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Traditional Financial Advice Is No Longer Relevant
The COVID-19 pandemic has already changed our economy. The U.S. has approved $3 trillion in pandemic-related relief, more than 22 million Americans are applying for unemployment, and 7.5 million small businesses are at risk of closing. At some point, we will all be financially impacted by the economic ripple effects of the global pandemic.
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We asked Sarah Nadav — CEO of Rapid Economic Innovation and a behavioral economist with the World Economic Forum who has spent 10 years creating technology for the secondary defaulted debt market — for her advice on navigating the coronavirus recession. She’s currently working on a book that will be a financial and emotional crisis guide to dealing with our new normal in a pandemic era.
How long will the COVID-19 recession last, and how bad will it get?
We are entering a period where there is almost 100% certainty among economists that this will become an economic depression on par or worse than the Great Depression in the US in the 1930s. What makes it different is that we have a welfare system and social safety net created to prevent the massive scale of poverty that was experienced during that time. This will be the first actual test to see if it will indeed prevent the large-scale devastation seen during the Great Depression.
Forget about the way things were, because they’re over.
In what ways do you think financial recovery efforts for the COVID-19 recession differ from those in past periods of economic strife?
Recovery efforts so far have been incredibly expensive but wildly off the mark. In that respect, I’m disappointed in how it is being handled. Trillions of dollars are being spent but most likely, that money is wasted. There is no way to stimulate an economy during a crisis, especially not by propping up corporations or pouring money into the economy in a top-down process instead of bottom-up. In a crisis like this, recovery efforts need to be focused on delivering direct benefits to people in need, supporting small businesses and preventing banks and lenders from foreclosures or seizure of assets.
Our economy needs to enter a state of “deep freeze” where the government suspends the need for growth, or even a return to normal financial activity and focuses on maintaining the basic needs of its citizens with the goal of supporting business for re-entry when the virus is under control and the economy is ready to grow again.
We should be taking our lessons from the measure taken to pull the US out of the Great Depression. Like expanding the government safety net and creating infrastructure jobs to make up for the jobs that have been lost.
How can people protect their finances during the coronavirus economy, and how does it differ from traditional financial advice?
For those directly impacted by the coronavirus, either by job loss or closure of their own small business, they must act as quickly as possible to reduce or eliminate their fixed expenses. This includes rent, mortgage, utility payments, car payments and any kind of loan or debt repayment. Write down the expenses that must be paid every month and then attack those ferociously.
This means making hard and painful decisions very quickly. The key here is to not get into debt by holding onto a lifestyle that you can’t support. There is an element of shock that we are all in, as this has happened very quickly. There is also hope that things will return to normal. Live in the reality where this change is permanent, or at least going to be for the next two years, and plan accordingly.
Always put your current and future expenses ahead of repaying a debt.
For any expense that you cannot eliminate, try calling your provider and asking for a discount or re-negotiating the deal that you have. With credit card companies, ask if you can put a hold on payments for the time being, call your landlord and see if you can negotiate a lower rent. Keep in mind, that businesses are struggling too and want to keep customers. Don’t be shy about asking for discounts.
Do not use your savings or rely on credit to support your lifestyle while you look for something else! Make a plan to rebuild, or restart your life when you get the finances to do so. If this means moving in with a family member or moving to a rural area where the cost of living is dramatically lower, then make those choices and put them into action.
Always put your current and future expenses ahead of repaying a debt. You can always settle an old bill, or repair a credit score but you need to make sure that you have money for essentials like food and medicine.
For those who haven’t been directly impacted yet, how might they feel the effects on their finances down the line (and prepare for them)?
If you haven’t been directly impacted, then my advice is not to be complacent. We are in the first wave of layoffs but economic problems have a domino effect. The tangential effects will come when the economy feels the impact of the reduction of spending power by the people who no longer have money. Also, businesses are restructuring and losing revenue which means they will likely cut more jobs. This would be a good time to cut back dramatically on your spending and create a plan which you could implement within 30 days to downsize your life financially.
What financial advice would you give to someone who has lost their job due to COVID-19?
Get every possible benefit from the government. Apply for everything as quickly as possible. Reach out to local nonprofits and social workers as well. If you qualify for unemployment, then be careful not to take “gig economy” work that will bring in some income but disqualify you from benefits. Do not agree to go back to work, even temporarily, as this is a tactic being used by employers and governments to deny people their benefits. If you don’t qualify for unemployment benefits, then apply for welfare, food stamps and Medicaid.
What other ways can people have agency over their situation?
The government systems are not responding as quickly as they should. Do not be silent about this or wait patiently. Find others online or in your area to pressure your local officials to take action and make the benefits available. Create or join grassroots organizations in your area. Beyond the fact that you will likely get your financial benefits sooner, you will also feel more empowered and in control of your life by taking action. You can also create a social support network with others who are in the same situation as you.
This is going to be extremely difficult. You must find friends or a therapist to speak to who can support you. For many people, this cuts deep into our sense of pride and identity, but we need to release ourselves from that burden. These are unprecedented times, and this is not your fault.
These are unprecedented times, and this is not your fault.
You have paid into taxes for years, you have made donations and supported friends and family through hard times. Now is the time to stay centered in the good that you have done, and accept that it is your turn to receive. Many people struggle with this, and sadly they don’t seek the help available because it is hard to overcome their sense of pride. Don’t let this virus rob you of your identity. Also, do not let this push you into accepting dangerous working conditions.
Some additional advice is to use this time to retrain through online courses. Ideally, pick work that you can do remotely so you can begin applying for jobs in your new field no matter where you live.
How would you advise people budget and save during the pandemic and the resulting fallout?
Budgeting is a funny thing. In normal times you can budget because you know what to expect. During a crisis, my advice is totally different. Cut everything possible, remove every cost that isn’t essential and save whatever money you have. Even if you have money to shop, don’t do it. Live as if you are poor and you have already lost everything.
Here is the scary part — money (as in dollars) or stock may or may not retain value. In previous depressions, the value of currency and markets have dropped so that even people who had money or savings were not able to benefit from it because it became worth less. This is why people who’ve lived through eras like this bought precious gems or gold and hid them under their mattresses.
The only way to prepare for that is to invest in owning what is most important to you. Pay off anything you can, like your car loan, buy instead of rent, or otherwise invest in a sustainable lifestyle that is resistant to the highs and lows of the market. Whatever level you’re at, own your life completely so that if you don’t have an income you’ll be okay.
Any further advice?
We are in a time of incredible abundance. There is more than enough manufactured goods to last for a long time even if factories close, and our capabilities for food production are more than adequate. In fact, many farmers are encouraged to reduce production for a variety of reasons. What we need is a change in priorities, to shift away from the profit motive and spend time investing in well-being as a priority above our GDP.
If people’s basic needs are met, and there is a sense of safety and well being, then we don’t have to push people into dangerous or premature working situations. Our economy can pivot to enable social distancing without ruining people’s lives.
Our danger on a personal economic and global economic level is a desire to maintain the previous status quo and try to return to how things were instead of being prepared to make rapid innovations and shifts into the way the world is now.
|Visit our COVID-19 hub for more financial advice during the coronavirus pandemic.|