Tips on how to build financial resilience
Even a few hundred dollars can protect you
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A few months ago you may not have thought much about strategies for managing credit balances or how much of an emergency fund you really need. But with finances strained by the coronavirus pandemic, making smart money decisions is crucial.
To better handle current conditions, ask yourself these three questions.
HOW MUCH OF AN EMERGENCY FUND IS NECESSARY?
THE ANSWER: Even a few hundred dollars can protect you. Don’t be daunted if you have no emergency cushion or it feels very slim.
“Families with a savings cushion of $250 to $749 are less likely to be evicted, receive public benefits and miss a bill after a job loss,” says Signe-Mary McKernan, a vice president at the Urban Institute. Research by that Washington, D.C., think tank found that less than $1,000 is enough to help families weather a financial crisis.
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“Even small amounts of savings can make a difference, and we find that low-income families with savings are more resilient than middle-income families with no savings,” McKernan says.
WHAT YOU CAN DO: With more uncertainty ahead, dig into your budget and make cuts so you can shore up savings.
McKernan suggests setting up automatic savings from your paycheck — even as little as 2% will add up over time — and saving any windfalls like a tax refund or bonus.
HOW DOES CARRYING A CREDIT CARD BALANCE AFFECT MY CREDIT?
THE ANSWER: Relying on credit cards can work as a financial bridge when money is tight, but paying at least the minimums on time is critical to protecting your credit standing.
“Your credit score is like your report card,” says Lauren Anastasio, a certified financial planner at SoFi, an online financial services company. “Every month that goes by is an opportunity for you to have a positive data point.”
WHAT YOU CAN DO: Because late payments hurt your score the most, pay at least the minimum by the due date.
If possible, pay more than minimums so you can bring balances down over time. The second-biggest influence on your score is how much of your credit limits you’re using, so rising balances may ding your score. But that damage quickly fades as you pay them down again.
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Do pay off cards completely if you can, because carrying a balance isn’t necessary for good credit. “It blows me away the number of people who say they don’t pay off their credit card because they believe it will help their credit,” says Anastasio.
SHOULD YOU TAKE MONEY FROM YOUR 401(K)?
THE ANSWER: The CARES Act enacted in late March provided $2.2 trillion in relief and made accessing funds from 401(k) accounts easier. But you likely have better options for cash in a crunch.
To start, here are the recent changes:
Those affected by the coronavirus can now withdraw up to $100,000 from their 401(k) accounts or IRAs without penalty and avoid taxes if the money is repaid within three years.
For 401(k) loans, savers can now borrow up to 100% of their vested balance, up to $100,000. While these loans are typically due over five years, the CARES Act allows borrowers to delay payments owed in 2020 for up to a year.
But taking money from your 401(k) will stunt your retirement savings because that money is no longer earning compounded returns.
“Any loan you take from a 401(k), those are funds that are going to be uninvested while you’re paying yourself back,” Anastasio says. “Even though you’re borrowing against assets you’ve accumulated, these are funds that are designed to be appreciated over time, so there is that opportunity cost.”
And if you can’t pay back a 401(k) loan on time, taxes and penalties kick in if you’re under age 59 1/2.
WHAT YOU CAN DO: You may have some options that won’t interfere with your future retirement plans:
— PERSONAL LOANS: Unsecured personal loans are a good option for those with good to excellent credit scores and generally range from $1,000 to $50,000.
— CREDIT CARDS WITH A 0% APR PERIOD: Also typically for those with good to excellent credit, cards with 0% APR periods, which usually last between 12 and 15 months, give you access to credit without paying interest.
If you need instant cash, services like Earnin and PayActiv can give you an advance on your paycheck without starting the cycle of debt often brought on by high-interest payday loans or car title loans.