May 28, 2020
Many of you are writing in to tell me that your lenders have contacted you with offers to temporarily suspend your monthly loan payment during this recent crisis. A common question I get is from people who still have the income to continue making the payments, but are wondering if it makes sense to suspend the payments anyway.
The key consideration is how the lender expects you to make up for the skipped payments. Some expect you to make a big “balloon” payment in a few months. For instance, you can suspend payments for three months, but then you are expected to repay all that money quickly. That doesn’t strike me as any sort of deal worth considering.
The other scenario is that you can suspend your payments and then however many months you didn’t pay will be added to the back end of your loan. For instance, if your loan was scheduled to be paid off in May 2025 and you skip 3 months now, those 3 months will be added to the end of your loan, so your final payment would now be due in August 2025.
That’s a deal worth considering if you don’t yet have an eight-month emergency savings fund. How great would it feel to skip your monthly mortgage payments for a few months and put all that money in savings?
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.