3,000 with an average interest rate of 16%, it can take 16 years to pay off that balance at the monthly minimum rate which is roughly 3%-4% using a credit card interest calculator. That assumes that you haven’t used a credit card during those years. It is a vicious cycle. The magical powers of compounding that work so well when investing or saving for retirement works against you when you are paying interest charges on interest accumulated. If you cannot use your card responsibly, you should work hard to reduce your spending. Some people have too many credit cards, maxing out their limits, losing control of their spending.

Watch out for the particularly punitive penalty interest which may be imposed when you are late on your credit card payment. The penalty interest rate could be as high as 29.99%, above your regular interest rate, and may stay in place for a period of time.

3. Lower Your Credit Score

Just as you may be able to raise your credit score, misuse of your credit cards can destroy your score. Missing payments, applying for credit too many times, and using more than 30% limit of your available credit all can hurt your scores. Even closing a credit card account you don’t use will result in a decline in your score. Your credit score reflects on your creditworthiness to lenders, landlords, and other professionals and could impact you negatively.

4. Read The Fine Print

Just like any contract you sign, make sure to read the terms and conditions of the credit cards you are considering. Despite legislation to protect consumers, issuers are well known for hiding information about their perks, fees, charges, and other liabilities that you should know about. In recent years, consumers have been able to compare credit cards more easily. Among my favorite sites are WalletHub, NerdWallet, and CreditCards.com which have a ton of good information on credit card features.

Be aware that if you have a dispute with your card issuer, you are usually subject to mandatory arbitration. This has been relaxed in recent years but is still buried in the terms and conditions. It is one of my pet peeves and a project I assign my law students to look at the fine print. The average consumer can’t fight the legions of arbitration attorneys that support card issuers.

Exercise Financial Discipline By Using These Rules:

  1. Shop wisely for a credit card, finding the perks that most suit you.
  2. Read the terms and conditions carefully even after you made your selection.
  3. Pay your credit card bill in full so you don’t carry a  balance.
  4. Have an ample emergency fund so you don’t put large unforeseen costs on your card.
  5. Spend below your means always and make savings and investing a priority.
  6. Don’t close any credit card. Instead, cut your card in a million pieces or simply put it in a drawer.
  7. If you have multiple cards, decide how to use them for different categories and don’t max out their limits.
  8. Avoid cards with annual fees unless they have important features you will use.
  9. Don’t get addicted to credit cards. Limit the number of cards you have.
  10. When it comes to paying your card bills, automate and don’t procrastinate. The penalty rate is punitive for a reason.
  11. If your child is an authorized user of your credit card, teach them about how to use the card wisely and safely.
  12. Be aware of behavioral biases of spending more when using your credit card instead of cash.
  13. Review your credit card bills for errors, poor judgment on your part, or to correct impulsive spending.
  14.  Once COVID goes away, hopefully soon, use cash for some of your discretionary spending.

 

Final Thoughts

Credit cards serve an important purpose as a financial tool in an increasingly cashless society. Used wisely, the advantages of credit cards will outweigh its disadvantages. Exercise financial discipline in all aspects of money management. We have had our druthers about using credit cards, learned a hard lesson or two.

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Key Financial Concepts When Saving, Investing, and Borrowing

Key Financial Concepts When Saving, Investing, and Borrowing

“Many people take no care of their money till they come nearly to the end of it. And others do just the same with their time.”

Johann Wolfgang Von Goethe

Use Time Value Of Money To Achieve Your Financial Goals

Understanding financial concepts can help you make better decisions. Time and money are inextricably related as in  “Time is money.” A dollar in your pocket today is worth more than a dollar received five years from now. Time value of money is the notion that money has the potential to grow in value over a given period of time. Today’s money can be saved or invested so that it is worth more in the future. Present value relates to what the sum is worth today. On the other hand, the future value is what an investment (or a series of investments) made today will be worth later on.

Earning Simple Interest Is Good

Invest your savings today to have more money tomorrow. The potential for this earnings capacity depends on how the money is invested or interest is paid out.  One way of calculating interest is using the simple interest formula. Here, the principal is set aside while generating income based on the interest rate. So if you had $10,000 in your savings account at 8 percent for four years, you would earn $3,200. However, you can do better by compounding the interest.

Compound Interest Is Far Better In Building Your Wealth

A different and more beneficial way is to earn income through compound interest, closely related to the time value of money. Assuming you don’t withdraw any money, compounding allows you to earn interest on interest on your balance. That is, your principal continues to rise as interest is earned. The frequency of the compounding matters.  More frequent compounding (daily rather than annually) adds incrementally to more money.

Compounding serves as the basis of the time value of money. By adopting good financial habits of saving money, compounding over time is what builds wealth. Instead of earning $3,200 over 4 years at an 8% interest rate, compounding gives $405 more or $3,605 on your initial $10,000 deposit. Over a longer period of time of 40 years, that $10,000 would grow to $217,245. Most of that growth comes from interest earned on interest. Ka-ching!

A Positive Effect On Your Money

Compound interest is one of the most powerful forces of investing. It fuels the urgency to set aside money early for your retirement. This simply means that you are adding interest to the sum of a loan or deposit, or interest on interest. Your balance grows at an increasing rate so long as you don’t withdraw money from your funds. The power of compounding is the basis of everything from your personal savings plan, 529 Savings Plan, retirement, and investment accounts. The earlier you save money, the longer the compounding works for you.

To better illustrate the power of compound interest is the classic question, “what would you rather have, a penny that doubles every day for 30 days or $1,000,000?” And the answer is ….the doubling penny which yields $10,737,418.23. Quite a bit more than the one million dollars. Take a look at our excel spreadsheet here..

Now, it is not reasonable to assume a 100% annual growth rate for any investment annually, let alone on a daily basis.

However, if you save $2,000 per year in an investment account early in your lives at a more reasonable 8% return, and save an additional $500 per month on top of that, over a 35 year period, you could accumulate $1.1 million. Try using a compound interest calculator.

Saving For Retirement Early Beneficial For Growth

The power of compounding interest, linked to the time value of money, will benefit you the most if you save and invest early. Let your earnings accumulate and grow rather than withdraw money from your accounts. It makes a big difference if you start saving for your retirement 10 years later than your friends or if you invest for 10 years and then stop contributing to your 401K retirement account. It is difficult if not impossible to catch up by doubling the amount if you start investing later on.

As a goal, try to contribute to your 401K plan to the maximum level which is $19,500 in 2020.  Some years it may be hard to do, especially when you experiencing a job loss. Resist withdrawing money from your retirement account as there is usually a 10% penalty tax to do so before you turn 59.5 years. As a result of the CARES Act, it is easier to withdraw funds up to $100,000 during 2020 from certain tax-advantaged 401Ks and traditional IRA  accounts without penalty if you are eligible. That said, withdrawing this money will put in a dent into your retirement fund that will be painful later on.

Lottery Winners: Lump Sum Or Annual Payments

There is only a small probability of winning the lottery. However, it uses the time value of money calculations (present value and future value) to decide whether to take the winnings in a lump sum or annual payments. Lottery winners, after the rush of adrenaline, have a choice to make regarding time and money. Most lotteries allow the winner to take a lower lump sum or an annuity. The annuity option is a series of annual payments.

If the jackpot is $100 million, the lottery could arrange for 20 annual payments of $5 million while investing a lump sum to fund those payments to the winner. Assuming a present value of a series of equal payments of $5 million at 6%, they would need to only $57,349,500 to fund the stream.

What Should The Winner Do?

If the winner takes the lump sum payment immediately (setting taxes aside), they would receive cash of $57,349, 500 before taxes. I used a present value of an annuity table finding a multiple of 11.4699 (at 20 years and 6%) multiplying it by $5 million. The savvy winner would have the opportunity to invest the money and take advantage of compound interest. They would have to pay federal taxes and possibly state and local taxes as well.  Most lottery winners do take the lower lump sum payment upfront.  They want to have full access immediately rather than over several years which is fine if they stave off friends and family who often benefit from this sudden wealth.

Choosing the annuity may be better for tax implications than the lump sum. The latter raises separate issues of sudden wealth and risk of overspending. That is for another post, another day. We will get back to more examples of the time and money relationship.

Becoming wealthy is not always a function of investing a lot of money. It is rather the result of investing early, consistently for long periods of time without the pressures of high levels of debt.

The Downside Of Compound Interest

When borrowing money, compound interest works against you. Your lenders are reaping the benefits of earning interest on interest on your loans. Consider this when going for a loan such as a mortgage, student loan, personal loan, and credit cards.

Using credit cards can be particularly detrimental when you carry balances rather than paying the full monthly balance. By merely paying the minimum on your monthly card balance, your debt is ratcheting up quickly with high-cost debt. Most credit cards carry interest rates in the mid-high teens level. Your lenders are channeling the Rolling Stones, “Time is on my side, yes it is..”

Manage Debt Carefully

Let’s say your credit card balance is $5,000 with a 20% interest rate, and you pay only the monthly minimum. The average minimum is usually a small percentage such as 3% of the balance or a flat amount of $25. We ignore this for illustrative purposes. Your interest of $1,000 will be added to your new total of $6,000 and at the end of the second year, you will have debt of $7200, adding interest of $1,200. The debt mushrooms in a negative way, holding you back from paying your debt off. Spend less than you earn. Make savings your priority so you outpace the growth in debt and reduce it to more manageable levels.

Related Post: How To Manage Debt For Better Financial Health

Financial Implications For 30 Year versus 15 Year Mortgage

When buying your home, you are likely going to borrow money for about 80% of the value of a house or an apartment. You will pay less interest when opting for the shorter-term mortgage.

When comparing the different loan maturities on a $300,000 loan:

  • The annual percentage rate (APR) will be higher for the 30-year mortgage than a 15 year one, all else being the same.
  • The monthly mortgage payments will be significantly higher for the 15 year mortgage given the shorter period. If you can afford to pay the higher monthly amount, you are better off with the 15-year mortgage because you are paying less in total interest.
  •  Assuming you have a 720 credit score, the total home price, inclusive of total interest paid and down payment will be lower with a 15-year mortgage loan.
  • The 30 year mortgage is much higher because you are paying interest on your loan longer, so total home price or principal is $375,000 plus $189,622 equalling $564,620.
  • If you opt for a 15 year mortgage, your total home price or principal  is $375,000 ($300,000 loan + $75,000 down payment of 20%) + $76,012 in total interest equals $451,012 for principal and interest.

Rent As An Alternative To Buying Your Home

On the other hand, renting provides flexibility and freedom. Your rent is usually more affordable than home costs, not having to deal with the home’s repair and maintenance, freeing you to use savings to make investments, and not having to worry about potential declining home values. The downside of renting your home is having restrictions to do what you want to make your place more livable. Your landlord could decide to sell the property and require you to move. There is always the risk of having a bad landlord whose actions force you to pick up and leave.

Related Post: A Guide To Buying Or Renting Your Home

 

Rule Of 72: How Long To Double The Principal

This handy formula always reminded be of a card trick. The Rule of 72 is a simplistic formula used to determine how long an investment will take to double given a fixed rate of return. Simply divide the interest rate that the money will earn into the number 72. For example, suppose that you owe $1,000 on a loan and the interest rate you are charged is 20% per year, compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double? The formula for this rule is 72 divided by interest rate or 72/20 and equals 3.6 years.

As mentioned earlier, it is always key to use the magic of compounding in your favor and for money growth, not debt. For other financial ratios like the Rule of 72, read this related post.

Opportunity Costs in Decision Making

The opportunity cost of any decision is the cost or the value of the next best alternative that must be foregone. In our lives, we have many choices that may consider time, money, effort, health, and enjoyment. When we invest in financial assets, we should consider risk, return, safety, and liquidity. We are making tradeoffs between these variables that we balance off of each other. Am I seeking higher returns in my portfolio and able to take on some high yield bonds or am I adverse to such high levels of risk?

When managing money, you may need to make a decision to reduce high cost debt before actively saving and investing. Consider your alternatives and do research to find reasonable options. We have written on How To Make Better Money Tradeoffs here.

Final Thoughts

Time value of money and compound interest are among the most important financial concepts. Understanding these ideas can improve your decision making when managing your finances. Time is money though time is a priceless resource. Use it wisely and more productively.

Thank you for reading! Please visit us for more articles like these and consider subscribing to get our weekly newsletter.

A Silver Lining To The Pandemic

A Silver Lining To The Pandemic

It has been hard to be optimistic as the coronavirus outbreak has devastated many families. We have been forced to change our ways of living in a hurry. Job losses are high and haven’t finished climbing. Small businesses are struggling or having to close. Difficulties vary by socioeconomic class with those of modest means hit the hardest. The gaps in broadband connectivity have become more apparent during the pandemic.

Yet, there may be a silver lining for us whether as individuals or society. In any disaster, silver linings may emerge from the gloom and doom. Find the brightest part of your day even during this crisis. We found 8 positive aspects that may have lasting benefits:

1. Saving Money

Many Americans have reduced their discretionary spending habits as our lifestyle has adapted to the coronavirus outbreak. We stopped going to restaurants, reduced our impulse shopping, and deferred purchases. Many people have paused gym memberships, canceled vacations, used far less gas, and saved on tolls. By not traveling to work daily, I have realized about $1,500 in savings just by working from home.

Lower Discretionary Spending

Retail sales in the US have dropped 16.4% in April. With lower retail sales, US credit card spending fell 40% during March and early April according to JP Morgan. These numbers are not a surprise. On the other hand, spending on essentials is up 20%. This coincides with our experience. By staying home, we probably saved about $1,500 exclusivity on r meals. I have cooked virtually every day for our family of four. Normally, we tend to eat out with friends or family several times a week. Naturally, our grocery bills are higher than during normal times. Overall, we spent less.  I know we are not alone in saving money. According to a Fidelity Market Sentiment study, Americans have lowered discretionary spending by 48% during COVID-19.

The CARES Act Has Provided More Benefits

The CARES Act and other government programs have provided more money for those experiencing financial hardships. For those who lost jobs, there were higher unemployment benefits and stimulus checks. The Act is allowing pauses on student debt and mortgage loans for a few months. Landlords and credit card providers have been more amenable to deferring or modifying their charges. With reduced driving, try to negotiate lower rates on car insurance. You may be able to get to reasonable discounts on other services.

Now maybe a golden opportunity to reset your financial priorities. Try to use some of the savings from reduced spending, added benefits, and pauses in debt for emergency purposes. Put some of these savings to work to reduce your debt. This pandemic took us all by surprise. Build up your emergency fund if you can. A large number (44%) of Americans are boosting their emergency funds.

2. Distance Learning Became More Widespread

The Covid-19 pandemic has proven to be a boon for distance learning as schools of every level were forced to close.  Over one-third of post-secondary students took at least one online class pre-pandemic according to NCES during 2018-2019. Roughly 65% of higher education students, including graduate levels, had not enrolled in any distance education. However, as students were sent home from campuses, online learning platforms were available in a variety of formats. Faculty took the lead in instituting technology to mirror the traditional classroom.

These platforms require two-way communications, content delivery, and permit instructors to assess student work. Formats such as Blackboard Collaborate, Zoom, and Webex supported those needs. Distance learning was a hasty move for many but a great alternative to losing the opportunity for education. As a professor at our community college, I prefer the traditional classroom. However, I was encouraged and motivated by my students’ adaptability to the situation. As a result, I wanted to help them as much as possible given the circumstances.

A Good Experience Given The Circumstances

I found some notable benefits using the online learning environment. The platform was flexible, providing for sharing materials like power points, videos, and other learning materials. Student interactivity would vary but even the shy spoke up more than previously. Learning online requires students to be more self-disciplined. Most students rose to the occasion. More students came on time and chatted more in class discussions. The experience can only improve with better planning for remote learning. With more time, faculty can develop more content conducive to the online platform.

Related Post: The Virtues of Online Learning: A Personal View

Our class met online synchronously. We didn’t have a choice when the coronavirus disrupted our traditional classroom. Synchronous learning means that online classes meet in real-time at a set time. A popular alternative to this is asynchronous online classes which do not occur at the same time. For undergraduate students, I prefer the synchronous mode which provides some structure like the meeting time

Expand Broadband Connectivity

It was easy to empathize with all college students. The abrupt departure from campuses during the middle of the term was frustrating. Many lost their work-study programs,  potential internships, and job interviews. That’s not all. Many students headed to homes lacking broadband connectivity and computers. Lacking the ability to connect to others exists for parts of our student population–Native Americans, rural and poor communities. Previously they depended on schools for their Internet and computer needs. However, even libraries were also closed when they returned home.

To expand connectivity to more people, the FCC has created “Keep Americans Connected.” Hundreds of major broadband providers, companies, and organizations have signed a pledge until June 30th to offset the coronavirus impact on Americans. They will:

  • waive any late fees incurred by residential or small business customers;
  • not terminate service to these customers because of their inability to pay bills due to the pandemic; and
  • open its Wi-Fi hotspots to anyone who needs them.

This will only be a short term measure to fill the broadband gaps that exist for many American communities.

3. Remote Working Became Essential

Prior to the pandemic, there was a lot of employer resistance to allowing employees to work from home. Like distance learning, the need to keep organizations running resulted in more people working from home. The latest Gallup poll reported that 62% of employed Americans say they have worked from home. This is a doubling of the previous rate since mid-March. Of those surveyed, nearly three out of five employees want to continue to do work remotely as lockdowns are removed. However, 41% prefer to return to their workplace.

Both employers and employees have found benefits, such as flexibility, independence, and better engagement. Remote work boosts productivity with employees being 35-40% more productive than at the office. Cost and time savings for the employees and organizations have been realized. Employers will want to continue some of the huge savings from reduced travel, hotels, conferences, car rentals, and meals out with clients. Employees may feel the same way about the inordinate amounts of time spent traveling away from home. Video conferencing appears to have worked well. Fewer face-to-face meetings may be the new normal.

Related Post: Coronavirus: A Tipping Point For Rising Flexible Work Options

4. Telehealth Usage Rises

Telemedicine has been viewed as a technology tool to provide greater health care access to vulnerable populations. However, usage has grown at a slow pace with only 9.6% of consumers using telehealth. Remote consultation is in lieu of a doctor’s office, urgent care, or emergency room according to a JD Power report in 2019. Younger people ages 18-to-24  have used telehealth the most (13.1%). On the other hand, seniors (5.3%) are the least likely to use the service than any other age group. Slow adoption was likely due to a lack of awareness and urgency.

That was then. Things changed dramatically with COVID-19. The health crisis has created not just an awareness but an urgency for patients to turn to telemedicine. Remote consultation has been encouraged by medical professionals who themselves want to remain healthy. Hospitals and urgent care facilities have been overwhelmed and their health care workers have been spread thin by the crisis.

The American Medical Association has updated guidelines for telemedicine in practice to help physicians swiftly ramp up their capabilities to care for patients. During this crisis, states have allowed more flexibility and discretion related to HIPAA Privacy rules.

Those who provide telehealth services report that growth has skyrocketed. There is no doubt that the coronavirus produced a boon for the services given greater awareness and need. People who have non-coronavirus ailments have increasingly used video consultations with doctors rather than going to medical facilities. This growth trend is likely to continue beyond the crisis.

5. Virtual Living Provides Greater Inclusivity

With all of these remote offerings–distance learning, work-at-home, and telehealth–virtual living may provide more inclusivity. Vulnerable populations, such as the poor, ill, disabled, and senior communities, may be able to participate as never before. For many, physical attendance at colleges, work, churches, religious, and cultural institutions may be nearly impossible. On the other hand, increased virtual offerings will make cultural events and facilities more accessible and affordable to an expanded population. These offerings can be limited only by our imagination and include Shakespeare, theatre, dance, museums, opera, and concerts.

The disabled population often needs greater accommodation in the workplace. Increased remote working may provide more opportunities for those who can more easily work from home as technology platforms improve and expand. Virtual living will require better broadband connectivity for all.

6. Finding Environmental Benefits

As a result of the dramatic drop in train, plane, and automobile traveling (my favorite movie!), environmental benefits have been reported globally. An unprecedented decline in emissions has been reported due to reduced oil demand. For the first time in history, US crude prices per barrel dropped to below zero. Oil producers actually paid others to take their barrels away because they did not have enough storage available. Improvements in our environment with reduced pollution have been cited. National Resources Defense Council pointed to some people in India being able to actually see the Himalayas from afar due to less pollution.

As more people stayed home, noise pollution has been lessened. Appreciating nature and wildlife has been a benefit for humanity. The big question is how long will an improved environment remain? It should be for all time as some of us may be experiencing these beauties for the first time. Even China, among the most polluted countries, saw improvements. As a direct effect of coronavirus and the reduced driving and fewer factories in operation, China’s skies became clearer.  Levels of nitrogen dioxide, a pollutant caused by burning fossil fuels, were down as much as 30% over China according to NASA. It remains to be seen if these benefits last as economies open up globally and cars return to the road.

7. FDA’s Accelerated Time For Drug And Testing Approvals

The US Food and Drug Administration  (FDA) has been expediting its review process of diagnostic and antiviral drugs since the COVID-19 pandemic. It has been providing more flexibility to develop and offer tests to combat coronavirus. The FDA’s timeline has shortened as it works with test developers and laboratories. They are using a relaxed standard, Emergency Use Authority (EUA). The EUA allows tests to be made available based on less data.

The FDA has accelerated its drug approval process over the past four decades. Using the “Accelerated Approval” pathway established in 1992, drugs for serious or life-threatening conditions can get a green light from the FDA with less evidence. To some, this may mean weaker evidence and more risk.

However, not all drugs are going on the fast track. The coronavirus event is a perfect example of why the FDA’s accelerated approval process is needed. A 2018 MIT study reported that nearly 14% of all drugs in clinical trial eventually win approval from the FDA. If you ever had a loved one with metastasized cancer, you would know the importance of the faster process providing access to a new treatment to slow tumor growth.

8. Express Gratitude To Your Communities

This coronavirus pandemic has been a difficult event. It is not over yet. Staying home with our families within our town has shined a light on the importance of being part of the community. We recently moved from Manhattan to a small community. During the outbreak, I felt like I had one foot in two different communities. From the 7 pm daily banging of pots and pans for health care workers in NYC to the outpouring of communal concern for shuttered shopkeepers and restaurants, we all are expressing our gratitude for others in our lives.

Expressing gratitude has a number of benefits, all healthy. It certainly beats anger and frustration. Hopefully, this pandemic is a one-time event worthy of sharing with your children and grandchildren.

Final Thoughts

The coronavirus outbreak has been a hardship. However, silver linings can sometimes emerge out of such crises.  As a society, we were forced to go online for learning, work, and health care. The digital divide among certain communities have become more apparent. We need more broadband connectivity to level playing fields across the country. By staying home, we may have realized some savings that can be used to reduce debt and/or be put aside for emergency purposes. Due to the coronavirus, our environment appears to have improved at least temporarily. Finally, let us share our gratitude with so many who paid a higher price to keep us safe.

Thank you for reading! We appreciate you taking the time to do so. If you found value in this post, subscribe to our weekly newsletter and become part of our community.

Coronavirus: Protect Your Finances And Your Future

Coronavirus: Protect Your Finances And Your Future

“When we are no longer able to change a situation, we are challenged to change ourselves.”

Viktor E. Frankl, Man’s Search For Meaning

Our values are tested during a crisis. We have learned that we need to make certain changes to our lives. As such, we have adapted our social relationships, our working lives, distance learningl to preserve our health and that of our communities. Crisis breeds uncertainty which none of us like. We don’t know how long this crisis will last before we can go back to normal. What is certain is that there will be more crises in our future.

To better deal with the anxiety, focus on what you can control and be true to your long term values. Use this time to reflect on what is important to you and your family. Take measure on what you have learned during this crisis about yourself. Some of the adjustments we are making will be transformative. Besides healthy handwashing, maybe you have experienced telemedicine, distance learning or remote working, options that are likely to grow.

Increased Financial Stresses

Many families are realizing greater financial stresses during this pandemic. The economy is in a downfall, financial markets may not yet have bottomed, and job losses are rising.Take some steps to review and strengthen your financial priorities and goals.

After all, April is Financial Literacy month. COVID19 has provided new meanings to our money values. While not all of our goals relate to money, it may be more about what you value. You may need better habits to accomplish your goals. Consider what changes you can make as a result of this crisis.To better achieve our short term and long term financial goals, we need better habits.

7 Steps To Improve Your Finances:

 

 

1. Emergency Fund Is A Necessity

Building an emergency fund for unforeseen events is essential. The coronavirus is a black swan event of major magnitude. A black swan event by its very nature is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. We have had major flu outbreaks but the impact of COVID19 brings more comparisons to the Spanish flu in 1918.

While no one could have predicted this pandemic, we should always have access to liquidity to pay for our basic living expenses. Establish an emergency fund of at least 12 months of your living expenses and learn where to invest it. Your fund should be a big enough cushion to pay your monthly bills and costs such as food, rent or mortgage, utility, health care, car, property taxes, and pet care. Previous guidance of 3-6 months seems woefully inadequate during these times.

This is not wasting assets as some think. Instead, it is preserving your future assets prudently. Without such a fund, you may have to borrow to pay your rent and other basic needs. File for unemployment insurance in your state which has been boosted in your state. Plow any incremental savings into your fund.

2. Make Savings A Habit

Yet we all have excuses as why we don’t need to set up an emergency fund account. You believe you have a stable job, your parents will help you out or you can always use your credit cards. You may not be able to fathom putting one month of savings, let alone the recommended one year of basic living expenses  in an emergency fund. It could simply be that you are procrastinating and intend to have one. Unfortunately, you can’t time your financing needs for the unexpected times you need cash.

Start saving a little at a time. Saving is always a good financial habit. You should budget for 10%-20%  of your income to go into savings. Part of those dollars should go towards unexpected needs. With social distancing (really physical distancing), you are likely to find that you have more savings because of less entertaining, not eating out and canceling vacations.

Life will eventually go back to normal, hopefully soon. Why not put some of those savings into your emergency funds? The rest of thost funds should be distributed to paying down debt, ongoing retirement contributions and careful investing in the market. Here are some ways to save without changing your lifestyle significantly, ” 25 Ways To Save Money And Feel Good About It.”

3. How To Pay Off Debt

As a result of the coronavirus, there may be some help regarding different kinds of consumer debt. Recently, government actions have added some flexibilities for temporary forbearance or payments of student loans, mortgage loans, personal loans, car loans, or possibly credit cards. Additionally, if you own a small business with less than 500 employees there may be benefits for the owners and employees if you abide by restrictions. However, you need to understand what the rules are. For example, there may be mortgage relief associated with the coronavirus. Now would be a good time to refinance your mortgage and othr debt at lower rates.

Check These Resources For Help

However, it is best to take a look at the Consumer Finance Protection Bureau for advice. Take a look at the Small Business Administration or SBA website for their guidance, especially for disaster loans if you are a small business owner. Those who are having trouble paying your bills or loans should review America Saves has a wealth of information here. If you have federal student loans, the government has placed your loan during this emergency into administrative forbearance from mid March 2020 until end of September 2020 with more information here.

Generally, you should adopt a plan to keep your debt levels at manageable levels. I advocate reducing loans with the highest loan rates first. On the other hand, if reducing small amounts of debt works better for  your motivation, then do that.   Automate payments to avoid late payments. Pay your credit card balances in full, not just the minimum. Spend within your means to lessen or eliminate your borrowing needs and avoid having to use your credit cards excessively.

4. Stay Vigilant And Check Your Credit Reports

With every crisis, financial scams increase. Phishing and investment scams rose during the 2008 financial crisis and coronavirus outbreak is no exception.  Scams like phishing involve the sending of emails and texts purporting to be from reputable companies. They are inducing you to provide personal information, like social security numbers, credit card numbers and passwords.

Both the FTC and FDIC have issued alarms to consumers to stay vigilant. Monitor your credit reports to find errors, and to find ways to improve your FICO score. This will help put you in a position to have financial flexibility when needed.

5. Continue Your Retirement Contributions Or 529 Savings Plan

If you lost your job or are on furlough, you may not be able to make the same contributions to your 401K,  Roth IRAs or 529 Savings Plan. If you are able, continue to do so without interpretation even if in smaller amounts during this time. Remember that these accounts benefit from tax-deferments and compound growth. Avoid withdrawing money from these accounts as there may be penalties beyond the loss of growth. Hopefully, we are in a short term crisis and you don’t want to damage your long term growth.

Generally, save for retirement through tax advantaged employer-sponsored benefits. Separately open up an IRA (preferably a Roth IRA) for more retirement savings.

Set up a 529 savings plan as early as possible for your newborn. This can help you and your child avoid borrowing later on for their college tuition.

6. Investing During A Down Market

Does an economic downturn mean you should sell stocks? Not necessarily if you have a long term strategy. Financial markets go through corrections, bull and bear markets. Selling during economic downturns will provide actual rather than unrealized losses. Many times that is the worse time to sell your securities. That said, when stocks do go up, it is a good idea to at least trim some of your holdings in these kind of markets if you are risk intolerant.

Take a look at our stock indices from peak to trough during the Great Recession:

Dates                                  S&P 500                      DJIA                  NASDAQ

10/09/07-Peak                   $1,565.15                 $14,164.53            $2,803. 91

03/09/09-Trough                $ 676.53                   $ 6,547.05             $1,268.64

Percentage %                        -56.8%                     -53.78%                 -54.75%

By mid May 2009, the S&P 500 was up 30%, rising over 60% by year-end 2009. Although you can’t pick the exact bottom of the markets, you can go bargain shopping for stocks that have undergone corrections or are in bear territory. For example, tech stocks have been strong leaders in the market but corrected during US-China on-off trade talks (remember that?).

What Can We Expect

Jobless claims are soaring and will continue for at least several months. The St. Louis Fed has pointed to a 32% unemployment rate by second quarter 2020 based on credible back of the envelope calculations.  Companies are reducing their upcoming earnings forecasts because of  reduced demand. Our economy has been shocked due to disruption but the Fed continues to proactively add liquidity to our markets as the federal government has added fiscal stimulus and likely to add more to our markets.

Could this mean we can bounce back quickly from that wicked unemployment rate and if so, could we miss a stock buying opportunity?  No one has picked the bottom unless they called it retroactively. (Wink, wink). That said, for those who have some available funds, it could be a good time to invest money in stocks so long as you have a long term horizon. Use small amounts and diversify your holdings if you are buying individual stocks. Better yet, research and find some low cost index  S&P 500 funds that mirror the market.

 7. Practice Gratitude More…It Helps Our Spirits And Our Finances

Be thankful for what you have; you’ll end up having more. If you concentrate on what you don’t have, you will never, ever have enough.” Oprah

We still can stay connected during this crisis, if not physically at the moment. Expressing gratitude to loved ones, colleagues and our heroes help us, let alone those who deserve it. Who hasn’t felt moved by strangers helping others, checkout at the grocery store, or stories we are reading on the Internet. We have new sets of heroes to thank such as bus drivers who we usually walk past, doctors and healthcare workers who risking their lives, construction workers and so many more.

  •  Simply smile at what you have in terms of family, friends, a job or career you enjoy.
  • Send old fashioned “thank you” notes to those whom you are grateful to or for having them in your life.
  • Keep up a gratitude journal to save those great moments.
  • Practice saying and thinking about gratefulness in a meaningful way.

I admit that there are times when I focus too much on life’s burdens that feel like they are overwhelming me. Exercising your ability to switch gears to counting your blessings over burdens often works for me. With two teenagers, it can be challenging to have some quiet moments for yourself. However, I find it can work for the good.

Sometimes losing a loved one makes you more grateful. It may run counter to the most difficult experiences. My mother lost her whole immediate family and extended family except for my Uncle before the age of 20. Yet, she was always grateful for her life and that of her brother’s. It gave her the chance to have her own family.

Having a traumatic experience often makes us grateful. We truly are going through a difficult time sharing a common enemy that has no political affiliation, no color, ethnicity, or religion.

Let’s be kind and grateful to each other. By the way, did you know that gratitude can lead to better finances? Really, read about that here.

Final Thoughts

Financial stresses have increased for many Americans as a result of the coronavirus. Clearly, we are entering a period of  an economic downturn and increased uncertainties. It is a good time to focus on what we can control rather than on the uncertainties. As April is Financial Literacy month, we reviewed 7 steps to improve your finances. Think for the long term. Practice gratitude to our loved ones  which helps our spirit and patience. Stay healthy!

We appreciate you taking the time to read our blog and welcome any of your comments and thoughts!

 

 

 

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Why Unemployment Matters

How To Prepare For A Coronavirus-Related Recession

How To Prepare For A Coronavirus-Related Recession

How To Prepare For A Coronavirus-Related Recession

A recession is a more than likely economic outcome caused by coronavirus. The swiftness of the impact of COVID-19 on our communities is unprecedented in modern times. This virus is a serious natural disaster spreading on a global scale. The virus is a pause button on our society.

Its results are not yet showing up in economic indicators.  Latest figures on unemployment remain low at 3.5%. Initial claims for unemployment insurance were down.  That’s because the latest indicators were largely based on February numbers, prior to the virus in the US. Unless you’re in denial, you know a recession is coming. If you are old enough you may recall how bad the economy got in 2008-2009. Fear is a justified feeling though each recession may be different as it is event-driven.

Fed Emergency Action Mirrors Efforts Taken For The Great Recession

At this writing, the Fed cut its benchmark interest rates by a full percentage point to a range of zero to 0.25%. They will also be buying at least $700 billion in Treasury and mortgage bonds. The Fed will be be joining a global coordinated effort with major central banks including Canada, England, Japan, Switzerland and the European Central Bank.

To put this in perspective, the Fed is using a near mirror image of near zero rates and quantative easing that were used during the severe 2008-2009 recession. In a relative short time, this Fed is using its power to lessen impact of virtual shutdown on our economy. We as Americans, as consumers and as the number one economy in the world have not been here before. COVID-19 is the kind of beast that has rattled our financial world. I applaud their action. However, implementation and impact will takes time.

Let’s get back to some basics.

What Is A Recession?

In its simplest terms, a recession is a decline in economic activity involving at least two consecutive quarters. The National Bureau of Economic Research or NBER defines an economic recession as a “significant decline in economic activity spread across the economy lasting more than a few months, normally visible in GDP, real income, employment, industrial production and wholesale-retail sales.”

Recessions can be mild and short like in 2001 when it lasted eight months. On the other hand, they can be  more severe as the Great Recession which lasted 18 months. What typically happens during a recession is this: consumer spending drops impacting businesses. In turn, they are forced to slow or stop hiring and potentially implement layoffs. Unemployment rises and households have difficulties paying bills and their debt.

The Fed’s Monetary Policy

The Federal Reserve has moved fast to lower the fed funds rate and add liquidity into our financial system. By lowering their benchmark, they influence all interest rates. That will result in lowered rates including the business prime rate, loans for mortgages autos and colleges. They look at many economic and inflation indicators—leading, coincident, and lagging–that telegraph where we are relative to typical business cycles. Leading indicators are predictive and occur before changes in economic cycles. They include the S&P 500 index, housing permits, and initial claims of unemployment insurance.

Government And Private Actions On Paid Leave For Workers

It is not just the Fed that is moving to help consumers. On a parallel track, there have been the beginnings of coordinated actions by government with the private sector. Help is needed for their employees and those who own small businesses. Besides the desperate need for available testing, workers without access to paid leave when falling ill or hospitalized experience additional stresses. Access for workers to paid leave varies dramatically with high numbers of people not covered according this table. Large companies offer paid leave but who pays for those who do not have that benefit?

It is difficult for those living paycheck-to-paycheck to make ends meet. Without paid leave, low hourly wage workers, freelance workers and others who are not being paid for any time off when sick. Some emergency packages are being put in place for those in need. Otherwise, some who are ill may take their chances going to work so as not to lose their earnings or job. This poses a nightmare scenario of the virus spreading faster. Social distancing in communities will come at a serious cost but the virus will spread faster without it.

From Bull Market To Bear Market In A Record Time

The impact on our volatile financial markets have been felt deeper and harsher than the many of the other leading indicators. Terms like stock market crash, corrections and bear market emerged in quick succession.  A stock market crash occurs when the market falls 10% from its 52 week peak in a matter of days of trading. On the other hand, a correction in the market is more gradual, with stocks falling 10% from the 52 week high typically over months. Bear markets result after a 20% decline from a 52 week level. This also happens over a number of months. The reaction in the markets to the coronavirus, once it arrived in the US from China, was rapid.

The End Of The Long Bull Market

Here’s how the stock market did in recent weeks illustrating its swift moves.The S& P 500 index used as a market proxy peaked at $3,386.15 on February 19th, declining  to just $2,978.76 on February 19th in six trading days. This a 12.3% drop into solid correction territory. We officially entered a bear market on March 11th when the S&P 500 hit a low of $2,707.22 that day, closing at 2,741.38, ending a 11 year bull market.

Since World War 2, we have had 26 market corrections (not including the latest one) with recoveries taking about 4 months on average. However, if stocks go into bear territory as we are now, there is more pain and it takes more time to recover. During that same timeframe, there have been twelve bear markets averaging a decline of 30% over 14 months,  taking 24 months to recover. The most severe recession was from October 2007 to March 2009, or 18 months. Stocks dropped 57% and took 4 years to recover.

When Will The Markets Bottom?

It is anyone’s guess when the markets decline will bottom. We don’t yet know the severity of the coronvirus spread or its full economic  impact. Hopefully, aggressive Fed action and containment efforts by government, private sector, communities and people will work well. There has been talk of fiscal stimulus that may further soften the downturn.

Here are five possible clues as to when the stock market bottom may be close:

  1. The Fed will be constantly looking at economic indicators to decline, trough and stabilize to signal our recovery. They will take further action, expanding quantative easing similar to what what has been announced just today.
  2. Economists look to the Conference Board Leading Economic Index which is composed of 10 indicators (including the S&P 500 index) that move up or down several months before the economy.
  3. We can look for the number of coronavirus cases to slow outside China. China seems to be recovering. I cheered when I read that Apple Stores are reopening in China.
  4. We have not yet hit chaos in the US, and our virus experience follows Europe, notably in Italy which has been locked down. Coronvirus cases will climb in the US, peak and start to stabilize in the US soon. When it appears the virus is under control, it may be a good time to buy.
  5. Corporate buybacks return with verve. Many companies have a lot of cash but have not activated their repurchases.

You Don’t Have To Wait For A Bottom

When the markets are particularly turbulent, I have used Investor’s Business Daily. They provide charts, volumes, market  upturns, downturns, and follow-through days. A follow-through day indicates a rally attempt has succeeded and the market direction has changed from a correction into a “confirmed uptrend.” It tells you to start gradually buying stocks again. Stock rises need to be accompanied by above average volume for a number of days to confirm a market uptrend.

On down days in the market, I have bought some shares to average down my cost basis. I am a long term investor, not a trader. Like most people, I have found it hard to look at my stocks on a daily basis. I don’t think we are near the bottom but who knows where that is. However, if you are going to own stocks for the long term, you can begin to add to your existing stocks or buy names that were on your previous list but may be at bargain levels.

Steps To Take To Prepare For A Recession

 

1. Save More, Spend Less

You may find it easier to save more during the coronavirus period. By staying closer to home, you are likely not eating out, shopping, going to the theater, concerts, sporting events or movies. True, you can order in or shop online. Use this time to cut down on spending for things that are unnecessary. Put savings to work in your emergency fund.

Make sure you are increasing your liquidity in your savings accounts or money market deposit accounts (MMDA) which are insured by the FDIC. It is not clear how long you may experience less work hours or reduced face-to-face time with clients. We wrote about how it important it is to have an emergency funds in the previous post here. Consider using some of these savings to set up an emergency fund if you don’t have one. It is never too late to start.

 2. Retirement Saving Accounts

You probably noticed a sharp drop if you even dared to look. It may get worse before your accounts look better. If you have a long term horizon before you are going retiring, do little or even nothing. Keep your automatic paycheck contributions in place especially if your employer offers match contributions. That extra money is valuable and through compounding, grows faster. Remember that if you take money out of these accounts that you are counting for later on, you will lose future compounding benefits and maybe even have to pay penalties for early withdrawal and taxes.

Unless you are facing or are about to face financial hardship, avoid drastic changes like a shift to cash especially if retirement is not imminent. Stocks which have been battered should not be sold as they have the greatest upside when it is time for the markets to recover. Bonds, especially high quality bonds like treasuries may be better places to withdraw money from. Investors flocked to these bonds for their safety, selling more risky stocks.

On the other hand, if you are near retirement, your portfolio should already be shifting into more bonds relative to stocks. Check your retirement accounts to see if you have put your money into target date funds which adjust accordingly by age of holder or recipient. Resist withdrawing unless you have an emergency. It is hard to replace these dollars.

3. Refinancing Opportunities

With mortgage rates likely to be further reduced with today’s action by the Fed, don’t wait until the virus outbreak goes away to use them. Consider refinancing your loan if you can get a healthy drop in your rate and/or shorten your term.  If you have been paying your bills on time, your credit may have been improved, enhancing your refinancing abilities.

The higher your credit score the better your new loan terms will be. Consider your budget and what is most appealing to you: a lower interest rate or a shorter term. A lower interest rate will reduce your monthly payments while a shorter term (from 30 year to 15 year term) may raise your monthly amount but you get rid of the loan faster.

4. Buying or Selling Your Home

The National Association of Realtors are seeing reduced home buyer traffic and that is likely to get worse before it improves. That is understandable as “Open Houses” aren’t very appealing in this environment. However, if buying a home was on your list, it is a good time to start house hunting online. The low mortgage rates will be a stimulant for buying your home once the virus is stabilized For sellers, this is a tough time, especially if you are in need of the proceeds of the sale but take some heart that demand will come

5. Paying Off Your Debt

You need to continue to reduce your debt. If you have the opportunity to refinance your mortgage or car loan you should do that now. Remember to pay your credit card balances in full each month. Simply paying the minimum requirement is not enough. Reduce your spending so you can pay your bills in full.

You may have heard that President Trump took some action related to student loans as part of emergency executive actions. He called for a waiver of your student loan interest on federally held student loans “until further notice.” Until it is seen in writing it is a bit unclear. It is not a suspension of monthly loan payments or loan forgiveness. It appears that your monthly payments will remain the same but credited towards the principal amount of your loan rather than waiving all of the interest you owe. This will likely lower the principal amount while they pause some of the interest that will be accrued during virus period. It is good but not as much as had been hoped for.

Positive Takeaways Will Emerge From COVID-19’s Wreckage

The coronavirus has had negative consequences. There are high costs for businesses and their employees not just in the cruise or travel businesses. The financial impacts are spreading to other businesses as well.

While the coronvirus has had negative consequences, here are some positives we are experiencing:

  • Closing of schools and colleges have increased reliance on distance learning. Imagine no more snow days because classes will be held online.
  • Time to learning new skills if you are staying home.
  • Reflection time, goal setting or review your future plans.
  • Heightened awareness about your communities.
  • Appreciation for the businesses and institutions that you depended on that are closed now. Validate their value by shopping or visiting them when the dust clears.
  • Taking  more health precautions in the future when we have minor illnesses around family, friends, acquaintances, and co-workers.
  • Kindness has been increasing in this tough environment. Let’s be thankful for what we have.

This too shall pass.

Final Thoughts

We have been experiencing dramatic times at lightening speed. The stock market fell into bear territory quickly, reacting to the anticipated impact on our economy and communities. The uncertain environment has been taxing in recent weeks signalling an inevitable recession. The Fed has undertaken massive emergency measures to lessen to burden on our economy that has not yet faltered. This post was designed to explain what is going as we grapple with these circumstances in our lives.

As a professor, I am rapidly redesigning my courses for students as we rely on distance learning for rest of the semester. As a mom, I will driving my kids to school to retrieve their books so that they can begin their own virtual learning experience.

This will be our new normal for awhile as many millions will do likewise. I truly wish you good health and happiness. I will continue to post as always. I am anxious to hear how you are doing! Please consider subscribing to our newsletter and our community.

How The Coronavirus May Affect Your Money

How The Coronavirus May Affect Your Money

The coronavirus outbreak has been increasingly weighing on us as we worry about our loved ones’ health. We lack knowledge about  COVID-19 and its transmission. Credible reports say that most cases are mild but 15%-20% of cases fall into the very serious to severe illnesses. Those suspected of having the virus need to be quarantined for 14 days. This is an important measure to prevent spread along with other CDC recommendations.

All of this is leading to disruptions. Reports of tockpiling supplies of surgical masks, hand sanitizers, and  nonperishables along with price gouging are disconcerting. Our financial markets have been significantly volatile with the DJIA rising and falling of over 1,000 points in a couple of days. Clearly, we are bracing for elevated risks to US and global economies, jobs and our investments. Daily, we are hearing about school closings, cancellations of conferences, and trade shows. Some companies in urban areas are allowing their employees to work remotely or move to suburban office campuses.

How DoesThis Outbreak Affect You And Your Money? 7 Takeaways:

 

 

1. The Economic Impact Is Real

We are quickly seeing behavioral changes by consumers in response to headlines. After enjoying a long recovery post-Great Recession and low unemployment, economic uncertainty appears to be moving toward a downturn or recession. As the virus outbreak became more visible in the states, we wrote about the need to better understand economy, market volatility, potential Fed action and how to lessen risks which you can read here. Is the coronavirus a new black swan event? A Black swan theory refers to a surprise event with a major effect. Some think so.

We don’t yet know how troublesome this virus will become. Companies have been reducing their near-term earnings forecasts, largely associated with their businesses. However,  they do not yet have visibility into the longer impact on their companies’ growth. Employees quarantined or illnesses will affect supply. It seems more and more likely there will be shocks to supply and demand from households and businesses, leading to potential job losses.

2. Fed Took Action At First Emergency Meeting Since 2008

This week, the Fed cut rates by half of 1%, bringing down the fed funds rate to 1%-1.25% to contain the impact from COVID-19. It was the Fed’s first emergency meeting and biggest rate cuts since the recession in 2008. It is not yet at the lowest fed funds rate which was near zero, having been reduced from over 5%. Lower interest rates influenced by the Fed typically stimulate the economy, helping to drive up consumer spending.

The Fed wanted to send a reassuring signal that they are being proactive. That’s good news but initially it is not clear how much they can do for demand in the near term. Are we likely to be thinking about buying a house or car when worrying about the virus?  The COVID-19 is an exogenous variable we haven’t experienced recently.

 Other Tools The Fed Can Use

There are more tools available to the Fed in their toolbox. They can reduce rates further though they have less room now to bring them down. They will likely increase their purchasing Treasury securities from banks who will get more liquidity. Some have postulated that the Fed could consider purchasing other securities like municipal bonds or equity securities. That may need require Congressional action. Fed buying of Treasury securities are typical but their yields are miniscule given high demand for safer instruments

3. Take Measures To Stay Healthy

Follow precautions to lessen the risks of contracting the virus. Easier said then done, especially when we lead busy lives and have children who bring tons of germs home regularly. Preparing for the COVID 19 becomes necessary as families travel and gather together for upcoming holidays as reflected in this post by A Dime Saved.

4. Emergency Funds And Emergency Measures

If you have an emergency fund for unforeseen events, coronavirus would be one such event to use this if your job or hours became endangered due to being quarantined or being ill. If you don’t have an emergency fund or are living paycheck-to-paycheck, there may be increased measures for people impacted by this virus. Some states are requiring employers to provide increased hours for sick leave. Cigna was the first insurer in the US to say they would cover coronvirus testing at no charges to patients and waiving co-pays. Others will, no doubt, follow suit. CDC also offering free testing to patients upon doctor’s orders.

Make sure you can pay for your monthly living costs first. Those costs are mortgage, maintenance or rent, utilities (including phones), groceries, and health needs.

Small businesses are at great risk from slowdowns either because of supply chain problems or reduced demand or sick. Congress is adding more resources and will likely put emergency loans in place to ease the risk for households, especially those most vulnerable.

It may be hard to put away money for emergencies in this kind of market. However, you may be surprised to find that you are going out less to restaurants, concerts, sporting events and cutting down on overseas trips. If so, consider using some of this money to set up an emergency fund. It is never too late to start.

5. Review Your 529 Savings And Retirement Saving Accounts

You probably noticed a sharp drop if you even dared to look. It may get worse before your accounts look better. If you have a long term horizon before your children are going to college or you are going retiring, do little or even nothing. Remember that if you take money out of these accounts that you are counting for later on, you will lose future compounding benefits and maybe even have to pay penalties for early withdrawal and taxes.

You may want to check on the mix of your securities. Rebalancing should be done annually as you age. Typically, the younger you are the more risk tolerance you have for equity securities which are of higher risk and provide higher returns than money markets or bonds. You have more years to weather storms like these.

On the other hand, if you are near retirement, your portfolio should already be shifting into more bonds relative to stocks. Check your 529 savings or retirement accounts to see if you have put your money into target rate funds which adjust accordingly by age of holder or recipient. Resist withdrawing unless you have an emergency. It is hard to replace these dollars.

Don’t Stop Adding To Your Accounts Unless You Have To

Your 529 and retirement savings accounts are tax-advantaged which are different than your taxable investment accounts. As such, you can lessen your taxes for investment accounts by using a buy-hold strategy. By holding stocks for at least one year and one day, you will pay taxes at the capital gains rate capped at 20%. This is more tax-efficient than short term trading which is taxed at an ordinary income tax rate. While you may benefit from tax efficiencies, investment accounts are taxable, not tax-advantaged as retirement accounts. Dollars invested into your 401K account come from your pay-check, are tax-deferred, thus reducing your taxes for that year.

Remember to continue to add to retirement accounts regularly. Make sure there are regular withdrawals from your paycheck to your employer-sponsored 401K account. Increase your contribution when you get raises or bonuses so you can earn your company’s contributed match, if offered. Employer matching of your 401K contributions means the company may contribute 50 cents on the dollar up to 6% of your salary each year you contribute. The more you contribute up to the cap, the more you receive in the match. Make sure to contribute to your Roth IRA account to the max.

6. Should You Sell Your Stocks During Downturns?

During the recession, on October 16, 2008, Warren Buffett (we are huge fans of Buffett as you may have already noticed) said,

“Let me be clear on one point. I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

      Warren Buffett

Wouldn’t we all want to know if Warren Buffett is adding to his portfolio currently? Rest assured the optimisic Buffett will be dipping in at some point if stocks trend downward. We recently reviewed his latest letter to his Berkshire Hathaway stockholders. The company is sitting on a rather large cash pile he was hoping to use for elephant-sized acquisition. The company searches for bargains.

Does an economic downturn mean you should sell stocks? Not necessarily if you have a long term strategy. Financial markets go through corrections, bull and bear markets. Selling during economic downturns provide actual rather than unrealized losses. Many times that is the worse time to sell your securities. That said, when stocks do go up, it is a good idea to at least trim some of your holdings in these kind of markets if your risk intolerant.

Take a look at our stock indices from peak to trough during the great recession:

Dates                                  S&P 500                      DJIA                  NASDAQ

10/09/07-Peak                   $1,565.15                 $14,164.53            $2,803. 91

03/09/09-Trough                $ 676.53                   $ 6,547.05             $1,268.64

Percentage %                        -56.8%                     -53.78%                 -54.75%

By mid May, the S&P 500 was up 30%, rising over 60% by year-end 2009. Although you can’t pick the exact bottom of the markets, you can go bargain shopping for stocks that have undergone corrections or are in bear territory. For example, tech stocks have been strong leaders in the market but corrected during US-China on-off trade talks (remember that?) and now with supply chain disruption that begain with China’s virus outbreak.

Investors have been seeking stocks to hedge the coronavirus outbreak. Some of those names—Teladoc Heath, Veeva Systems, Clorox, Zoom, Gilead, Moderna–have been strong performers as investors pick these winners. However, these stocks may have moved up too quickly so check to see if they are trading at rich valuations or wait for pullbacks. Its always worthwhile to have some gold and defensive stocks that pay above average dividends in your portfolio. Look at GLD ETFs or Vanguard Dividend Appreciation ETF which are known for having more stable stocks in the portfolio.

Current indicators point to a weakening sentiment:

  • Gold is at seven year highs.
  • Utilities are at near all time records.
  • 10 year and 30 year Treasuries are sporting all time low yields.
  • Mortgages are at an 8 year Low

 

7. Lower Borrowing Rates May Spur Consumer Spending As Virus Fears Ease

With mortgage rates at their lowest rates in eight years, don’t wait until the virus outbreak goes away to use them. Consider refinancing your loan if you can get a healthy drop in your rate. If you have been paying your bills on time, your credit may have been improved which will further improve your refinancing abilities.

While you may not be going house or car hunting now, low interest rates are appealing when you are borrowing. Mortgages are at their lowest rate in years. If you have been in the market shopping for a car, you may also reap some benefits. Student loan rates may drop as well. Interest rates on credit cards are not likely to go down much. However, we may be using them more to avoid handling germ laden dollar bills. If so, make sure to pay your balances in full and on time. Use your credit cards for convenience, not for a borrowing machine.

Final Thoughts

You can’t control the COVID-19, it is here for the foreseeable future. Hopefully, it will be a distance memory very soon. First, take care of yourself. It may be a painful time money-wise for you. Try not to panic if you don’t need your money right away. However, if you do need liquidity, use your emergency funds for essential living costs. If you aren’t liquid because you are losing hours at work, seek out corporate or government programs for healthcare costs or emergency loans that have been emerging in recent weeks.

Review your savings and investment accounts and see if you need to rebalance your porfolio. This should be done annually regardless.  If you have a long term horizon don’t sell stocks recklessly. Heed Warren Buffett’s words. Those with money needs like college loans or retiring may be tempted to sell but consider the tradeoffs such as withdrawal penalties.

How are you faring during this stressful time? I wish you and your family good health and safety from the virus. How are you preparing. If you are an investor, how do you lessen your risks? Thank you for reading! Consider subscribing to our blog and get some freebies and our weekly newsletter. We would love to hear from you!

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