A pandemic is hardly ever planned for and as we are quickly finding out it’s as if a nuclear bomb went off on our finances. With the outbreak of COVID-19, over 1 million Canadians and 3.3 million Americans have applied for employment insurance in the last week of March 2020 alone, and it’s going to get worse. With nearly half of people one paycheck away from not being able to pay their bills, losing a job or not being able to work is devastating.
You might be wondering:
- How will I pay my bills?
- What about my mortgage?
- How can I save money if I’m ill or sick?
- How will I care for my family?
The good news is there are things you can do during COVID-19 and any future pandemics that can help. Here is what you should do during a pandemic.
1. Increase Your Liquidity
Even if you have an emergency fund, you should be ready for the worst. You need to have liquidity which I like to refer to as springy debt. Springy debt is a debt you can pay off or increase at will. Call your bank to increase your line of credit and look into a low-interest credit card, like the no-fee MBNA True Line Mastercard with a 12.99% interest rate, if you don’t already have one. It’s best to do this when you still have a good credit score.
For example, I have an emergency fund but I recently called my bank and tripled my line of credit. I don’t expect to use it but it is better to be safe than sorry. Interest rates have also decreased which will help if I ever have to draw on it.
2. Lower Your Expenses
It’s important to perform an expense review and to cut back or negotiate on non-essential expenses to preserve liquidity. For example:
- Cut out or put on hold any non-essential subscriptions.
- Cut back or cancel unused annual fee credit cards.
- Put on hold or change your car insurance if you aren’t driving.
- Negotiate your home internet and cell phone plans.
- Cancel or put on hold your gym membership if it’s closed.
- Cancel or put on hold your parking pass or transit pass.
- Cancel or put on hold any dating apps (all about social distancing!).
For myself, I am eating out less and cooking more at home because restaurants are closed but I signed up for Crave TV and Disney+ and ordered a Kindle for cheaper books. Have to pass the time with something and they are cost-effective.
3. Change Your Automated Payments
You may want to review and change your payment amounts to reduce the amounts going forward until the pandemic is over. For example, if you recently lost your job it probably doesn’t make sense to have automated payments going to your savings every month.
4. Make the Minimum Payments
Under such extreme circumstances, it is okay to be making the minimum payment on purchases you are making on your debt such as groceries and critical bills like your rent or mortgage payment. You want as much liquidity as possible. Think of it this way, which is more expensive, paying a $40 minimum payment on a $1,000 credit card balance, or coming up with $1,000 upfront. Once you are back on your feet or when things get back to normal you can get back on track.
5. Call Your Lenders and Other Service Providers
If you are having financial difficulties paying your bills on time contact your lender, credit card company, and utility provider and ask what they’re doing as a result of the pandemic to help people in financial distress. For example, the big 6 banks in Canada are offering six months deferral of mortgage payments for those that qualify. This does not mean that the payments are being missed, just that they are being deferred, essentially extending the term of your mortgage. Important to note that deferrals may mean that the interest accrued from each deferred payment is being added back to the mortgage. Essentially then you would be paying interest on interest for those payments that were deferred increasing future payment amounts. You should look at your bank’s policy to make sure. If this is the case, and you are not desperate for financial relief, then don’t take it.
How this affects your credit score has not been released yet but I would expect lenders to be lenient when reporting to the credit monitoring firms like Equifax and TransUnion. Even if taking advantage of their program hurts your score, credit scores bounce back with time. Right now freeing up cash is the best way to get through this crisis.
6. Get a Copy of Your Credit Report
You want to know where you stand now and how your financial situation is going to impact your credit score over time. The breakdown of scores are as follows:
- 800+: Exceptional credit
- 750 to 799: Excellent credit
- 700 to 749: Good credit
- 640 to 699: Fair credit
- 580 to 639: Poor credit
- Below 580: Bad credit
You can order your credit score directly from Equifax or TransUnion for free or sometimes your bank offers them to clients. Other alternatives are using CreditKarma.com or CreditKarma.ca. Once things settle down and you are back to work then check your credit score again to see the damage. In the US at least, your credit score should not be impacted between January 31, 2020, and 120 days after the end of the national emergency if you have modified your payment plans with your providers. If your credit score has been negatively impacted during that time, be sure to call up the credit reporting agency.
7. Prioritize Bills
Create a list of your bills and rank which bills are more important than others to make payments on time. If your bank won’t let you defer your mortgage payments then this will likely be ranked #1, same as rent. Utilities would also be high up on the list if they can’t be deferred. Anything else is fine to miss a month or two if your financial situation calls for it like your home internet. However, if you can continue to make payments it is best to do so.
8. Look Into What Government Support is Provided
Every state, province, and country is going to be different in how they react to a pandemic, but it helps to know what programs are in place to help with the pandemic. For example, in response to COVID-19 in Canada the Federal Government is offering the following:
- Increasing the Canada Child Benefit by $300 per child for the 2019/2020 benefit year;
- Giving extra time to file income taxes. The return filing due date for 2019 taxes will be deferred to June 1, 2020. If you owe any taxes, you can defer until after August 31, 2020, the payment of any income tax amounts;
- Providing mortgage support. If your mortgage is CMHC insured and in financial distress, you can apply to defer your payments for up to six months;
- Improving access to Employment Insurance. They are waiving the one-week waiting period for those individuals in imposed quarantine that claim Employment Insurance sickness benefits;
- Add a New Canada Emergency Response Benefit (CERB). For Canadians who lose their jobs or face reduced hours as a result of COVID’s impact and not eligible for EI they will provide up to $2,000 per month as a taxable benefit for up to 4 months starting in early April;
- Increasing their goods and services tax credit this year. They are proposing a one-time special $400 payment by early May 2020 through the Goods and Services Tax Credit;
- Offering a moratorium on the repayment of Canada Student Loans. For any individuals currently in the process of making payments on their loans, payments will be deferred for six months.
Need more support? Visit your provincial government’s website for more information on how they’re providing COVID-19 support.
If you live in the US, the Government is providing the following in response to COVID-19:
- Cash payments. Most adults will get $1,200, although some will get less depending on your income. For every qualifying child age 16 or under, the payment will be an additional $500. If you make more than $99,000 or married and earn $198,000 you won’t qualify. If someone claims you as a dependent you also won’t qualify. You don’t need to apply, the IRS already has your bank account information and will transfer the money to you via direct deposit;
- Expanded unemployment benefits. Under the plan, eligible works will get an extra $600 per week on top of their state benefit. Some states are more, some are lower. Self-employed people are also eligible as well as part-time workers. The program goes until December 31, 2020;
- Federal student loan payments are deferred until September 30, 2020;
- Penalty-free withdrawals out of IRAs and workplace pensions. You can withdraw up to $100,000 in 2020 without the usual 10 percent penalty, as long as it’s because of the outbreak ie. people who are diagnosed with COVID-19 or have experienced financial hardship from quarantine, layoffs, reduced hours, or furlough between now and December 31, 2020. You will be able to spread out any income taxes that you owe over three years from the date you took a distribution;
- Temporary, nationwide moratorium in place for renters whose landlords have mortgages backed or owned by Fannie Mae, Freddie Mac, or other federal entities. Landlords also can’t charge any fees or penalties for nonpayment of rent.
9. Stay Invested If You Can
It’s hard to watch the market drop and all your hard-earned money along with it. But remember that markets have a history of bouncing back. See my post, What To Do During a Market Crash. If you sell now when the market is down, you will likely miss out on the market rebound.
10. If Things Get Bad, Consider Selling Your Retirement Accounts
If you have an emergency fund or savings then great. But a lot of people don’t. Then what? If don’t have access to springy debt or you lost your job and your financial need is a lot higher than you originally planned for and the government programs are not enough, then as a last resort consider selling your retirement accounts.
If you live in Canada, this means looking to sell your TFSA first before your RRSP. Why? The TFSA allows you to withdraw funds at any time tax-free and without penalty which makes it far more flexible than an RRSP. Furthermore, making a withdrawal does not result in lost contribution room. Any withdrawals you make this year will be added to your unused contribution room next year. With an RRSP, any withdrawals will be treated as taxable income and withdrawals cannot be added back to your contribution room.
If you live in the US, during the COVID-19 pandemic, as mentioned above, the standard 10% withdrawal penalty for IRAs under the age of 59.5 is waived up to $100,000.
Remember selling your investments should be used as a last resort. The stock market will likely be down during a pandemic (as it is now) so you will most likely be taking a loss and diminishes your future earning potential.
Legal Disclaimer: The views expressed by Mr. Dumont on Money Sensei are solely his and not intended as investment advice nor a guarantee of any financial return. Mr. Dumont is not an investment or tax professional, so the information contained on the blog is not a substitute for professional advice. The contents of this blog are accurate to the best of his knowledge at the time of posting, but rules and laws are ever-changing. Please do your research to confirm that you have the current information.