COVID + Credit: 5 Ways to Prepare for the COVID-19 Recession
Time to read: 5 minutes
The Coronavirus (Covid-19) pandemic has caused financial stress to go through the roof, with all signs pointing to the start of a deep, prolonged global recession.
The stock market has taken a massive hit. The Trump administration has warned of a possible 20 percent unemployment rate in the near future. Almost 80 percent of Americans across the country were already struggling to pay their bills at the end of a typical month. None of these developments will help lower the financial stress that so many are feeling, including you.
A recession is undoubtedly a difficult time, but you can weather the storm by anticipating challenges early and preparing for the future. With that in mind, here are five essential steps to help you survive these uncertain times:
1. Reassess your financial priorities
One of the hardest parts of a recession — not to mention a global pandemic — is not knowing what comes next and when things will get better. That’s why it's so important to be clear about where you stand financially. Ask yourself these key questions as you take stock of your financial situation.
- How much cash do I have on hand?
- How much cash can I get my hands on quickly, if I need it?
- How much debt do I currently have (credit cards, student loans, etc.)?
- What are my basic monthly living expenses, including food, shelter, health insurance, transportation and childcare?
- Do you have any major life events (for example, weddings, a baby or retirement) coming up with significant expenses attached?
Now is the time to understand what you’re spending today and to anticipate your needs over the next six months. If you’re well-prepared for a recession, job loss or some other financial hurdle, you’ll have an emergency fund that covers three to six months of living expenses (and hopefully a healthy nest egg for retirement).
If you don’t have at least three to six months of basic expenses in cash, then set that as your financial goal. Start by developing a basic understanding of how you are spending your money and building a budget.
To start building a budget, figure out your total household income from all sources, including you, your spouse/partner and any side hustles that bring cash into the household. You should also include income from investments and any other sources, such as child support. Next, list your monthly expenses, including your rent or mortgage payments, utilities, groceries, pharmaceutical and medical needs, childcare costs, home and auto maintenance, debt payments and insurance premiums, as well as any other regular expenses, including those you only pay annually. Add everything up to understand whether you’re spending more, less or roughly the same as your take-home pay each month. Finally, prioritize your essential expenses and make sure you identify the minimum you can spend in a given month to get by — just in case you or your spouse/partner experiences a job loss.
Your budget may need to adapt in preparation for a recession, and that’s okay. Try to cut down on non-essential spending, like entertainment, cable and clothing. While it’s unrealistic to think you can cut out all discretionary spending, it’s important to separate wants and needs. Look for areas where you may have overspent. Try to figure out why that happened. You might not have extra money right now to put toward your retirement or a down payment, which is all right for the short-term.
Once you get in the habit of reviewing your finances and looking for problem areas, you’re off to a great start.
2. Prioritize debt repayment
You might be worried about paying off outstanding debts in the coming months, like credit card bills, utilities or student loans. If you experience a loss of income, you might have to forego paying one or more of these bills, so it’s important to understand which bills you need to pay.
After all, if you lose income, you may not be able to pay every bill on time or in full every month. And, that will have a direct impact on your credit scores. While normally we suggest doing whatever you can to keep your credit scores intact, that may not always be possible. Therefore, you should prioritize how you pay your bills, so your available cash covers as many debts as possible.
- Make sure you pay your rent or mortgage on time and in full. You don’t want to face foreclosure or eviction.
- Make your car payment, especially if you need a car to get to work.
- If you’re facing an income reduction, contact your student debt lender and ask for a hardship application, which may buy you a few months where you don’t have to make a payment.
- Make at least your minimum payment on your credit card. If that’s not possible, contact your credit card company and try to work out a payment plan. (Just know that the creditor will likely freeze your accounts, which will prohibit you from making additional purchases with the card.)
- Continue to keep up with your medical debts if you can, however, do so after other debts are met first. If your health insurance is offered through your employer, you will continue to receive health insurance coverage even if your medical bills mount. If you buy your own health insurance, whether you're self employed or for any other reason, be sure you pay your premium on time so your policy isn’t canceled.
Remember, if you’re falling behind, reach out to your creditors right away and ask for hardship concessions. This might include making interest-only payments on your debt or putting payments into forbearance.
You can also check out your local bank or credit union for a personal loan. There are online lenders as well, and your own employer may offer a short-term loan program in times of trouble.
If you’re making your payments on time, you can also ask your credit card company or any other lender about lowering your interest rates. A significant number of major utility providers offer programs that might allow you to pay your bills at a later date or provide other hardship assistance. You’ll never know what agreement you and your creditor can reach if you don’t ask.
3. Make use of community and government aid programs
Fortunately, many local, state and federal governments will take action during a recession to provide relief to those in need. For instance, during the Coronavirus (Covid-19) pandemic, the U.S. government is considering all sorts of assistance and has already announced that taxpayers will get an automatic extension to pay their tax bill and file their taxes without penalty or interest. Tax day has been moved from April to July 15th. Additionally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has established a temporary moratorium on foreclosures and evictions for homeowners with federally backed mortgages. If your mortgage is federally backed, you may also be eligible to receive forbearance on mortgage payments if you have experienced a financial hardship because of the COVID-19 pandemic. You can consult the Consumer Financial Protection Bureau's guide to coronavirus mortgage relief options for more information on aid that may apply to you.
On a smaller scale, community organizations like food banks and places of worship will often try to help anyone struggling. Check with your local government as well as community activist groups to see if there are resources in your area that meet your specific needs.
4. Put away as much cash as you can into your emergency fund
Even if job cuts or layoffs are looming, keep salting away as much cash into your emergency fund as possible. You’ll need every bit of it when the income stops flowing. Give up all the extras, including takeout and delivery. Try to live as leanly as you can, so your cash goes as far as you need it to.
While tapping into your emergency fund is never a decision you should make lightly, losing a job or being forced to live on a reduced salary certainly qualifies as a good reason to use some of the cash you’ve stowed away. However, it’s important that you start to rebuild your emergency fund as soon as your financial situation is more stable. Otherwise, when the next emergency hits, you might have to make tough decisions, like withdrawing money from your retirement account or applying for a home equity line of credit.
5. Stay on top of your financial situation — and take advantage of the guidance we have on hand
The next few years may be uncertain, but the best thing you can do is take proactive steps now to prepare yourself. To help you stay on top of your finances in these stressful times, you can trust Equifax for reliable information on need-to-know topics. Now more than ever, financial education is important, so you can feel good about where you are with your money, regardless of any challenges ahead.