Over 10 million people applied for unemployment in March as the economic shutdown from measures to fight the new coronavirus is forcing many businesses to slow or stop operating altogether. Whether things get better or worse for us mere mortals in the near term depends heavily on how long the shutdown lasts.
After all, even companies that have remained open are dealing with the fallout of lowered travel, fewer gatherings, and people focusing their spending on the essentials. The longer that continues, the harder it will be for businesses that have been negatively affected to remain open and able to keep paying their people.
With so much risk and uncertainty with what comes next, you have every reason to both worry about tomorrow and to make plans to help protect your family as best you can. To help on the money front, here are six coronavirus fighting tips for your finances that can get you in a better spot to handle what may come next.
1. File your taxes electronically and get your refund direct deposited
Although the tax filing and payment deadline for your 2019 Federal income taxes has been extended to July 15, that extension really only helps the people who still owe taxes and expect to pay. If you expect you'll get a refund, waiting only serves to keep you and your money separated that much longer.
In addition to simply filing your taxes, do it electronically if you can. The IRS typically expects it will take around three weeks after you electronically file a return to get your refund electronically deposited. Contrast that with around the six to eight weeks it takes for a paper filing and mailed refund check to work its way through the system, and operating electronically will get you your cash back much faster.
2. Adjust your withholdings to reduce next year's refund
In addition to filing quickly to get your 2019 refund, remember that for most of us, a tax refund is simply you getting money back that you had overpaid to the IRS over the past year. If you get a regular paycheck and have taxes withheld during the year, you can reduce those withholdings now to get closer to breakeven when you file your taxes next year. File IRS Form W-4 (or your employer's substitute) with your employer's payroll to request the adjustment for yourself.
The IRS doesn't expect you to get your withholdings perfect throughout the year, just to get close enough to avoid penalties, and then true up any differences by the filing deadline. There are three basic "safe harbor" tests that the IRS uses to determine whether you're close enough. As long as you pass any of them from your paycheck withholdings, you're good enough to avoid penalties by settling in full anything you may still owe when it comes time to file. Those tests are:
- If you're within $1,000 of your total taxes owed through your withholdings.
- If you've had at least 90% of what you owe for the year withheld.
- If you've had at least 100% of what you owed for the previous year withheld (110% if you're considered high income).
By adjusting your withholdings to reduce what comes out of each paycheck (but still staying within one of those safe harbor rules), you put more money in your pocket every payday.
3. Cancel any recurring charges or subscriptions you don't need
These days, it's really easy to sign up for a service that automatically bills your credit card every month or quarter, and then simply not think about the charge again. Especially in this time of uncertainty, though, it makes a ton of sense to scrub through every expense you have and cut out the ones you no longer need. Ones that generate automatic charges can be low-hanging fruit to cut that can quickly improve your cash flow, particularly if they're for things you don't really need.
4. Redirect "extra" cash toward topping off your emergency fund
An emergency fund is something you hope you never have to dip into, but if you do wind up needing it, you'll be very glad you have. As a good rule of thumb, you should target having around three to six months of living expenses in an emergency fund invested in nothing riskier than cold, hard cash in an FDIC-insured account. The key exception to having that well stocked of an emergency fund is if you're actively paying off high-interest debt such as a credit card.
If there's an upside to being limited in where you can go and what you can spend your money on, it's that any money you still have coming in may last longer than it would in normal times. That gives you the opportunity to beef up your emergency fund to get you closer to that three to six month buffer. If you're particularly nervous about an extended stretch of unemployment, you can look to be toward the higher end of that target.
5. Consider taking your dividend payments as cash
As many companies suspend their dividends to conserve cash, it's a sign that they're expecting the fallout from the coronavirus mitigation efforts to last longer than their own cash reserves would. That's a pretty good signal to you that they don't think this ends quickly and that their own financiers aren't too keen to lend them money while this mess is going on. If major companies are affected to that extent that quickly, then what chance do we mere individual employees and small investors have?
Still, not every company has suspended its dividend. If you happen to own investments that are continuing to pay their dividends, now might be a great time to collect those dividends as cash instead of reinvesting them. While that does mean you might be a bit less efficient in your compounding, the benefit of cash is that, well, it's cash.
If the market continues to fall or the economy takes a while to restart, every dollar of your cash will still be worth exactly $1.00. If you need to, you can withdraw and spend cash from your brokerage account almost as easily as you can from your checking account. If you don't need to spend it, you can use it to bargain hunt in the market's wreckage for companies whose shares may have been wrongly discarded.
Even if your existing investments do snap back quickly, the beauty of dividends is that they give you cash without having to sell your existing shares. Those existing shares will still participate in the rebound. While you'd miss out on a bit of the compounding you'd get through automatic reinvestment, it's a small price to pay for having that much better of a cash buffer in the middle of a crisis.
6. Keep your eye on your investments' balance sheets
For the companies you own to survive this shutdown, it's not enough to have a business model that works well in a thriving economy. It has to have a strong enough asset allocation plan of its own to enable it to have the money to pay its own bills when times are tight.
Like all of us, companies have bills to pay, and many of those bills can have nasty consequences if they don't get paid on time and in full. In particular, if a company defaults on its debt, the debtholders take priority over the shareholders. In some circumstances, those debtholders can actually take control of the company from its shareholders in the event of a serious enough default.
Key numbers to keep an eye on are a company's current ratio, its debt-to-equity ratio, and its total cash and equivalents on hand. The higher a company's current ratio and the larger proportion of that current ratio appears as cash and equivalents, the better the likelihood the company can handle a short-term stumble. The lower a company's debt-to-equity ratio, the less total debt it has compared to the total of the things it owes, and the more likelihood its lenders will continue to be willing to lend it money.
In a healthy economy, balance sheets are easily overlooked. When the economy is largely shut down, they can very well be the key to a business' ability to survive to see the bright future that may yet come.
Sometimes defense is the best offense
In ordinary times, having such a defensive posture when it comes to your money and investments may seem like it's too conservative to really maximize your net worth. In times like this, when substantial parts of the economy is shut down and there's no clear answer as to when it will start up again, being a bit more defensive makes much more sense.
Certainly, if you have a solid financial foundation already in place, the market is offering incredible potential bargains on companies that may very well survive this coronavirus mess. Remember, though, that, those bargains are really only available to you if you can hold on to them until the crisis passes. So make sure your own financial house is in order first, and then go look for the opportunities to pick up great businesses at bargain prices.