The coronavirus pandemic has left me, like so many others, on pretty shaky financial ground. I’ve stared at my credit card statement every now and then, wondering whether I should pay more than the minimum amount, or hold on to what I have, in case I end up in a jam, or someone in my family does. Right now, is it smarter to pay off debt, or hoard money?
While the specifics will vary depending on your personal situation, all the financial experts I spoke to agreed that now is a good time to prioritize saving, given the incredible amount of uncertainty, especially in the job market. For most people, that means paying off only the minimum amount of credit card and/or other debt each month, keeping your money out of the stock or bond market, and cutting down on expenses, Jason Kirsch, a certified financial planner and founder of Grow, a life and financial planning firm, tells Mic.
“Cash, right now, is king,” he says. “It’s the most valuable asset that anyone could have.”
He cites two reasons for this. One, you’ll sleep better at night knowing you have cash on hand in case you experience a steep drop in income. After all, “it’s the only truly liquid asset.” Two, protecting your cash will allow to buy stock and real estate assets if their prices fall, which Kirsch believes has a high likelihood of happening within the next few years. “There’s a downward pressure on prices that started a few months ago and will accelerate,” he explains. Buying these assets at a discounted rate, in turn, could allow you to reap higher returns on them.
Take advantage of rent deferral, student loan forbearance, and other opportunities that allow you to reduce your spending, Kirsch says. He worries that paying these bills now might make you ineligible, or only partially eligible, for any future relief. “I would be shocked if there is not student loan relief in the next few months,” he says, explaining that the government would probably rather see you pump your income into the enfeebled economy than into student loans.
Mary Beth Storjohann, a certified financial planner and founder of Workable Wealth, a financial education and empowerment platform, advises her clients to build a three- to six-month emergency fund in normal times. In the time of COVID, though, she urges them to shore up six months’ worth of emergency funds, if they can. Simply put, you’d budget enough to cover basic needs, like your rent, mortgage, car payment, and groceries, for the next six months. “You want to be able to basically support yourself, but without all the frills.”
You’ll sleep better at night knowing you have cash on hand in case you experience a steep drop in income. After all, “it’s the only truly liquid asset.”
Restrictions on dining out, traveling, and other paid experiences in many places should free up some money for your emergency fund, Storjohann adds. Check in with your car insurance provider, since some have been giving refunds and credits to drivers. And as tempting as it might be to go ham online shopping with your stimulus check, funnel it to your emergency fund, too.
If you’re just starting to build your emergency fund, Storjohann recommends opening a high-yield savings account from a bank like Ally or Synchrony, which would allow you to earn around 1.3% interest a year on your savings; U.S. banks allow you to earn only 0.06% on average, as of the week of May 18, according to the FDIC. “They’ll pay you more on your savings than your standard bank would.”
Like Kirsch, Storjohann recommends putting off rent and other payments, but mainly if you’ve lost your job, or live paycheck to paycheck, with zero savings, so you can contribute more to your emergency fund. Make only the minimum payment on your debts each month. If you need to, call your lender about renegotiating the terms of your repayment. On the other hand, if you still have job security, an ample emergency fund, and the means, you have the luxury to forego rent deferral and similar programs.
Take the time to read the fine print on rent deferral and similar programs before you sign up for them, Storjohann adds. Dominique Broadway, financial planner and founder of Finances De·mys·ti·fied, a personal finance bootcamp, agrees. “It’s important to understand the terms, such as when will repayment begin? Are there any additional costs or fees for postponing payments?”
Even if, say, deferring your mortgage helps you now, you might need to start making payments again in six months, Storjohann tells Mic. Plus, it’s hard to plan around the terms of future relief programs. It might make more sense to stick to your original debt repayment plan, while you can afford it, and to avoid the hassle of setting aside funds — or worse yet, surprises — later on.
Based on my financial situation, I’ll probably continue paying only the minimum amount on my credit card bill and holding off on paying my student loans until I beef up my emergency fund a bit more. Even this basic game plan makes these tenuous times seem a bit more manageable.