The coronavirus crisis is creating chaos throughout the world, and not just because of how quickly the new virus can spread within populations and overwhelm healthcare systems. Another side effect of the pandemic is the toll it’s taking on people’s financial lives. Since March, more than 36 million Americans have filed for unemployment benefits.
There also is the very real danger that the U.S. economy is headed into a recession. The Bureau of Economic Analysis forecasts a -4.8% contraction in first quarter GDP and the Atlanta Fed’s GDPNow model sees GDP in the second quarter at a startling -34.9%, leaving little doubt that a recession is in the works.
If you have savings to turn to during this crisis, you’re in a fortunate position. Yet that doesn’t mean you should dive right into those funds without a plan. Yes, the COVID-19 crisis may be exactly the type of occasion when it’s okay to draw money out of your savings or other accounts to meet current needs. Still, with the amount of uncertainty in the U.S. economy at this time, it’s important to tap your emergency funds as wisely—and as slowly—as possible.
Below are four tips you can use to stretch your emergency fund until you’re back on your feet financially.
1. Make a Crisis Budget
Have you lost your job or had your income reduced during the COVID-19 crisis? If so, the first step you should take is to make a crisis budget.
Figure out how much money you have to work with for budgeting purposes. This total may include remaining funds from your checking account, an emergency fund or other sources. For example, if you have $1,000 tucked away for a summer beach vacation, you may want to include that money in your budget if it can help you make ends meet this spring.
Remember to check the rewards balances on any cash-back credit cards you hold. You could potentially have access to extra funds that you can transfer to your bank account.
Eventually, your new budget may include unemployment benefits or other sources of income. However, it could take several weeks to access funds from either of those sources. In the meantime, you need to know how much cash you have to work with right now.
Next, figure out your essential expenses. These may include:
- Housing (rent or mortgage)
- Basic utilities (power, water, etc.)
2. Lower Your Spending
Now that you have a list of essential expenses, you can determine what you can afford. If you don’t have enough money to cover even the basics, reach out to your utility company, landlord or auto loan provider. Certain creditors may be willing to work with you, while others won’t. But you’ll put yourself in a better position if you reach out before you miss a payment.
Do you have more than enough money to cover your basic needs? If so, you can branch out to other expenses. For example, paying at least the minimum payments on your credit obligations can help you protect your credit score during the crisis.
Many banks and other lenders are reducing fees and letting customers pause or reduce payments for a period of time during the COVID-19 crisis (federal student loan payments, for instance, have been put on hold for six months). Just be sure to get the full details before you take advantage of any loan relief offers. Some lenders and servicers, especially in the mortgage space, are requiring borrowers to repay the skipped payments in a lump sum when the forbearance period ends, which could create new problems later.
Tip: Don’t forget to put automatic bill payment drafts on pause if you’re making adjustments to your normal bill-paying habits.
Finally, consider lowering or cutting nonessential expenses from your budget, at least on a temporary basis. Cost-cutting ideas include asking your car insurance company for a lower rate if you will be spending less time on the road in the coming months. You also can cancel gym memberships, pause streaming services and spend less money shopping online.
Budget cuts are smart even if you’re still earning your full salary. With the current state of the economy, not to mention other unknowns, it’s difficult to predict whether your income will still be holding steady months or even weeks from now. Yet one thing you can control is how you spend the money you’re currently earning.
Use this opportunity to create or grow your emergency fund for future uncertainties. If you want to amplify your savings, you might consider opening a high-yield savings account.
3. Look for New Income Sources
Even if you did a great job of planning for the unexpected, your emergency savings aren’t unlimited. The stash of cash you sacrificed to put away may not be enough to carry you through the COVID-19 crisis by itself.
It’s in your best interest to find ways to replace the income you’ve lost. Otherwise, your emergency fund won’t last very long. Unless you have a new job lined up immediately, consider applying for unemployment benefits as soon as you’re laid off or furloughed from your job. Your first unemployment check can take several weeks to arrive.
On a positive note, the federal government has taken an unprecedented step and expanded unemployment benefits for workers affected by the pandemic. Instead of relying on state unemployment benefits alone (which averaged $387 per week nationwide in February), unemployed workers will receive an extra $600 per week from the federal government for a period of four months, thanks to the CARES Act.
You also can start looking for full-time or even part-time employment to help make ends meet for your household. There are numerous websites that can help you find work-from-home jobs (both full-time and freelance) that you can do from the safety of your own home during the pandemic. You also can find thousands of new jobs that are being created in response to the coronavirus.
Finally, if you’re one of the 20 million Americans still waiting on a stimulus check, don’t just spend it blindly once you receive it. Make a plan for how you’ll spend the cash before it arrives. Whether you use the funds on basic essentials, pad your emergency savings or apply it to staying current on your debt payments, the money will stretch further if you take the time to figure out your immediate financial priorities.
4. Put Some Financial Goals on Hold
Perhaps you’re working to pay off your high-interest credit card debt this year. Maybe your goal at the start of 2020 was to eliminate your student loan balances. Setting financial goals is wise, but there’s nothing wrong with hitting the pause button in the middle of a crisis.
Unless you’re still earning your regular income and you have a healthy emergency fund that covers at least three to six months’ worth of your living expenses, it’s probably best to reassess your financial strategy—at least in the short term. If you don’t want to lose traction, one option to consider is to continue to make those extra debt payments to yourself instead.
If you’ve been paying an extra $500 per month toward your ongoing credit card debt, consider putting those funds into your savings account instead. Yes, your credit card debt will continue to accrue interest, but you’ll have the option to access the funds for essential emergencies if you should need the money. (Using a 0% APR balance transfer credit card could help you save money on interest as well.)
Hopefully, you won’t have to touch this debt fund and you can go back to making the larger payments to your creditors at the end of the current crisis. The extra interest costs, if you can’t avoid them, are well worth the added peace of mind and security that having the additional cash on hand will give you in the meantime. And, if you do need to access the money to cover necessities, you’ll be grateful for the decision you made.
There are many differing predictions about how the future will play out with regard to the economy and the coronavirus itself. In late March, the Federal Reserve Bank of St. Louis estimated that the unemployment rate in the United States could exceed 32%, smashing the previous record of 24.9% at the height of the Great Depression in 1933. And yet the COVID-19 crisis is affecting different sectors of the economy in very different ways.
Nearly all would agree that much remains unknown. Only time will tell just how dire the health and economic fallout from the coronavirus will be. Whether life returns to normal sooner than expected or the crisis grows more serious, one fact is certain. When you have extra cash in savings—even a small amount—you’re in a better position to weather whatever situation comes your way.