6 Common Financial Mistakes To Avoid During COVID-19
The COVID-19 pandemic has shaken up Americans’ everyday lives, changing the way people work and socialize, while also having some far-reaching financial impacts. For instance, unemployment levels have reached historic levels, food prices for some items are skyrocketing, and a return to a sense of normal is likely still several months away.
In the meantime, the decisions you make with your money are more important than ever for maintaining your financial health. Whether you’re coping with a loss of income or simply trying to stretch your budget during this time, there are some COVID-19 finance mistakes that you should do your best to avoid.
1. Not Adjusting Your Budget
Your pre-coronavirus budget may look very different from the way you earn and spend now. If you haven’t tweaked your budget to account for income changes or shifts in your spending patterns, now’s the time to address it.
In reviewing your budget, consider:
• Whether your income has increased or decreased since the crisis began.
• Which spending categories you’ve added to your budget and which ones you may have temporarily eliminated.
• Where you’re spending more money or less money as a result.
• How the pandemic has affected your ability to save or pay down debt.
Looking at the numbers can help you decide how to shape your budget categories going forward. And it can also help you spot opportunities to save money long-term.
If you’re eating at home instead of going out, for example, that’s a money-saving habit you could continue once stay at home orders lift and restaurants begin to reopen.
2. Assuming You Don’t Qualify for Unemployment
Unemployment is designed to provide some financial relief when you’re out of work. The federal government expanded unemployment benefits to help struggling Americans who’ve been laid off or lost their jobs as a result of the pandemic.
Not applying because you assume you’re not eligible is a COVID-19 finance mistake that could cause you to miss out on these benefits.
Unemployment insurance is usually reserved for traditional workers, but under the federal CARES Act it’s possible to receive benefits if you’re:
• An independent contractor
• Performing gig work
• Seeking part-time employment
You can apply for unemployment online through your state’s unemployment agency. It can take time but it’s worth doing so to find out what benefits you may be entitled to if your self-employment or gig income has taken a serious hit because of the pandemic.
3. Not Communicating With Creditors
Falling behind on bills isn’t a situation you want to be in but during a worldwide crisis when you may not be working, it might be unavoidable. The worst COVID-19 finance mistake you can make where your bills are concerned is ignoring the companies you owe money to.
Instead of letting the bills pile up, it’s better to stay in touch with your creditors. For example, you can:
• Contact your credit card company to discuss a credit card hardship program.
• Talk to your mortgage lender about putting payments in forbearance or setting up a loan modification.
• Ask your student loan servicer about using deferment and forbearance options to temporarily pause student loan payments.
• Request a skip-a-payment option from your car loan company.
These are temporary solutions that can give you some breathing room to get caught up if you’re struggling to pay bills. By working out payment plans or deferring payments, you can avoid serious damage to your credit score from late or missed payments.
You can also weigh the merits of refinancing or consolidating debt to see if it makes sense. Refinancing private student loans or a mortgage, for instance, could lower your interest rate and monthly payments so they’re more affordable in the long run.
4. Draining Retirement Funds Without Weighing the Pros and Cons
If you have money saved for retirement in a 401(k) or individual retirement account (IRA), the CARES Act makes accessing those funds easier. Under the Act, you can:
• Borrow up to $100,000 from your workplace plan using a 401(k) loan.
• Withdraw up to $100,000 from a qualified retirement plan without triggering the early withdrawal penalty.
• Repay withdrawn amounts over a period of three years to avoid paying income tax on the distribution.
That sounds good if you need cash, but consider what it means for your retirement first. By taking money out of your 401(k) or IRA, you’re not giving that money a chance to grow through the power of compounding interest. While a loan or early withdrawal can be repaid under the CARES Act guidelines, the lost growth in your retirement account may outweigh the short-term advantages of accessing your savings.
5. Waiting To File Taxes if You’re Due a Refund
The CARES Act delayed the federal tax filing deadline to July 15, 2020, to give Americans more time to prepare their returns. But waiting to file could be a costly COVID-19 finance mistake if you’re owed a refund.
According to the Internal Revenue Service, the average refund so far this year is $2,908. That’s almost $3,000 you could use to cover living expenses and pay the bills if your income has dropped because of the pandemic.
If you haven’t filed yet, consider adding that to your financial priority list. And here’s another COVID-19 finance mistake to avoid: filing late or not at all.
Failing to file on time and failing to pay taxes if you owe can trigger steep penalties. Not to mention, interest can accrue on any outstanding tax balance you owe. While you have a little more time to get your return in this year, it’s better if you don’t wait until the last minute to start sifting through your tax paperwork.
6. Blowing Your Stimulus Check
As part of the CARES Act, the federal government approved economic impact payments to put cash in the hands of Americans. An estimated 150 million payments were set to be sent out and if you’re on the receiving end of one of them, it’s a mistake to spend the money without a plan.
Instead, think about how you could make the most of this windfall. For example, you could use it to:
• Pay your mortgage or rent.
• Pay your current month’s or next month’s utility bills.
• Stock up on essential groceries that you find on sale.
• Make a lump sum payment toward one of your debts.
• Start your emergency fund if all your bills are current and paid up.
When you’re going stir-crazy at home, it can be tempting to treat yourself to an online shopping spree. But before you fill up your cart, give some serious thought to the best ways to put a stimulus check to work.
Avoid COVID-19 Finance Mistakes By Staying Connected to Your Money
One of the easiest and best ways to avoid making these or any other coronavirus-related money mistakes is staying in tune with your finances. Using a tool like SoFi Relay allows you to easily track your finances—including your credit score, spending habits, and money goals—all in one place.
Being able to see your financial picture at a glance can offer reassurance that you’re making the right money choices as you navigate the COVID-19 outbreak.
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