Since February, the spread of COVID-19 has been disconcerting on many levels due to daily headlines about the imminent public health crisis and the extreme measures being taken to mitigate it. This has caused uncertainty, which has in turn caused high financial market volatility.
During times of uncertainty, it's important to focus your energy on the areas that you can control. As such, we thought it would be empowering to see a list of proactive personal finance strategies to consider during these turbulent times.
Before delving into the content, please note that if you’re experiencing a loss of employment/income or think you may be in the near future, there are separate actions that should be considered and we’d be happy to discuss your options with you. Please call our office at (303) 261-8015.
Maintain and Bolster Emergency Savings:
- Preserve six months of income in a dedicated savings account. An even higher amount would make sense if your income is variable, you have dependents, or are a single-income household.
- Look for competitive interest rates from online banks, local credit unions, etc. Despite the dramatic decrease in interest rates, there are still many institutions offering compelling high yield savings accounts. Shy away from CD’s as this money should remain particularly liquid.
- Set up a system for saving. Just like your 401k, increasing savings is best done through regular contributions, so use your bank’s automated tools for having the money deposited in the applicable account on a bi-weekly or monthly basis.
Create or Update Your Budget:
- Prioritize your spending. What better time to focus on what expenditures are essential? Cut the monthly subscriptions that you don’t use. Shop around for better rates on your insurance policies. Assess items on which you’ll be spending more or less in light of working from home and socializing less.
- Consider increasing charitable giving and/or local business spending. With less being spent on travel, gas, and big discretionary expenses this may free up money for “impact” spending to help those in your community.
- Make savings (emergency, investment, discretionary) a top line expense. Many people use what’s left after their monthly expenses for savings, which is often not much. It is much more effective to view your savings contributions as an expenditure right below your fixed expenses (mortgage, rent, car payment) and above lifestyle (eating out, clothing, entertainment) in terms of priority. This helps to ensure that it happens in the frequency and amount that you desire.
Add New Money to Investments (Buy the Dip!):
- Increase your 401k contribution and make sure you’re contributing enough to receive the full company match. This is part of your benefit package. Plus, increasing your contribution by 2-3% may not be very noticeable, particularly if your contributions are pre-tax (traditional 401k).
- Max out your 2019 Roth/IRA contribution. The deadline for contributions has been extended to the new tax filing deadline of July 15, 2020. While we prefer that you maintain a long-term view for your retirement accounts when possible, the Roth IRA has some compelling withdrawal features to keep in mind. You can withdraw your principal at any time penalty-free. What’s more, you can withdraw earnings penalty-free after having the account open for five years as long as you are age 59 ½ or older.
- Front Load your 2020 Roth/IRA contribution. If you’re contributing monthly or usually wait to contribute until later in the year, this could be a better time to invest the money due to the relatively lower cost of investments compared to just a month ago.
- Invest in a non-qualified account, particularly if you don’t qualify for additional retirement account contributions. There may be some benefits to investing in this type of account, as capital gains can receive a more favorable tax treatment than income distributed from an IRA and you can use losses in the account to offset gains (discussed further below).
- Add funds to a relative’s 529 college funding account, particularly if the child has 10-18 years until graduating high school. In some states, including Colorado, the contribution is tax deductible if it is made in the Colorado state 529 plan. The biggest benefit is the tax-free growth and tax-free distribution if the funds are used for qualifying education expenses.
Enhance Existing Investments:
- Increase your risk tolerance in your accounts. This will effectively increase your allocation in stocks and decrease your exposure to bonds/cash. This is another way to the buy investments in equities at lower prices without adding new funds.
- Convert a portion of your IRA to Roth. This may be a great opportunity to pay the taxes on pre-tax investments in your IRA at a much lower price than even a month ago. This will allow the investments to grow in the Roth tax free, and be distributed tax free when you or your beneficiaries withdraw funds in the future. You will owe income tax on any amount you convert, so set aside an estimated amount for that payment in savings or pay it now so that you don’t forget.
- Harvest Tax Losses. If the value of certain investments has gone below what you paid during this sell-off, it may make sense to swap it into a similar but different investment. This will generate a short or long-term loss which can be used to offset any gains from earlier or later this year. Beyond gain offsetting, it could reduce taxable income by up to $3,000 for this year and potentially more in years following. This is a fairly complex strategy and worth discussing with us before deploying.
Invest For the Long-Term:
- Don’t make dramatic changes if you think markets will be higher in 5-10 years. However, it is important to assess your asset allocation to make sure it aligns with your risk tolerance, time horizon and underlying objective for the funds. Hiring an investment manager, like Denver Wealth Management, can help alleviate these responsibilities.
- Participate in the market’s best days as they often happen amid the worst. Missing out due to selling out of the market or waiting for a better entry point has shown to dramatically reduce your long-term investment returns.
- Keep perspective: Downturns are normal and typically short. Market downturns may be unsettling, but history shows stocks have recovered and delivered long-term gains. Over the past 35 years, the stock market has fallen 14% on average from high to low each year, but still managed gains in 80% of calendar years.
This pandemic we are facing may feel unprecedented, but turbulence in the financial markets is far from. Event-driven or otherwise, our markets have faced extreme adversity in the past, but time and time again, they recover. We recover.
We wish you and your families health through this stressful time. We are here to serve you and help manage your financial needs. The information provided in this article may not pertain to all, but if you have any questions, please do not hesitate to reach out. Our team is available and working harder than ever to best prepare our clients for their financial future.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Roth IRA offers tax deferral on any earnings in the accounts. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may results in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All investing includes risk including possible loss of principal.