COVID+Credit: Rebuilding Savings After Unemployment
Reading time: 3 minutes
Over 30 million Americans have applied for unemployment benefits since steps to contain the Coronavirus/Covid-19 pandemic began in March. Now, as businesses nationwide slowly begin to reopen and more states remove shelter-in-place restrictions, many across the country are pondering a simple question: What’s next?
You may have been fiscally responsible your entire life, setting money aside for retirement or to build up a rainy day fund. Then, through no fault of your own, something unexpected happens and you suddenly find your savings depleted. Here are some examples:
- You or your spouse loses a great job only to replace it with one that doesn’t pay even half of the previous wage.
- You lose your spouse, the primary breadwinner, unexpectedly and become the financial head of the household.
- You or a member of your family faces an unexpected illness, racking up huge hospital bills.
These types of emergency situations can cripple your finances, and you may find yourself asking, “How do I start over?” The situation is made even more complex by the Covid-19 pandemic and the uncertainty regarding when the economy will recover and life will get back to normal.
The first thing to make clear is what most people may already know: There’s no quick fix to any financial problem. If it took years, or even decades, to build your savings, it may be a long process to replenish those reserves. By accepting that there’s no easy solution, you can move forward in planning a gradual financial recovery.
Set a budget and reduce your expenses
The first thing you can do is set a firm budget and do what you can to lower your expenses. The less money you budget to spend each month, the more you’ll have left over to put in your savings.
Next, attempt to get your existing debt under control. As long as part of your monthly budget is devoted to debt payments, it will be difficult to put money aside. Also, by retiring interest-bearing debt, you will actually save money over the long haul. Interest payments on credit card debt of 25 percent or more could be adding hundreds of dollars a month in expenses. Therefore, if you have credit card debt, you should strive to pay it off as soon as possible.
If you have a mortgage, look into refinancing at a lower interest rate. Once you’ve brought your debt under control, you can begin setting money aside again.
Prioritize your savings
If possible, begin to build an emergency fund that is equal to three to six months of expenses, keeping this money in an interest-bearing savings account separate from your day-to-day funds. This way, you’ll have savings that can be retrieved if an emergency crops up — but that is not so readily accessible that you’ll be tempted to dip into it for non-emergency spending. Read more about building an emergency fund here.
Next, begin contributing to a 401(k) or IRA as soon as possible. Your employer may match any 401(k) contributions you make, which can significantly increase your rate of savings. Depending on your income level, both 401(k) and IRA contributions bring tax benefits, which means you’ll have more money to save overall.
Make contributing to your savings a top priority:
- Pay yourself first by immediately putting aside a set amount of money from each paycheck, rather than waiting until the end of the month to see how much is left over. Treat saving as a predictable monthly expense, like food and utilities.
- If possible, have some money automatically deducted from each paycheck and placed into your savings account.
- Immediately deposit any financial windfall — a bonus or a rebate, for example — into your savings so that you’re not tempted to use it for day-to-day spending or a splurge.
You should also think about how you will spend any government assistance that may be available in the coming months as a result of the Covid-19 pandemic. If a new round of federal stimulus payments is passed or unemployment aid is expanded, it’s good to have a plan for how you will use that money to your best advantage — instead of relying on it as part of your monthly budget.
Rebuilding after your savings have been depleted is not an easy task, but you can do it with discipline and the right attitude.