Coronavirus and Your Finances: Here's How to React
by Matt Frankel, CFP | March 13, 2020
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Here are some smart moves to make -- and some not-so-smart moves to avoid.
The stock market has plummeted over the past month, and many workers have been forced to stay home from work, sometimes along with their children whose schools have closed, due to the outbreak of COVID-19, also known as the novel coronavirus. With so much uncertainty still surrounding this pandemic, it's natural to have some major financial concerns.
There are some aspects of your personal financial life that aren't within your control. You can't really control how much paid sick leave your employer is willing to give you, or how much of any medical treatment your health insurance will cover. Estimates say that uninsured patients can expect to pay $500 to $1,000 or even more to be tested for the COVID-19 virus, and the cost of actually treating a confirmed case can be astronomical.
However, there are some smart financial moves you can make during the novel coronavirus outbreak and containment efforts. Here are some of the most important steps to take now.
Don't sell investments out of fear
We'll start with things you shouldn't do. If you've been following the news, you know the stock market has dropped like a rock and threatens to continue spiraling. As of March 13, the stock market is more than 20% lower than it was a month ago. Even if you don't own stocks directly in a brokerage account, this has likely caused your 401(k) or other retirement account to lose a significant percentage of its value.
It can be extremely stressful to watch the value of your retirement nest egg plunge by tens or even hundreds of thousands of dollars. I've watched a significant portion of my account value evaporate recently as well.
However, one thing you absolutely do not want to do is sell any stocks or stock-based investments as a result of this panic -- especially in retirement accounts that you won't need for several years. So long as your immediate financial needs are met, selling stocks after a massive market selloff is the worst thing you can do to your long-term financial health. The goal of investing is to buy low and sell high. By panic-selling, you're doing the exact opposite.
Stocks experience 20% or greater declines every few years on average, but they have always gone up over the course of decades. In fact, many people are better off not even looking at their 401(k) or brokerage account when the market is so volatile, as doing so often leads to irrational, knee-jerk decisions.
Most retail investors (like you and me) underperform the stock market over time, and the main reason is that we're prone to making emotion-based decisions. Just stay invested for the long run. This isn't the first time the market has dropped this much, and it certainly won't be the last.
Don't over-buy items in preparation
At this point, we've all heard the stories about stores being sold out of toilet paper (of all the things to panic-buy...) and other essential items. While it's certainly reasonable to stock up on some staples in anticipation of having to isolate yourself for a while, be careful not to over-prepare. Ask yourself questions like: "If I'm forced to stay home for a month, would I use anywhere near 10 cases of toilet paper?" Buy what you need, but be reasonable.
I'd especially advise readers to avoid over-buying anything on credit cards. You're probably reading this because you're concerned about your personal finances. Well, buying a ton of disaster preparation goods on credit cards may do far more harm than good, as you'll rack up high-interest debt.
Put some emergency plans in place
Now is a smart time to figure out what you'll do if you're forced to stay home from work for a prolonged period, especially if your kids' school is closed and they're home with you. As a working parent of two young children, I certainly share this concern.
One idea is to talk to other parents who are in a similar predicament. Maybe you can alternate watching each others' kids so you can all have some time to get work done. Or you could let relatives who don't work know you might need their help and gauge their willingness to pitch in. My parents live a few miles from me, and I can assure you that grandma and grandpa are part of our contingency plan if preschool is closed (sorry, mom).
Take advantage of low interest rates
Interest rates have plunged during the coronavirus outbreak, and this has resulted in some of the lowest borrowing costs in history.
The most significant example is mortgages. The 30-year fixed-rate mortgage rate is at a near-record low of 3.47% as I write this, and borrowers with excellent credit scores can likely find even better rates. If the mortgage rate you're currently paying is significantly higher than the current national average, it could be a good idea to look into refinancing your mortgage, which can lower your monthly payment and help you build equity faster by putting more of your mortgage payment towards your principal balance.
If you choose to look into refinancing, here are a couple of suggestions:
- Make sure you're paying attention to the annual percentage rate (APR) of any mortgage offer, not just the interest rate. The APR tells you the total cost of borrowing, including certain fees.
- Shop around. While mortgage rates are at historic lows, you'll still receive different offers from different lenders. You may be surprised at what a seemingly tiny difference in APR can do over the repayment term of a 30-year mortgage. Plus, there's a provision in the FICO® credit scoring formula that ensures your credit score won't be hit by multiple hard inquiries if you do all your rate-shopping within a two-week period.
- Know your FICO® Score and what it means. Your credit score has a big impact on the mortgage APRs you're offered. There are several places where you can view your FICO® Score -- many credit card companies give customers access to one of their FICO® Scores for free -- or you can pay for a more comprehensive service such as myFICO.com. To get an idea of what to expect, you can check out the current average mortgage rates by FICO® Score at myFICO.com.
The downtrend in interest rates that has accompanied the COVID-19 outbreak is likely to extend beyond mortgages. If you have a lot of high-interest debt, you might want to consider taking out a personal loan for debt consolidation, for example. Other forms of borrowing, such as home equity loans and auto loans, are also likely to be cheaper than they were just a few weeks ago.
Boost your emergency fund
Experts suggest that you should have three to six months' worth of expenses in a readily accessible place, such as a savings account. While this is certainly a good goal, the reality is that the majority of Americans don't have anywhere near that amount.
Times like this are the reason emergency funds are so important. Imagine the peace of mind in knowing that if you were forced to take an unpaid month off work, you'd be just fine financially.
If you don't have a comfortable emergency fund, now could be a great time to start building yours up. You don't need tens of thousands of dollars -- but some cushion is certainly better than none. If you're among the fortunate people whose income and work schedule haven't been disrupted yet, consider saving more aggressively in your emergency account. And if you haven't yet received or allocated your tax refund, bulking up your emergency fund could be an excellent way to use it.
Keep some cash on hand
If the COVID-19 outbreak gets significantly worse, it's not inconceivable that we'll have full-scale shutdowns in some areas of the country. As I write, virtually all businesses in Italy except grocery stores and a few others are closed. That could happen on a localized scale here.
This may make it more difficult to get cash if you need it, especially if bank branches close. It could be smart to get a reasonable amount of cash and keep it in a safe place in your home.
Look for opportunities to cut expenses
If you don't have an emergency fund, or are simply worried about your general level of cash flow during the outbreak, it's smart to look for ways to cut expenses. Some of the usual suspects might not be practical -- for example, I can't in good conscience suggest that you get rid of your Netflix subscription when you might be stuck at home indefinitely.
Fortunately, there are many ways to get your costs under control without depriving yourself too badly. And if you've thought about scaling back on going out to eat or shop because of the virus, considering how much money you'd save by doing so could give you extra motivation.
One of my favorite tactics is to print out my most recent bank account and credit card statements and highlight expenses I didn't really need. I typically suggest this as a New Year's resolution method, but it works well anytime you need to cut back.
Remember that this too shall pass
A final thought: The most important thing to do now is take a deep breath and resist the urge to panic. Panic leads to irrational thinking, which leads to poor financial decisions.
The COVID-19 pandemic is a terrible and frightening situation. There's uncertainty surrounding how long the outbreak will last, how bad it will get, and many other variables. But we will get through it. Your 401(k) will, too. So make some smart and rational financial decisions and focus on what's really important -- your health and the health of the people you care about.
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