More Americans than ever are feeling insecure about their finances and struggling to make ends meet as the coronavirus pandemic takes hold of our health and economy. According to the All-American Impact Survey from Peak Prosperity, 49% of Americans reported a cut in income due to the pandemic while 19% said they have had to dip into savings to cover normal monthly expenses.
“The reality is, families who are making less during this pandemic have the same expenses,” says Jen Hemphill, accredited financial counselor, author and host of the “Her Dinero Matters” podcast. “With this situation, it is challenging to pay the same expenses with less.”
During these financially challenging times, typical money management guidelines have gone out the window. In fact, here are seven common personal finance rules it’s OK to break during the pandemic, along with how to mitigate the potential damage of doing so to your bottom line.
1. Always pay your bills on time.
2. Maximize retirement contributions.
3. Keep your credit utilization low.
4. Pay double or triple the minimum due on your credit card.
5. Pay off student loans quickly.
6. Never touch your retirement fund.
7. Shop with cash to avoid impulse purchases.
1. Always Pay Your Bills On Time
Paying bills late or missing them altogether will destroy your credit, but there are options for those who don’t have enough money to make ends meet. If you’re in a dire situation, postponing payments is not just acceptable, it’s advisable and companies are willing to help.
Hemphill suggests calling each service provider and your various lenders to inquire about and negotiate a payment plan. “Currently, some mortgages, auto loans, credit cards, private student loans or personal loans are deferring payments,” she says, adding that “there may be no penalty in terms of a late fee for not paying and not hurting your credit, but you need to have a good understanding on how the individual company is handling the interest portion and how that will impact you financially.”
2. Maximize Retirement Contributions
Considering that 43% of U.S. workers anticipate outliving their retirement savings due to lack of proper financial planning, as reported by the 2018 Planning and Progress Study from Northwestern Mutual, maximizing retirement contributions is crucial for creating a comfortable life down the road. However, this money can be used more wisely during a pandemic.
“A common rule is to stuff money into your retirement funds as much as possible, especially if you’re eligible for a match at work,” says Joe Saul-Sehy, creator and co-host of the “Stacking Benjamins” podcast.
However, with so many people in jeopardy of losing their jobs, Saul-Sehy says this is one rule it’s OK to break during the pandemic. Instead, he advises reducing or completely stopping retirement contributions and using that money to build up a emergency fund faster.
This emergency fund will help you get through a tough economic time so you don’t have to touch long-term investments and jeopardize your future financial health.
3. Keep Your Credit Utilization Low
Your credit utilization rate refers to the amount of debt you are using in comparison to the amount of available credit you have, and this figure is used by lenders to determine how likely you are to repay a loan. To maintain a good to excellent score, which is vital to qualifying for loans with the best terms and lowest interest rates, it is advised to keep your credit utilization rate at 30% or less. Unfortunately, many families whose income has been disrupted are leaning on credit cards to make ends meet and ballooning their credit utilization rate. The good news is your credit score can be fixed.
“Upping your credit utilization isn’t a permanent stain on your credit score,” says Kelly Anne Smith, personal finance expert and founder of Freedom in a Budget, a personal finance blog. “Even if your credit score goes down, remember that credit scores can be repaired.”
4. Pay Double or Triple the Minimum Due on Your Credit Card
Paying just the minimum due on your credit card bill typically only covers monthly interest charges instead of going toward the actual principal debt. Therefore, it’s important to pay at least double to triple the minimum due in order to pay down the balance and save on interest. For many debt-laden consumers, though, increasing debt payments isn’t an option at the moment.
Instead of requesting a postponement on your credit card bill, look for a new credit card and transfer the balance. You can find several credit cards offering 0% interest on balance transfers for a promotional period of anywhere from 12 to 21 months. Some may even come with a cash sign-up bonus that you can apply as statement credit when you spend a certain amount within the first few months of the account opening. This will buy you more time to keep payments low without racking up interest fees.
5. Pay Off Student Loans Quickly
Total student loan debt has reached $1.64 trillion in the U.S., according to the latest Consumer Credit report from the U.S. Federal Reserve, and such debt loads make it difficult for young adults to get ahead. For this reason, it’s advised to stick with a bare-bones budget and put as much income toward paying down student loan debt as fast as possible. Luckily, there are special conditions that make it OK to break this rule without costing you more.
Under President Donald Trump’s executive orders signed in August, graduates can defer payments and interest on all federal student loans will be waived until Dec. 31, 2020. “If you’ve lost your job due to the pandemic and have other bills that need to be paid, you can put your student loans on the back burner,” Smith says, adding that if your income hasn’t been affected, it’s a great time to get ahead on paying down the balance while interest fees are frozen.
Keep in mind that the interest freeze does not apply to private student loans, so you will need to request a deferment with your specific lender and inquire about how interest will be applied during this postponement period.
6. Never Touch Your Retirement Fund
Once you put money into your 401(k), it’s supposed to stay there until you retire. Otherwise, you will get slapped with hefty early-withdrawal fees. For families who are struggling during this pandemic, however, a 401(k) loan may be their only option to stay afloat.
“401(k) loans offer clients the ability to take up to $100,000 and repay it with three years without taxes,” says Amy Richardson, certified financial planner at Schwab Intelligent Portfolios Premium. “Keep in mind there is double taxation involved with the interest on 401(k) loans, and taking money from it will prevent that portion from further growth.”
7. Shop With Cash to Avoid Impulse Purchases
According to a 2018 credit card spending study from Value Penguin, people are willing to spend as much as 83% more on a purchase when paying with a credit card instead of cash. Therefore, cash is the preferred payment method to avoid going into debt and spending beyond your means. However, during a time when there is fear of spreading germs among dollar bills and with fewer people shopping in stores, plastic and digital payment methods are acceptable and advised.
Melissa Mittelstaedt, money coach at MelissaMitt.com, which offers personal money planning for female business owners, says it’s important to be mindful of potential impulse purchases. She suggests deleting payment information saved in Google Pay or within retail apps or sites, and blocking the ability to buy through voice command via a smart speaker in order to limit mindless shopping.