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What if Financial Recovery From COVID-19 Seems Impossible?
Some 44% Americans predict it will take three years or more to recover economically from the pandemic, according to a January 2021 Pew Research poll. One in 10 Americans believe they will never recover.
For many of us, the goals we had for our lives a year ago reflect a different world than what we see now, with people lost, relationships altered, professional situations changed, and financial accounts impacted.
The most important thing to recognize is that even if the goals you held a couple of years ago now seem impossible, rebuilding your financial foundation and working toward a brighter future still remain within your grasp. Your long-term destination might be different, but you can still work to make each day better than the one before it.
Financial recovery has two pieces. First, you need to rebuild your financial foundation, then you need to start taking steps toward a brighter future. Let’s look at the game plan for financial recovery, even if your old goals now seem impossible.
Rebuild your foundation
Start by getting your current life as stable as possible. Don’t worry about the future quite yet. Instead, get yourself in a situation where you’re not constantly battling debt and you’re consistently spending less than you earn with your life and professional prospects as they are now.
Permanently downsize less meaningful spending
The incredible tragedy of COVID does hold some seeds of opportunity, and one of those seeds is the power of clarity. It’s given all of us a unique opportunity in our lifetimes to consider what really matters to us and what doesn’t.
One big part of this is considering what pre-COVID and COVID-era spending was actually meaningful to you and what wasn’t. Pull out some bank and credit card statements from the last few months, as well as some statements from the months just before COVID impacted your life.
Consider, from your current perspective, which of those expenses are actually meaningful. Which ones do you vividly remember? Which ones brought value into your life? Which ones brought value, but that value could have been easily substituted with something less expensive? Which ones were simply forgotten or completely forgettable?
It’s simple: Don’t bring back the low-value expenses. Leave them in the dustbin of history. Keep the ones that seem meaningful and the ones that are essential for daily life and trim away everything else. If you cut too much and it’s not joyful, that’s OK. Simply consider what’s missing and aim to just bring that back. Having this perspective on spending will give you the money for most of the other steps in this article.
Rebuild an emergency fund
An emergency fund is a pool of cash set aside for unexpected events, such as a global pandemic, but also things like an unexpected car repair or a sudden job loss. It’s usually stored in a savings account. While some financial advice focuses on having a specific dollar amount in your emergency fund, a much better approach is to automatically fund it forever by setting up an automatic weekly transfer from your checking account into that savings account and just never turning it off, then tapping that emergency fund when emergencies happen.
For many people, COVID drained their emergency fund, and if they didn’t have one, it resulted in a lot of credit card debt (which we’ll get to in a moment). One valuable step to rebuild financial stability in your life is to simply start an emergency fund, whether for the first time or a rebuild. This becomes a valuable tool for the next time something big and unexpected comes at you.
Pay off high interest debt
The first step is to construct a debt repayment plan, which helps you identify which debts to prioritize. Make minimum payments on all of your debts, then throw the biggest extra payment you can at whichever debt your debt repayment plan indicates as a priority. Make this a major focus until you’ve eliminated all of your high interest debt (anything over 8% interest is considered high interest debt).
Repay money borrowed from retirement accounts
Not only did people rack up credit card debt, millions more tapped their retirement accounts during the COVID lockdown, according to CNBC. This leaves them in a financially tough spot going forward.
For many, the money taken out of retirement accounts can be repaid without tax penalty, thanks to Section 2202 of the CARES Act, as long as you repay it within three years of the distribution. If you took money out of a retirement account in 2020 and are unsure if you qualify, talk to a tax professional.
If you don’t qualify for repayment, you can still make up some ground by prioritizing contributions to retirement accounts going forward.
Move into a brighter future
Once you’ve re-established a firm financial foundation, the next step is to build a brighter financial future for yourself. It might not match up with the goals you once had for yourself, but you can still pave a financial path to a better life.
Avoid reinflating spending unless it’s meaningful
Most Americans saw significant changes to their spending during COVID, whether out of need due to a loss of income or out of a loss of opportunity to spend due to services and businesses being closed. As things reopen and opportunities present themselves, don’t simply dive back into the “way things used to be.”
As you think about things you used to do, think carefully about whether they really provide value for you now. Aim to make a new set of routines that merges the best of both your pre-COVID life and your COVID choices, choosing to keep only those things that are meaningful.
If you bring back something “old” to try it again, ask yourself whether it’s really bringing value and don’t be afraid to drop it if you’ve found a better routine.
Increase retirement plan contributions
Many Americans saw a negative impact to their retirement plans during COVID, whether because they were unable to contribute or they had to borrow money from the account. As you get things back on track and your financial foundation is secure again, consider bumping up those retirement contributions to a level higher than they were before.
If you have a workplace retirement account, simply bumping up your contributions is a good choice. If you don’t, consider opening a Roth IRA, or if you already have one, increasing your contributions.
Remember, the funds for this will come from being discerning about your spending. If you’re not bringing back the frivolous things from your pre-COVID life, then you have money for financial security, and this is a powerful way to spend it.
Figure out your non-retirement goals and start saving
What if you have other life goals, or you already feel secure in your retirement savings? Identify other big goals in life and come up with a plan for them. Here are a few common life goals:
- Saving for your child’s college education is a priority for parents. This can be done in an easy tax-advantaged way by using a 529 college savings plan.
- Saving for a car purchase is useful for almost anyone who relies on a car. Since this purchase will almost always happen in the next several years, store your money in something with low risk, like a savings account.
- Saving for a house down payment is key if you’re considering owning your own home in the future. Again, if this is a goal that seems likely to become real in the next several years, put money into something with low volatility and risk. However, since this is money you aren’t strictly relying on, you can choose more aggressive investments.
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