When you lose a job, the bills don’t vanish along with your income. If you’re one of the 7.1 million Americans who are out of work during the COVID-19 pandemic, you still need to provide the essentials for yourself and your family.
That may mean taking special steps to fix your budget, including cutting back on expenses and looking for extra sources of income. But, say financial planners, your goal should be to get through the rough patch without compromising your long-term financial security.
Here’s what to do first — and what you should only do as a last resort.
Apply for unemployment
Before you tap any assets, apply for unemployment, says William Hatton, a financial planner in Sherman Oaks, Calif. In many states, the CARES act—which helps people who have lost work to the coronavirus crisis — means that more groups of people are eligible to receive unemployment assistance, including part-time workers and self-employed people.
“The average unemployment check is around $400 a week, and the CARES act adds an extra $600 a week for four months,” Hatton says. “That should be a good cushion of cash for most families.”
Put bills on hold
Because of the epidemic, many lenders are letting borrowers suspend payments for some period of time. Federal student loan borrowers can take a six-month break, from March to September. No interest will accrue during this period, and borrowers won’t pay late fees or see dings on their credit reports.
Fannie Mae, Freddie Mac, and the Federal Housing Administration, which back millions of Americans’ mortgages, are all have programs to offer homeowners a recess from mortgage payments of up to twelve months, though the actual deal depends on your loan servicer. “I’ve seen several clients take advantage of this, and the application wasn’t crazy,” says Luis Rosa, a financial advisor in Henderson, Nev. Make sure you understand the terms of the suspension, he cautions. “A balloon mortgage payment later wouldn’t be much help.”
Other lenders are sometimes willing to cut borrowers a break, too. Rosa has a client who called her credit card company and got a two-month waiver on making minimum payments.
In most states, foreclosures and evictions are on hold, even for tenants who can’t pay rent. Private landlords can also apply to suspend mortgage payments. “One of my clients did this for his investment property,” Rosa says.
Your car insurance rate depends in part on how much you drive—a number that’s probably much lower without your commute. Call your insurance company and ask for a reduction. If you have children who are at home when they would normally be at college, ask for a room and board rebate.
Tap your assets in this order
Once you’ve eliminated unnecessary items from your budget, tap assets for cash. Begin with bank accounts: checking, savings, and certificates of deposit. “Cash should first be taken from sources where there are no fees, taxes or penalties to withdraw, and no need to liquidate investments that are at depressed prices,” says Andy Panko, a financial planner in Iselin, N.J.
If you’re forced to sell part of an investment portfolio, start with your taxable account and sell assets that have lost relatively little of their value. You can also take principal from a Roth account without owing taxes or penalty.
Tax-deferred retirement funds should be the last place you look for cash. The CARE act lets you take up to $100,000 from an IRA without penalty, penalty-free, or borrow the same amount from a 401(k). You’ll still owe taxes on whatever you don’t pay back, and you’ll lose that money’s long-term compounding power as a tool for funding your retirement.