Even if your income hasn’t taken a hit, you’re probably feeling a little uneasy about spending money these days. That’s a natural reaction to the economic uncertainty caused by COVID-19.
That doesn’t mean that you have to hoard cash, though. If you still have your job, and a healthy savings cushion, buying that new laptop could be just fine. Everyone’s financial situation is unique, so the best thing to do is be honest about your finances, and how badly you need to buy something, before you swipe your credit card.
Take stock of your finances
Have you had any changes to your household income? Do you have three to six months worth of savings in an emergency fund? How you answer questions like these will play a big role in helping you decide if it’s safe to spend money now.
Before you make a purchase, sit down and plug in all your expenses and income (you can use online calculators like this one). Consider both how strong your finances were before the pandemic and whether they’ve gotten better or worse since, says Elliot Pepper, a CPA and certified financial planner with Northbrook Financial.
Next, you can rely on the same fundamentals of smart spending that existed pre-pandemic.
- You are spending less than you make. That seems obvious, but essentially spending less money than you earn is the foundation of all good financial decisions, says Matt Elliott, a certified financial planner with Pulse Financial Planning. To ensure that happens, you need a budget. Two of Elliott’s favorite free budget apps are Mint and EveryDollar.
- You have three to six months worth of expenses in an emergency fund or are in the process of building one. The best way to build an emergency fund is to set up automatic withdrawals from a checking or savings account “so it happens without you having to think about it. That reduces your disposable income before you’re tempted to spend it,” says Ryan Sterling, a chartered financial analyst and founder of Future You Wealth.
- You can actively save for your financial future by contributing to retirement accounts using the “pay yourself first” method, which means automatically routing a percentage of your paycheck toward savings, Pepper says. A good goal, if you can afford it, is to put at least 15% of your pre-tax income (which includes employer matches) toward retirement every year.
If you’re doing well in all three categories, it may be safe to make some purchases. But if not, your best bet is to focus on building an emergency fund, Sterling says.
“These last couple of months have especially highlighted the importance of having a cash cushion,” Sterling says. “If you have three to six months of living expenses in an emergency fund, you can operate from a position of strength in a financial crisis.”
Balance wants versus needs
Almost every purchase can be divided into one of two categories: needs and wants. Labeling purchases this way before you spend a cent can guide your buying decisions, Pepper says. If you’re struggling to pay your current expenses, you may want to put off all “want” purchases. If your finances are stable, the “want” items might be feasible, but you should evaluate them first.
Pepper recommends asking yourself a few questions before making a purchase:
- Will spending this money negatively impact my cash flow?
- Will I need to dip into my emergency fund or other savings/investment accounts to cover this expense? And if so, how quickly would I be able to replenish the account?
Because of the uncertainty around the economy, it’s best not to make any nonessential purchases that would jeopardize your ability to pay your current expenses, or require tapping into your emergency fund or your retirement savings, Pepper says.
That said, if an unexpected essential cost comes up, don’t be afraid to use your emergency fund money, especially if it helps you avoid going into debt, Elliott says. “It doesn’t make sense to go into debt and pay interest for a necessary expense while your emergency fund is sitting there fully funded and unused,” he says.
While most financial planners don’t recommend reducing your retirement contributions right now, you may need to do that if you don’t have an emergency fund or if you’re having trouble paying your bills.
Be careful about debt
The riskiest type of purchase right now is one that requires you to take on debt to pay it off, Pepper says. That’s especially true for large purchases like a house or a car.
Debt, whether you put it on a credit card or you take out a loan, is challenging because your financial situation might unexpectedly change in the near future. And while it’s true that prices are down on some consumer goods and interest rates are low — mortgage interest rates, for example, are among the lowest they’ve been in 50 years — don’t let that tempt you to take on more debt, Pepper says.
If you do decide to finance a purchase, carefully read the contract, Elliott says, and know your options in case you have trouble paying off the debt. For example, are there grace periods or chances to reduce your monthly payment? He also advises budgeting for all the expenses that go along with your purchase. For example, before you buy a new car, make sure you can afford not just the loan payments, but also insurance, gas, and repairs.
Sixty percent of people in a Credit Karma survey said they are spending less money now than before the coronavirus, but 35% said they’ve made impulse purchases because of the stress from the coronavirus. Adding to your debt can cause more stress, so it’s a good idea to be mindful about your spending, Sterling says. That means questioning how much value a purchase brings and how it benefits or hurts your financial goals, he says.
“Now, more than ever, we need to be very intentional about our spending,” Sterling says.
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