A year ago, pandemic personal finance was a topic only discussed by doomsday theorists. But times have changed, and now we're all familiar with the economic, social, and financial ravages brought on by the global outbreak of COVID-19. And while we may not have much control over national and global trends, we can take charge through this crisis with a renewed focus on our finances.
The conventional advice to improve your financial situation involves paying down debt and saving more in your emergency fund and retirement accounts. Those strategies are always beneficial, but they're tough to implement if your job outlook is uncertain or you're already unemployed.
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For those of you who don't have a dime to spare, here are four free ways you can improve your financial situation right now.
1. Review your fee structures
Banks, brokerages, 401(k) plans, mutual funds, and credit card issuers are all charging you fees. Some you can't avoid, like the administration fee in your 401(k). But other fees, like the late fee on your credit card or the monthly fee in your checking account, can easily be sidestepped.
Start with your 401(k), as the fees there can really dig into your wealth production over time. Look for administration fees charged by your plan and investment fees charged by your mutual funds.
- Administration fees: You should see this in your quarterly benefit statements. If you don't, it means your employer is paying these fees for you, or your plan is hiding them in stated fund expense ratios. Call your plan administrator to find out which it is. You can't negotiate administration fees, but it's good to know what you're being charged. If you ever part ways with this employer, high fees would be a good reason to move your money elsewhere, fast.
- Investment fees: A fund's expense ratio represents the investment fees, charged to you as a percentage of your holdings in that fund. These expenses do reduce your earnings, so it's wise to choose funds with expense ratios below 0.75% whenever possible. Compare the expense ratios of the funds available in your 401(k). If there's an option in the same category with lower fees, it makes sense to switch.
You can also review the fee structures on your credit cards and bank accounts. Annual fees on credit cards and monthly maintenance fees in bank accounts are completely avoidable if you're willing to switch providers. And you can stay away from balance transfer fees and cash advance fees by limiting those activities.
Late fees on credit cards may be harder to prevent if you're in a cash-flow pinch. Try asking your credit card issuer to waive the late fees temporarily. Many card issuers are already doing so for individuals who are affected financially by the coronavirus.
2. Check your asset allocation
Asset allocation is the mix of your investments across different asset classes like equities, fixed income, and cash. The online dashboard for your 401(k) probably tracks your asset allocation for you. If it doesn't, read up on the strategy and holdings for each fund you own. Use that information to understand how your money is invested across asset classes.
Then, turn to the Rule of 110 to evaluate your allocation. The Rule of 110 states that the percentage of stocks you should hold in your portfolio is the difference between 110 and your age. If you are 30, for example, your investment holdings would be 80% stocks. The remainder would be fixed income and cash.
If your allocation is way off, you can adjust it right away or over time. The fast method is to sell off the positions you have too much off and use the proceeds to buy into the positions you need to increase. This strategy may require you to lock in losses, though. To avoid that, you can make the change gradually. Leave your existing holdings as is, and adjust how future contributions are invested.
3. Combine old 401(k)s
Believe it or not, people do lose track of old 401(k)s. Don't let that happen to you. Gather up your paperwork on any orphan 401(k)s you have from previous jobs. Then, figure out where you want to combine these accounts. If you're still working today, ask your plan administrator if you can roll these assets into your current 401(k). Alternatively, you can put these funds into an IRA. If any of your old 401(k)s are Roth 401(k)s, put those funds in another Roth 401(k) or a Roth IRA.
To avoid any tax withholdings, you'll want to complete a direct rollover for each orphan account. Unfortunately, you'll have to reach out to each plan administrator separately to coordinate this. There will be forms to complete and documentation to provide. It's tedious, but worth it. When you're done, you'll have one or two retirement accounts to manage, instead of several.
4. Inventory high-rate debts
Maybe you can't pay off your high-rate debts right now, but you can get in touch with where you stand. Make a list of your credit card accounts, balances, and interest rates. Rank them in terms of payoff priority. The usual advice is to pay off the highest-rate account first. But you might free up more cash, more quickly by paying down the lowest balance first.
Choose which strategy feels right and build your payoff plan. Once you're more stable, you can jump right into to implementing that plan.
Small money moves still make a difference
You don't have to make big money moves to improve your finances. In times of crisis, it's often the more detailed actions that make a difference. A switch to a lower-cost mutual fund in your retirement account, the elimination of an annual fee, consolidation of your retirement assets, and a go-forward plan for your debt -- these actions benefit you a little today and a lot in the future. And not one involves coming up with cash you don't have.
