These are unprecedented times. However, despite the coronavirus pandemic, if you are lucky enough to be employed and your family is keeping safe, you can still take proactive steps to avoid bankruptcy even if your financial circumstances change.
Step 1 – Start an Emergency Savings Fund
This is first for a reason. You probably have witnessed friends and perhaps even family lose their jobs due to the COVID-19 economic downturn and mandated quarantine and social distancing practices. Those who had emergency savings are not only much more financially secure in fact, but must feel better about their forced hiatus from work and everything else because they are not struggling to pay bills and not relying totally on government assistance.
Having a readily-available emergency savings account will make you feel more secure now as well as when you need it. Isn’t that what money is for?
Conventional wisdom dictates that families should have 6-8 months’ worth of expenses saved in case of emergencies. Why so much? Well… look at our current situation. As of this writing (August 10, 2020) the CARES Act expanded unemployment benefits have run out, meaning, the extra $600 a week is no longer available. Congress is at a stalemate and has not passed any extensions.
Those with emergency savings will survive until Congress gets its act together or the economy improves a bit. Those without emergency savings will be desperate for Congress’ solution, whatever that is and whenever that comes. In the meantime, they are likely using credit cards for daily expenses, or failing to pay their monthly bills for lack of income. These practices are the sure path to bankruptcy.
Avoid damaging your credit score, going into credit card debt, and that feeling of desperation that comes with financial struggle. Start saving now if you have no emergency savings. Luckily most of us are spending less because we are going out less. Put at least 10% of your net income away for now, and do so until you have saved up 6-8 months’ worth of expenses, You will be glad you did when and if you ever need it.
Step 2 – Save for Retirement
If your employer offers a 401(k) retirement plan, contribute to it. Why? Because you will be contributing with pre-tax dollars, your taxable income will be less by the amount of your contributions, and your tax bracket will be lower – meaning, you will pay less on income tax than you would if you did not contribute to your retirement account.
If your employer offers to match your contributions, you absolutely must contribute at least the amount matched. If you do not, you are basically refusing free money.
You might be thinking, I’m young, why do I need to think about retirement now? With Social Security in danger of being defunded or underfunded in the foreseeable future, and market conditions unstable, you must start saving now to be sure of income in your retirement years. How many so-called retirees do you know who must still work to survive?
Resolve to contribute 10% of your income to your retirement plan. Only you can ensure your financial security as a retiree.
Step 3 – Live Within Your Means
Now that you are saving for your retirement and for emergencies, you must live on the remainder. Make a list of all of your monthly household bills, and be sure to include occasional expenses such as grooming, medical co-pays, and holidays and gifts. A typical list of expenses for a young family will look like this:
- Rent/mortgage
- House/yard maintenance
- Electric
- Gas or Oil
- Cable/internet
- Cell phone
- Groceries
- Clothing
- Personal grooming
- Car payment
- Travel expenses (gas/tolls)
- Car repair
- Homeowner’s, Renter’s, Life, Auto insurances
- Student loan payment
- School supplies
- Child care/babysitting
- Holidays/gifts
- Entertainment
- Travel
- Tithe to church, synagogue, mosque, etc.
If you have credit card debt, put this at the top of the list and determine to pay that off.
Next to each expense, write down what you spend each month. Estimate from your bank statements if you need to. Then add it up. Are you living within your means?
If not, determine where you can shave a bit off. Can you lower the heat in the winter, and lower the AC in the summer? Can you get a more affordable cable, internet, or cell phone plan? Can you combine insurances to get a discount? Are you not travelling as much and so can budget less for gas, tolls, and car repair?
You must find a way to live on what is left over after you contribute 10% to emergency savings, and 10% of pretax dollars to your retirement account. If you do not, you will incur bills you cannot pay, and if you don’t pay them you will damage your credit score and eventually creditors will sue you. This is another sure path to bankruptcy. If you do pay bills you cannot afford but with a credit card, that credit card balance will quickly become unmanageable and eventually lead to a bankruptcy filing.
Step 4 – Pay all Bills in Full and on Time
If you fail to pay your bills in full and on time, creditors will first report your delinquency to the credit bureaus. This will damage your credit score, making it more difficult and more expensive for you to borrow money, say, for a car loan or a mortgage.
If the delinquency continues, your creditors will sue you. This can lead to money judgments against you, garnishing of your wages, levies on your bank account, and even a lien on your house. Another sure path to bankruptcy.
Failing to pay your rent may result in eviction. Failing to pay your mortgage may result in foreclosure. Filing to pay your car loan or lease may result in repossession. These all can easily lead to a bankruptcy filing, but more importantly, you need a place to live and a way to get to work. Do not default on these loans.
If you cannot pay your bills, open a dialogue with your creditor(s). They will help you because they would rather have your money than sue you. For example, most utilities that vary seasonally, such as oil and electric, offer a monthly payment plan where you pay the same amount each month regardless of how much is used.
Step 5 – Ensure Your Family’s Income Stream
What happens to your family if something happens to the major breadwinner and he or she can no longer work? Your best bet is to purchase a term life insurance policy in an amount to replace that income. How much coverage you purchase will depend upon your income, the size of your family and age of your family members, and your family’s needs.
Most term life policies will offer an AD&D rider. Accidental Death & Dismemberment insurance provides benefits to the insured if he or she is accidentally injured, and benefits in addition to the death benefit to the family of the insured if the insured dies in an accident.
Insuring the family’s income stream is actually insurance against having to file bankruptcy.
Take these five steps and you will have done all you can to ensure your family’s financial security and stability. Good luck!
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