Finding financial footing during and after COVID-19 impacts

Financial havoc was wrecked over the past year by the still lingering COVID-19 pandemic. Many lost their jobs, some lost much more and most are trying to regain what they lost in the form of some kind of debt.
 
As vaccines stunt the spread of the coronavirus and regress the global health crisis, the economy is poised to progress. Now is the time to take stock of personal finances.
 
COVID-19 was a perfect storm that drained the funds of even those prepared for a rainy day. With personal bank accounts in dire straits, returning to a sound financial state means getting back to the basics and formulating a solution. 
 
Everyone’s financial plan is different so there is no single strategy that objectively applies to all. However, there are several components that serve as cornerstones for a healthy financial diet.
 
Advice from a trusted financial advisor is the first step in the process of recovery from financial hardship. The Daniel Island News interviewed several firms on the island, including Commonwealth Financial Group, Edward Jones and the Wells Fargo Investment Institute, to create a cumulative guide as a checklist for financial wellness. Some advisors also engaged in question-and-answer forums regarding advice that they’ve given clients during the pandemic, and their answers are provided following this article. 
 
Make a plan
 
There is a big difference between what you can do with your money and what you need to do with your money. In order to know where you’re going, you need to know where you stand and therefore it’s imperative to start with a financial plan.
 
Quite literally sit down and put pen to paper or hire a financial planner to define your goals for you. A solid financial plan should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. 
 
Ask yourself what do you want your life to look like in five years or 10 or 20? Do you want to be a homeowner? Are kids in the picture? How do you want to live life after your working days are over? 
 
Be proactive versus being reactive. Take action thoughtfully instead of emotionally.
 
Budgeting is a balancing act 
 
Living within one’s means is easier said than done, but it doesn’t have to be a constant strain. But it does revolve around a balanced budget.
 
A common fiscal problem throughout COVID-19 is having insufficient liquid savings and having to dip into retirement accounts. 
 
There is an incalculable amount of ways to monitor spending today. Everything from personal finance apps, to spreadsheets and the timeless 50/20/30 rule.
 
A traditional rule of thumb is that one should spend up to 50% of your after-tax income on obligations. The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want but don’t need.
 
Although, be cautious of discretionary spending. Fortunately, during the pandemic, eating out, traveling and shopping was at a minimum which helped curb impulsive habits.  
 
Debt does not discriminate 
 
Regardless of your income or what tax bracket you file under, a clean slate of debt is something that everybody strives for. Debt doesn’t discriminate but it will accumulate if you’re not careful.
 
Whether it’s student loan debt, credit card debt, a mortgage and car loans, it is crucial to prioritize attacking debt. The two most common debt payoff methods are the debt snowball and debt avalanche.  
 
Popularized by the personal finance author Dave Ramsey, debt snowball pertains to paying down the smallest of debts first, regardless of interest and then proceeding to the next smallest. Debt avalanche is paying extra toward eliminating the debt with the highest interest first.
 
Expect the unexpected
 
Meanwhile, amidst one’s regular savings plan to afford that new car or boat, there needs to be an entirely separate fund devoted toward emergencies. Set money aside on the expectation that something will unexpectedly go wrong in the future, whether it be losing one’s job, personal injury or breaking down on the side of the road with car trouble.
 
A traditional rule of thumb was to save three to six months’ worth of essential expenses for an ideal emergency fund. Now, financial planners recommend six months to a year worth of savings to be safe.
 
Although saving for something that isn’t foreseeable can seem daunting, start by saving a small amount each week. Instruct your employer to deposit a portion of your paycheck directly into your emergency savings account. Take baby steps. Start by saving $1 a day, then up the ante to $2 a day and so forth. 
 
Think long term in the short term
 
Retirement seems so far away until it’s not. It’s tempting to focus on the short-term, but it will be more rewarding in the end if you keep your sights set on long-term goals.
 
To begin saving today for retirement, when you should have started yesterday, open a retirement account through an online brokerage through a traditional IRA, Roth IRA or taxable brokerage account. These accounts have different rules, limits and tax
implications, so be sure to look into each account’s structure.
 
One of the biggest contributors to your long cherished days of relaxation is your employer if they offer a 401(k) match. Not to mention the compounding interest that will essentially become free money by the time you’re eligible to withdraw without penalty at the age of 59 and a half years old. 
 
When it comes to estate planning, age is only a number and there’s no better time to make a plan then the present. It’s irrelevant whether you’re single, married or what you own. 
 
Newsflash, estate planning is not only for old people. Accidents happen throughout all stages of our life and some of them are more debilitating than others.  
 
Don’t be caught off guard and left unable to manage your finances and personal affairs. Consider executing basic estate planning documents such as durable power of attorney, health care power of attorney, a living will and a will. 
 
FINANCIAL FOOTING: ASK THE PROS
 
Q: What was the most common personal finance ailment of clients during the pandemic?
 
“Realizing the funds established in their short-term bucket, needed to cover expenses for a period of time, has not kept up with their increase in spending. We frequently find clients underestimate their spending by 20-30% coinciding with the shortfall of their reserves.”
— Billy Petzold, Commonwealth Financial Group financial advisor    
 
“One common refrain heard was those who needed to suspend their 401k contributions during the pandemic, due to fluctuations or uncertainty about their incomes going forward, or of employers suspending their matching contributions to their employees due to the uncertainty of how their business might fare during the crisis.” — Wells Fargo Investment Institute
 
Q: What was a popular financial flaw that clients continued to make associated to COVID-19?   
“We have many clients that maintain personal investments accounts with online brokerage firms and a mistake they made was moving to cash in March. The dreaded buy high and sell low scenario. Trying to time the market is extremely inefficient and creates added stress when deciding when is the right time to get back in.”  
— Petzold 
 
“Investors can sometimes let emotional headline risk affect their investment decision making and may find themselves selling at the bottom or buying at the top.” 
— Wells Fargo
 
Q: What is a piece of advice you’ve given most to clients struggling financially from the pandemic?
 
“Biggest piece of advice was to focus on what you can control. As planners, budgeting is on the forefront of our mind and the foundation for our path to financial freedom. We worked extensively with struggling clients to define wants versus needs in their monthly budgets to minimize any potential debt accumulation.”
 — Petzold
 
Q: What is a universal lesson of financial planning that we all need to take into account regardless of your income or tax bracket? 
 
“Follow your money. Spend time understanding the flow of dollars in your financial plan. True tax-adjusted income, spending habits, retirement accounts, nonqualified accounts, risk mitigation products etc.” 
— Petzold
 
“In order to know where you wish to be, you have to start with a plan to get there.” 
— Wells Fargo
 
Q: What is the single most important factor of regaining/maintaining financial health post-pandemic?  
 
“Follow the financial blueprint you have established and start with rebuilding the parts of the foundation that have been most damaged. Never has the idea of an emergency fund been more relevant so be diligent in restoring it.” 
— Petzold
 
“Be methodical in your savings and try to pay yourself ‘first.’ If you’re concerned about the market, just add some to your investments each month instead of taking a leap. Building wealth does not happen overnight. It takes time and patience.” 
— Wells Fargo

 

Daniel Island Publishing

225 Seven Farms Drive
Unit 108
Daniel Island, SC 29492 

Office Number: 843-856-1999
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