COVID-19 has impacted millions of Americans' mental and financial health. If you're having money worries right about now, you're in good company, but the moves you make in the coming weeks or months could spell the difference between emerging from the crisis financially unscathed or hurting for years. Here are three big mistakes it pays to avoid at all costs.
1. Selling stock investments out of panic
COVID-19 has sent the stock market on a roller coaster ride since cases started multiplying rapidly back in March. As such, there's a good chance your investment portfolio is down right now, and that's an unsettling notion to grapple with. But before you start selling off stocks left and right out of panic, remember that you only lock in actual losses when you unload investments when they're down. If you sit tight and wait for the market to recover, you may not lose so much as a dime. And if you're thinking of cashing out investments when they're down because you need the money, first explore other options. You may be able to borrow in an affordable fashion to tide yourself over for a bit, or take a withdrawal from your emergency fund to ride out the crisis.
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2. Raiding your retirement plan early
Thanks to the COVID-19 relief package that was passed back in March, it's possible to remove up to $100,000 from your 401(k) or IRA penalty-free if you've been impacted by the pandemic. Normally, a withdrawal before age 59 1/2 results in a 10% penalty on the sum you remove. If you're struggling financially, raiding your retirement plan can be tempting. But remember, the more money you take out of that account today, the less you'll have when you're out of work for good (a/k/a retirement) and need it the most. And it's not just the principal sum you withdraw that you won't have later in life; you'll also lose the chance to grow that amount into an even larger sum.
Imagine you take a $15,000 withdrawal from your IRA to tide yourself over, but you're not set to retire for another 20 years. Let's also imagine you have your IRA invested in a manner that generally gives you a 7% average yearly return. After 20 years, you won't just be short $15,000; you'll have $58,000 less than you could've amassed had you left that money alone. As such, you should really do everything you can to avoid having to tap your retirement plan.
3. Racking up costly credit card debt before exploring other borrowing options
If you have a bunch of credit cards in your name that you haven't maxed out, racking up charges on them may seem like an easy solution if the need for money exists. That way, you just pay off that debt when you're in a stronger financial position. But credit card debt is a dangerous kind to have, mostly due to the exorbitant interest rates that tend to come with it. Too much credit card debt can also wreck your credit score, making it harder to borrow money affordably.
Before you rush to rack up a credit card balance, see if there's a better way to borrow. One good option is a home equity loan or line of credit that uses your home as collateral. Borrowing against your home is generally affordable from an interest rate standpoint, and qualifying is usually pretty easy.
Another option you might consider is a personal loan, which you can apply for at most banks or financial institutions. Having strong credit, however, is your ticket to a personal loan with a competitive interest rate attached to it.
At a time when the economy is in shambles and there's so much to be stressed about, it's easy to make rash decisions you regret after the fact. But if you manage to avoid the above mistakes, you'll have a bit less to worry about as you navigate this extremely difficult time.
