As you probably know “may you live in interesting times” is not a blessing, but rather an ancient Chinese curse. And boy, do we live in very interesting times.
After two consecutive quarters of negative economic growth, we’re officially in a recession. The unemployment rate has recently soared to its highest levels since World War II, and according to some estimates, nearly half of the population is out of work or furloughed.
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To help us to make sense of this complex situation, we gathered four leading professionals in personal finance:
Sally Herigstad, a CPA and the author of “Help! I Can't Pay My Bills: Surviving a Financial Crisis”
Roger Wohlner, a veteran financial advisor and the owner of the Chicago Financial Planner blog
Chris Muller, the founder of the Money Mozart financial blog
Lance Cothern, a CPA and the owner of the Money Manifesto blog
We asked them to brainstorm about the consequences of this unprecedented crisis and the recommended ways to survive and even grow financially.
Avoid errors that could hurt your credit score
Financial crises are fertile ground for erroneous and desperate financial decisions. Such decisions may lead to a debt spiral - ever-increasing levels of debt which could substantially harm an individual’s credit score. We asked the panel members what one can do to avoid those situations.
“The first thing is to sit down and take a look at your budget. We all have expenditures that are critical, such as our rent, mortgage, food, things like that. But look where you’re spending money, and cut out things you can cut out to save money,” says Wohlner.
He then suggests looking into unemployment benefits, including the additional $600 benefit, whose fate is now being debated in congress.
Finally, he advises to look at your skills and think whether you can harness them to make more money through a side-gig. “Driving [for] Uber probably isn’t really lucrative right now, but if you’re in a situation where you have computer skills or you’re into e-commerce, there may be something you can do.”
“I think the most important thing that people can do is to educate themselves on how credit scores work,” says Cothern, and explains that there are five main factors that impact your credit score. Here they are in the order of importance:
- Your payment history
- The amount of money you owe
- The length of your credit history overall.
- The mix of the types of credit you have
- Whether you are applying for new credit or not
On the practical level, he suggests minimizing payments on all your debt. “According to FICO’s credit score models, payment history is about 35% of your score. So just make minimum payments across the board, and don’t worry about paying things off beyond that right now.”
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The crisis can be an opportunity for you
A Gallup poll from June suggested that Americans are relatively positive about their personal finances. We asked the professionals whether the data they see justifies this sunny perspective.
“We’re apparently not quite sinking under the water yet. We’re very optimistic, very resilient,” says Herigstad.
However, she notes, we can’t simply ignore those who are losing everything now. “Say, the person dependent on tips, and one day, it was just gone. Or the person who has a small business. Restaurants in my little town are closing their doors permanently, and their dreams are shattered. So, that cannot be downplayed.”
According to Herigstad, she sees a lot of advantages in this new normal. “All of a sudden, the roads are great, and people are working from a distance. We’ve been saying for decades, why can’t we work from home? And all of a sudden, we are.”
“Friends of mine just moved to the country, a couple of hours away, and he still has his job in Seattle. That was not possible four months ago. So, that’s a breakthrough, a huge breakthrough. I don’t think we’ll ever go back. We can spread out across the country, and live where we want, and still have good, meaningful work. That’s more than a silver lining, I think,” she adds.
Muller also sees the benefit in the widespread work from home (WFH) practice. “We’re in the situation where you can be location-agnostic when you’re working. A lot of companies are now able to recruit from across the country whereas they may not have been able to before. Many organizations historically weren’t [able to], and now they are.”