EP 219: Conserving Cash During the Pandemic

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In this episode, I want to discuss preparing your finances during a recession and how to conserve as much cash and capital you can during this time period. It’s not purely a divorce topic, but it has some general financial discussions in here. And there’s some things I want you to think about. As I’m recording this, there’s something like almost 30 million American adults out of work. The unemployment rate is high. A lot of states have been locked down, and some are slowly starting to reopen, but the economy has fundamentally changed. And just a few months ago, at the beginning of 2020, there was a great economy, and then that changed in the span of about a week or two. And a lot of people have lost jobs or are on unemployment or some combination of those.

And when you’re on a budget, regardless of your lifestyle and your income, oftentimes a big decrease like what has happened recently can completely change your lifestyle, your budgeting, your plans, and it can be hard at a certain point if you’ve exhausted your savings or are getting close to it to figure out ways to conserve some additional money and give yourself added financial flexibility as you try and keep up with the relevant payments that you may have.

And so I want to go through a few different strategies, five specific strategies to consider when it comes to this environment and some ways to improve your financial picture, particularly if your income is down, but your expenses have remained the same or your expenses have even increased given everything that’s going on. And so I’m going to go through five things and I’m just going to start them now.

The first is to check and understand your spending. You should have a very good handle on your expenses. If you haven’t completed a financial affidavit or statement of net worth, oftentimes they ask you for your monthly expenses. One of the things you should be doing is really understanding what those expenses are, how they look, what can be cut from your expenses. I look at every transaction every month and I go through and I say, “Hey, do all these transactions look good? Where do I spend too much? Could I cut something here or there to make sure that I’m not spending too much?”

And when your budget is tight, you have to realize that even small things add up. I’ll use a very simple example, is if you pay $10 a month for Netflix … I don’t know the exact Netflix price at the moment, but let’s just say you pay $10 a month for Netflix, and that’s $120 a year over five years, that is $600 of spending on Netflix. I always look at those small subscriptions as a five year commitment, and you can realize that $10 a month can add up pretty quickly, much less if you have an expense that’s $50 a month or $120 a month or more. And so you need to really think about those expenses and what you may be able to cut.

The second thing is if you have debt of any kind, be it a credit card, student loan, personal loan, mortgage, whatever, you can negotiate with your lenders. Under normal economic environment times, people were not as willing to defer or adjust your payment schedule, but now given the millions of people in very tough situations, and you may be one of them, there are ways to lower your payments in the short-term so that you have some flexibility and in the long-term, you’re going to make up for it. But doing and cutting what you can in the short-term can be helpful.

When it comes to a student loan or a credit card or personal loan, you can pay … Sometimes they’ll let you just pay the interest. Maybe you can’t pay the principal balance, so if you have … I’m just going to make up a student loan, for example. Well, let’s say you pay $1,000 a month on a student loan. Well, 500 of the $1,000 might be going to interest, and 500 of that $1,000 may be going to the principal balance of that loan. And if you don’t have the same amount of income coming in, you can say, “Hey, can I maybe just pay interest only for the next six months, the next 12 months until I can get back on my feet?”

And most lenders are very willing to do that for you because I mean, they want a payment and they don’t want you to stop. And it’s better for them if you pay some over paying nothing and it’s okay … They’ll be happy if you carry a balance for six months, so long as month seven or even month 12, whatever it is, you start paying that as normal again, but if you just stop payments altogether, that actually hurts them quite a bit as well. So people are willing to negotiate and adjust the payment schedules today, so whatever kind of debt you may have all the way to a mortgage or a credit card or anything in between, call the institutions, tell them the situation, and most aren’t even requiring a whole ton of proof in the short-term just because the mass volume of people who are affected right now.

Now, a caveat to that is don’t just stop paying. You should contact the lenders and tell them what’s going on, but if you stop paying, it can hurt you. Now, the only plus side … I would stop paying is a last resort. The only upside is if you stop paying, it does take a few months before those missed payments show up on your credit report, but it’s not suggested. Much better to modify and find a lender or find someone who’s willing to work with you than just stop paying because you don’t have the capital available.

The third tip is to pause retirement contributions. If you are still working and you have a job, or I know plenty of people who still have jobs, but I have lots of friends and people I know who got salary cuts to keep their job. Some took 30%, 25% salary cuts. I know other people who are on unemployment at the moment, but whatever it is, consider pausing those retirement contributions. If you’re contributing 3% or 5% of your salary to retirement, whatever the number is, well, I would lower that to nothing and conserve as much capital as you can in the short-term so you can get through this difficult period.

And conversely is point number four is pause college savings. If you’re saving for your kids’ colleges, you might want to pause that and keep that cash as well. And when you’re in a better financial position, you can start making those contributions again. I imagine just as a general note is particularly for kids who aren’t going to college in the next few years, there’s going to be some adjustments given the whole virus situation and some hard questions in terms of the cost of college, the value of college and what you’re paying for. And so if you’re planning to spend 200 or $300,000 on a kid’s education, you might need to save or hold off. These are short-term bumps in the road, or at least try and think of them as that, and you can catch back up when you are on your feet, but you shouldn’t overstretch in the short-term.

And then finally is consider negotiating or consolidating debt. One of the things I do all the time whenever looking at someone’s debt is I like to rank debt by interest rate. Let’s say your mortgage is somewhere between 3 and 5%. Well, that’s not a very high interest rate, but you could have a credit card that’s charging you 21%, or if you’re behind, it could be 27% and you can have everything in between. And what you should do is be very organized or very careful about how much you’re paying and know how much you’re paying an interest for pieces of debt and figure out if there’s ways to lower that.

I was just having a conversation with someone the other day and I got an offer in the mail, said, “You are preapproved by Discover,” because I use Discover for some of my daily expenses and they said, “You’re preapproved for a personal loan at 6.99% and we can get you up to” … It was a really high amount. And they were like, “We can get you up to $36,000 if you apply within 24 hours.” And I was like, “Wow, that’s a lot of money.” Thankfully, I don’t need it to pay anything off, but there are situations where something like that could be helpful.

If you have a credit card and your credit card payment is charging you 18, 19, 20%, and let’s say you have $10,000 in credit card debt, you could be paying $2,000 in interest a year. But if you refinance with a personal loan at 7%, well, you would be saving yourself 1,300 bucks in interest on that $10,000. I keep a document actually that I update for myself every month that has each credit card, how much the interest rates are and just making sure I pay off my balances, but if there was a situation where I had a bunch of debt, I would know, “Okay, well, this is the most expensive debt, so I need to pay that off first. This is the cheapest debt, so like a mortgage and I’m only paying 4% and there’s some tax benefits, so I’m going to leave that one outstanding and not try and pay that one off.” And so organizing your debt and negotiating, figuring out if you should consolidate certain debt, you can quote unquote “refinance debt” by getting a lower interest loan to pay off some high interest debt. These are all considerations, particularly during difficult times.

The five tips to help you conserve some capital are to first just check and understand your spending. That’s one of the biggest tips I give everyone going through the divorce process in general, but with the economic situation changing on top of it, understanding your spending and cutting your spending for anything that’s unnecessary is the top tip.

The second is negotiate with lenders. Be it a credit card, a student loan, a mortgage, whatever it is, if you can’t make the payments or you need to reduce the payments in the short-term, people are willing to work with you. I guarantee it.

The third is pause your retirement contributions in the short-term, and the fourth is pause your college savings contributions if you’re making them for a kid. And then finally, the last is consolidate your debt or renegotiate your debt and … excuse me … refinance your debt if you have to. And so if you have high interest debt like credit card debt and you get a personal loan at a lower interest rate, it can save you hundreds, if not thousands of dollars over the course of a year or several years just by refinancing certain pieces of debt. And that might be something for you to think about and work on.

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