January 07, 2021
In the coming weeks many households will likely be getting some financial help from Washington. A new round of stimulus checks and a supplemental federal unemployment benefit was finalized in late December. There’s also the possibility that many households with college loans may be getting a big break, as the Biden administration is considering student loan debt relief. And we’re also heading into federal tax filing season. Last year most filers received a refund, and the average was more than $2,500.
For those of you whose households are struggling through unemployment or have less income right now, I know any extra money coming in will be needed for essentials. I only wish the assistance for those most in need had been more substantial.
But for those of you who will see a boost in household cash flow that you don’t need to cover essentials, I sure hope you have a formal plan for how you will use the extra money.
I want to repeat advice I have been giving ever since the pandemic began: I would prefer you put your emergency fund ahead of paying down credit card debt. You must, must, must pay at least the minimum due on every credit card bill. But as much as I hate high-rate credit card debt, I hate the thought of your household being financially vulnerable even more. An emergency fund of at least eight months of living expenses (and ideally as much as one year) is the best way to be able to take care of yourself whenever the world throws you a serious curveball. So for now, consider paying the minimum on your credit card bills and using any extra income to build up your emergency fund.
And I can’t overstate how important it is to hatch a plan for the possibility of having student loan debt forgiven. To be clear, right now we don’t know if it will happen. But that’s the perfect time to strategize what you will do if you no longer have a $200, $300, $400 monthly payment.
That is a serious amount of money. My advice is that at least 80% should be directed to needs, not wants.
Starting with an emergency fund.
For those of you living at home who want to move out on your own, you can likely save up a security deposit in just a few months. And if you are working and haven’t yet started saving for retirement, this is the year you open a Roth IRA. Do you hear me?
Don’t blow this. You can’t tell me you can’t afford any of that. The whole point is that you have been making the monthly payments on your student loans. If you get any relief, you have an amazing opportunity to redirect that monthly payment to building financial security.
And I challenge everyone to come up with a plan for what they will do with a tax refund. Right now, without hesitation or thinking for more than 20 seconds, answer this question: “What’s the one financial step you’d love to take that would make you feel less stressed?” If I were you, that’s the goal I would focus on when your tax refund hits your bank account.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.