If you’re watching your investments drop in value and your savings account dwindle right now, you’re part of a growing number of people who are dealing with financial setbacks from the coronavirus pandemic. Not that it’s much of a consolation, but at least you had savings to draw on.
Millions of Americans were already financially struggling before the COVID-19 outbreak. A survey found that 69% of Americans had less than $1,000 in savings shortly before the pandemic. They may have been dealing with insurmountable medical bills, growing debt from overspending, or a difficult divorce.
This figure sheds light on a stark reality: the majority of Americans are unprepared for an emergency. They’re most at risk of facing serious and long-term financial consequences from a pandemic, natural disaster, economic downturn, or job loss. However, there are steps everyone can take to improve their finances, recover from financial setbacks, and better prepare for what the future brings.
Establish a Budget
Many financial issues stem from overspending. For most people, the overspending isn’t due to a lack of impulse control but from not knowing how much money comes in and goes out. Creating a budget can help you get your spending in order and understand your finances better.
You can create a simple budget by folding a paper lengthwise in half and listing your monthly expenses on one the left and your income on the right. Go through all your expenses, including cash withdrawals, online bill payments, checks, and recurring monthly bills. Recurring bills include your mortgage or rent, student loan payments, credit card, and loan bills, and utilities.
Once you’ve listed all your income and expenses, add up your two columns to compare the figures. Hopefully, you are in the black and not spending more than you make. If you find that you’re spending more than you make, you have two options. You can cut back on your spending or pick up a second job to make up for the shortfall.
Even if you’re not overspending, if you don’t have any savings or you’re paying off loans, you should increase how much you contribute to savings and pay off debt. You may also want to cut back on your non-essential expenses such as takeout or online shopping so you can put more money towards getting out of debt faster.
Safeguard Your Home
Your home is likely the most valuable asset you own. In many cases, it’s also the largest expense you have. It’s crucial to safeguard your investment by making sure you make your mortgage payments every month. If you don’t, you could lose your home through foreclosure.
If you’re struggling, talk to your lender right away. They may be able to work with you to provide you some relief until you can get back on your feet. Your lender may approve forbearance, a temporary pause or reduction in your loan payments. You may also qualify for CARES Act protections against being foreclosed at this time.
Rebuild Your Credit
High debt and unpaid bills can damage your credit score. Although you may think a low credit score is the least of your worries, consider this. Your landlord may check your credit before they rent to you. In addition, If you’d like to have a credit card or a loan, you won’t get approved without good credit, and even if you do, you’ll probably be charged a higher interest rate which will cost you more in monthly payments.
There are several ways you can rebuild your credit:
Order your free annual credit report and review the information. If you see any incorrect reports, such as an unpaid account, report them to the credit bureaus for investigation and removal. Clearing mistakes can raise your credit score.
Pay down your loans and credit cards. The credit bureaus penalize consumers who max out their credit cards or carry high balances.
Make your payments on time. Even if all you can afford is to pay the minimum payment due, make a payment. If you don’t, your creditor can report you for late payments, further dropping your credit score.
Start or Rebuild an Emergency Savings Fund
The best way to avoid getting yourself in a financial setback in the first place is by having an emergency savings fund you can turn to. The fund is meant to cover your bills for a period of time should you become unemployed, sick, or injured, or to help you deal with an unexpected emergency.
Aim to save enough money to cover at least three months’ worth of expenses although six months is better. Set up an automatic savings plan in which a certain amount of money is drafted from your checking account and sent automatically to your emergency fund every month. Having several months of cash to cover the bills can provide you with peace of mind. Plus, it will keep you from getting into financial trouble during a crisis.
These time-proven personal finance tips may not reinvent the wheel, but they work. Keeping your spending under control, paying your bills on time, and saving money for a rainy day will help you recover faster from a financial setback or even avoid it altogether.