Eight months after the coronavirus pandemic turned “normal” on its head, one thing is becoming clear: We’re not getting back to normal any time soon, if ever. Another wave of COVID-19 cases is sweeping the U.S., and the effects of the pandemic economic crisis may last long after the virus is under control.
Since the crisis began, most people have focused on dealing with the short-term impact of the pandemic. Now, as 2020 draws to a close, it’s time to start thinking about your long-term financial plans through the lens of the changed world we live in. Everyone is affected by the current situation in one way or another, and making a few important changes now could make a big difference in your financial situation years from now.
Let’s first look at what financial planning is and how it works, then we’ll highlight how you may need to adjust your plans to meet the current situation.
What is financial planning?
Although financial planning is often thought of as a service for the wealthy, the truth is that anyone can have a financial plan.
Financial planning is an assessment of your current financial situation, your financial goals for the future, and a plan on how to reach those goals. In other words, your starting point, your desired end point, and a path from point A to point B.
A financial plan usually includes the following:
- A retirement plan, including when you expect to retire and how you plant to cover your living expenses in retirement.
- A long-term investment plan, which details how you’ll save for goals like retirement, a child’s college costs, healthcare costs as you age.
- A tax reduction strategy, which includes taking advantage of tax-advantaged accounts like a 401(k) or IRA, 529 college savings account, health savings account, etc.
- A risk-management plan for unexpected situations such as a job loss, health crisis, natural disaster, disability, and death.
- An estate plan, which includes planning for your funeral expenses as well as how your assets will be distributed to future generations after you pass away.
How do you create a financial plan?
Your financial plan can be simple or complex, depending on your situation and needs. To create a simple financial plan for your household, you’ll need to determine:
- Your current financial situation
- Your medium-term and long-term financial goals
- Your investment strategy
On top of that basic structure, you can add tax planning, risk management, and estate planning as appropriate for your situation.
To get a clear picture of your financial starting point, gather the following information:
- Assets – List things that you own, like a house, car, business, etc.
- Liabilities – List money owed, such as credit card debt, the remaining mortgage on your house, a car loan, etc.
- Net worth – Take the value of your assets and subtract the amount of your liabilities to get your net worth.
- Income – List sources of income and how much you get from each on a monthly or annual basis.
- Expenses – List your regular monthly or annual expenses.
- Cash flow – Subtract your expenses from your income to get your cash flow.
Goals: Medium-term plans
When defining your financial goals, it’s a good idea to look at both long-term goals and medium-term goals. To address more immediate goals, ask:
- Do you have a rainy-day fund to cover unexpected expenses such as a job loss, or health crisis?
- Are you setting aside money for a big purchase like house, car, or college?
- Are you saving the money necessary for a planned vacation, or extras like holiday spending?
Goals: Long-term plans
Even if you’re a long way off from retirement, now is the best time to start thinking about the needs you’ll have in your later years, so you can take advantage of the power of compound interest in your investments. Here are some questions to ask:
- When do you want to retire?
- How much money will you need monthly in retirement?
- How will you cover your health costs?
- How will you provide for your final expenses, bequests, and debts when you pass away?
Getting there: Strategy
Once you know what your goals are, the next step is to figure out what financial tools you’ll use to fund your savings goals, such as:
- A rainy-day savings account for short- and medium-term unexpected expenses
- A retirement plan, such as an IRA or 401(k)
- An HSA for healthcare costs now and in the future
- A 529 college savings fund
- Life insurance
Even if your financial goals are modest, having a solid plan written down will go a long way to helping you achieve your goals.
Financial planning in a COVID-19 world
Whether you already have a financial plan or are creating your first one now, here are some of the ways that the coronavirus economic crisis may prompt you to adjust your strategy.
Prioritize building your emergency savings fund
Unemployment remains high at 6.9%, despite some job gains since the spring. With coronavirus cases spiking again, leading to more lockdowns, this could lead to more furloughs and layoffs. Very few people are sure of their job security these days, which means that having a rainy-day fund to cover a period of unemployment is more important than ever, especially for single-income households, contract workers, and high-income earners who may need extra time to find a new job. In the best of times, experts recommend saving 3-6 months’ worth of essential living expenses. In the current environment, it may be safest to save even more than that, if possible.
Re-examine your healthcare coverage options
Many employers offer both low-deductible and high-deductible health insurance plans. If you’re on a low-deductible plan, could your long term goals benefit if you switched to a high-deductible plan and put the money saved on premiums into a HSA that could be used to cover your deductible if needed? Using tools like an HSA may provide benefits that you can’t get from other options like an FSA. However, take another look at all the healthcare planning tools you currently use and weigh the pros and cons of each relative to your situation.
Consider an early retirement or semi-retirement
If you’re nearing retirement age and worried about being in the workforce for health reasons, or are having difficulty finding employment in the current environment, you may want to consider the possibility of retiring early. Semi-retiring by taking on remote-based part-time, gig, or contract work may also be an option.
However, keep in mind that there are some possible downsides to retiring early, including:
- You may not be able to withdraw as much per month from your pension or Social Security benefits if you retire early.
- You’ll have fewer working years to contribute to you retirement fund
- Your retirement savings may not last as long
- You may need to cover your own healthcare costs out of pocket until you’re eligible for Medicare
If you have a healthy amount of savings outside of a retirement fund, you may able to live off of your savings for a few years so that you can delay pulling from Social Security or pension benefits, allowing you to collect more from those sources when you reach age 65.
There’s a lot to consider, so seek the help of a financial planner if possible. While many financial planners have minimum investment requirements, it is possible to find a qualified financial advisor even if don’t consider yourself rich.
When you’re burdened by debt that’s preventing you from saving for your financial goals, it may feel like financial planning doesn’t apply to you. But that’s not true. It just means that the first part of your financial plan should include finding a way to get out of debt as quickly as possible. You can use our free How to Manage Debt guide to learn about the six options available and put together a plan that works for you. Take it one step at a time and get help if needed. You’re not alone!
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