COVID-19 is affecting everyone differently, but it’s affecting everyone. 88% of Americans say the pandemic has affected them financially, according to a NEFE survey (and this survey was back in April).1 The survey found the top money stressor was simply not having enough in savings.
We’re all learning the importance of an emergency fund and many have learned that their numbers were off when it came to how much they would need to have to cover living expenses during an unforeseen event.
And the coronavirus was about as unforeseen as it gets.
In 2018, the federal Reserve claimed the median amount Americans had in savings was $5,200. The average was over $30,000, but the average doesn’t show an accurate representation.2 One person having a few million would skew the numbers and we all know that more than one person has a few million.
In fact, as recently as 2016, a Bankrate survey showed 63% of Americans couldn’t even cover a small emergency with their savings.3 Another study showed over half the country has less than $1,000 in savings.4
Around the globe, more and more economists are predicting the financial impacts will last at least a year.5 Individual households, in many cases, could be affected for many years.
“In July, 31.3 million people reported that they had been unable to work at some point in the last 4 weeks because their employer closed or lost business due to the coronavirus pandemic,” according to the US Bureau of Labor Statistics.6
Unemployment rates have skyrocketed. Teleworking has become the new norm, but many aren’t able to telework due to the type of job they held when this all started or due to other limitations.
Doom and gloom aside, what can you do to improve your finances during these trying times? Fortunately, there are plenty of things you can do to both improve your finances and set yourself up for future success in any event. These are things you can pass down to your kids to make sure they aren’t caught off guard down the road, now that we know a financial crisis can mean more than we could’ve ever imagined.
Let’s start with the basics…
The Elusive Emergency Fund
As I said earlier, people are starting to see the importance of an emergency fund.
You may have one or you may have had one when this all started and you’ve been tapping into it. But what if you don’t have one?
In my experience, more emergencies happen when you don’t have an emergency fund than when you do. I guess it’s part of Murphy’s Law, but it’s been a harsh reality in my life for sure.
If you follow Dave Ramsey, you know his first baby step is to get $1,000 in savings, and then pay off all your debt (except your mortgage), and step three is to have a fully funded emergency fund.
With all of this going on, many people have wondered if $1,000 is enough to begin with.
$1,000 isn’t going to do much when a crisis like this hits, but having a lot of debt is going to make a crisis like this worse, so that brings us back to the first principle of personal finance: it’s personal. Everyone’s situation is different.
For example, if you’re a freelancer, you definitely need more than $1,000 in savings, regardless of how much debt you owe. Ideally, you’d be a month ahead on your budget — living on last month’s income. If that’s not possible for you yet, you may just need to do everything you can to increase your savings.
On the other hand, if you have a steady paycheck, $1,000 is likely enough until you get out of debt. Again, every situation is different.
Regardless of how your income comes in, you need to be prepared. Emergencies used to mean simple things like job loss or blowing an engine. Terrible things, but simple things. Now that we know an emergency could mean things like a global pandemic that forces you to stay home for months at a time, we may need to change our planning.
As far as the $1,000 goes, plenty of people have called into The Dave Ramsey Show and argued it wasn’t enough to start with. His counter is usually something like, “well you didn’t have anything in savings before you started the baby steps, so $1,000 is pretty far ahead of where you were.” The point is, people who were financial messes can’t make a good argument for why anything will or won’t work, if all they’ve ever known is things not working.
The main thing is having a plan. Only you know what your finances would look like in an ideal world and you should be taking the steps to get to that perfect picture.
It doesn’t help to criticize a method like the baby steps if you don’t know what you’re doing, but yeah, I get that Dave Ramsey isn’t always the most understanding and compassionate person when he’s talking to guests on his show.
Just start doing something different. So while I think $1,000 is usually enough to have in savings until after your consumer debt is paid off, I don’t think it always has to be that way.
However, you do want to get any high-interest debt paid off immediately. It might make sense for you to save $1,000 first, pay off things like credit cards, payday loans and other personal loans, and then get a fully funded emergency fund before you pay off low-interest debt like a mortgage, student loans, and potentially even auto loans (but often getting rid of a car payment means freeing up a lot of cash flow each month — more on that in a moment).
When you begin building your emergency fund, there are some things to remember.
What an Emergency Fund Should Be
The typical goal for an emergency fund is three to six months of living expenses.
But remember, in an emergency, living expenses change.
It may not be as hard as you think to hit this goal. If you lost your job today, you’d be on a bare-bones budget until you got another job. So if you currently spend $4,000/month on expenses, the logic would be you’d live on much less in an emergency situation.
You’d stop eating out, you’d budget more precisely on groceries, you’d live tighter.
Plan your emergency fund that way.
Now, with the current pandemic, you may have realized six months isn’t even a big enough fund. So you may want to store closer to a year’s worth of living expenses, depending on your employment situation. But that will be easier to get to if you have this bare-bones mindset.
Where Should You Keep Your Emergency Fund?
Before COVID, it was actually fairly easy to find a good savings account with an interest rate well over 1%. Since March, interest rates have been dropping.
We keep our emergency fund with Marcus by Goldman Sachs, which had a 1.55% interest rate when we originally switched to them, from our Bank of America savings account that basically didn’t earn any interest compared to 1.55%. Currently, Marcus’s rate is 0.60%, which is still better than any other traditional savings account. Internet-only banks are crushing the interest rate game compared to traditional banks.
Still, interest rates simply aren’t great right now. I’m sure they’ll get higher in years to come, but right now, we just have to ride out the COVID wave of low interest rates. The rates being lower is great for other things, like mortgages, which have some historically low rates right now. But savings accounts are just taking a hit at the moment.
Choosing a place to store your money isn’t difficult. Either a money market or savings account is best. They are both considered “preservation of capital” funds, which means you can’t lose money like you can with a mutual fund, individual stocks, or even bonds.
Just keep these things in mind when searching for an emergency-fund savings account:
- Be sure the bank is a credible FDIC-member bank
- You shouldn’t need to pay any annual fees, or any fees at that
- Once you confirmed those things, just find the best interest rate
Pay attention to any account minimums, or minimums to get a specific interest rate, before you open the account. There are several banks offering close to a 1% rate right now. Head over to Bankrate and see what the current interest rates are on savings accounts.
Other than an emergency fund, how can you be prepared for anything?
The Debt Has to Go
Regardless of how much you decide needs to be in your emergency fund and when you plan to build it in the process, the debt needs to go.
Ridding yourself of debt diminishes your financial responsibility. If you do get into another crisis situation, or if you’re still heavily feeling the corona effects, the less debt you have, the better off you’ll be.
First, it’s the obligation itself. The less obligation you have to debtors, the more freedom you have with your money.
And then there’s the cashflow. I know plenty of people with car payments well over $500/month. If you pay off that car, that’s an extra $500 in cash flow. Whether you use that money to pay off other debt, to build your retirement, or to fund your children’s education, that’s a lot of cash flow.
Being debt free is not only emotionally freeing, it’s cash-flow freeing.
And it’s worth it. There’s no better feeling in the world when it comes to your finances.
And you’ll want to make sure you have more than one plan.
Creating a Backup Plan and Another
Some of the most successful people will tell you they got there by not having a backup plan. They didn’t have a choice other than succeeding, because the difference in success and failure could have literally meant the difference in living in a mansion and being homeless.
But for every success story along that vein, there are 100 stories of struggle that didn’t end so nicely. So for the rest of us, it makes sense to have a plan B, and possibly even a plan C, D, and E.
I have a BA in Finance. And while it helps me as an author, speaker, and financial coach, the main reason I got the degree was to have a fallback plan if anything were to happen with my military career (and because, due to my military career, it was free).
In addition, we have to be willing to have a backup plan that may not be as attractive as our primary plan. We have to be willing to forget the past, for better or worse. What do I mean by that? I’ve witness someone become a millionaire due to real estate, lose everything due to leverage, and become homeless due to pride.
We may have been a huge success at one point, but if things crumble, we have to be willing to do what it takes to feed our family. Even if that means suiting up and applying for that management position at In-N-Out until we get back to even.
It doesn’t matter if we used to be a huge financial success. Sometimes all that matters is feeding our family.
We have to forget our past failures after we learn from them, but sometimes we have to forget our past success, or at least be willing to humble ourselves for a period.
Many of us our witnessing the importance of a backup plan.
The more skills we know and abilities we have, the more capable we are during any financial downtown, pandemic, or anything else.
We shouldn’t worry ourselves to death. We should be prepared for anything. The only way to do that is to have multiple backup plans in place. While your backup plans aren’t going to be ideal (that’s why they’re backup plans), it’s good that they are at least there.
As far as the rest of your money, like your investments, I covered all of that in an article I wrote right after COVID hit. Seven months later, I still stand behind everything I said in that article.
So be sure to read: How to Stop Worrying About Money During Financial Downturns.
Further Book Reading
- Debt Free for Life by David Bach
- Your Money or Your Life by Robin & Dominguez
- The Total Money Makeover by Dave Ramsey
- How to Stop Worrying and Start Living by Dale Carnegie
Further Bible Reading
Photo Credit: Dave Ramsey
- How to Save Money on EVERYTHING for Your Family: The Complete Guide
- Stop Saying Adoption is Expensive
- Large-Family Minimalism: How We Declutter 5,000 Things a Year
- How to Teach Kids the Dangers of Debt (And My Debt-Freedom Story)
- When Should Your Kid Have Their Own Phone? A Real Conversation
- How to Raise Grateful, Selfless Children
- NEFE/The Harris Poll. (2020, April 16). Survey: Nearly 9 in 10 Say COVID-19 Crisis is Causing Financial Stress. NEFE.
- M, Backman. (2020, April 3). Does the Average American Save Money? We’re Not Sure. The Motley Fool.
- S, Steiner. (2016, January 6). Survey: How Americans contend with unexpected expenses. Bankrate.
- M, Mcgrath. (2016, January 6). 63% Of Americans Don’t Have Enough Savings To Cover A $500 Emergency. Forbes.
- Euart et al. (2020, July 23). Financial life during the COVID-19 pandemic—an update. McKinsey & Company.
- US Government Data. (2020, September 23). Labor Force Statistics from the Current Population Survey. US Bureau of Labor Statistics.