As we all continue to navigate the uncertain times associated with the coronavirus pandemic, it is important to be aware that financial stress can create financial mistakes. Feeling stressed about your finances isn’t anything new but it is important to recognize that the stress and anxiety felt at this time is elevated in most Americans.
In fact, the American Psychological Association (APA) study found that 72 percent of Americans have felt stressed about money at least some of the time during the first few months of the COVID-19 pandemic.1
Here are ten financial stress triggers that you may be experiencing and our tips on how to overcome them.
Mistake #1: Rushing into Financial Decisions, which may be irrevocable
When experiencing any major life transition, scientists have found individuals become disoriented, overwhelmed and unfocused. During these times our neocortex, which governs are reasoning processes tends to shut down while our limbic system, in charge of emotions, and the reptilian complex, managing instincts will run the show. This means that are not thinking rationally and we should not making any irrevocable decisions. The best thing to do right now is to assess what is more important and focus on that. We recommend categorizing your financial to-dos into Now, Soon and Later activities. The later items are decisions you can postpone until the "fog" has cleared. This may not happen until we get more clarity on our future.
Mistake #2: Making Too Many Financial Decisions at Once
As mentioned, during this transitional time, making financial decisions can be overwhelming. The Now, Soon and Later activity can help you organize what really needs to be done and how quickly. Decide what can wait (maybe a home renovation project) versus what can’t (such as car repairs or maintenance).
Figuring out where you can minimize decision-making and space out your financial obligations can help ease the stress of dealing with everything at once.
Mistake #3: Losing Track of Your Spending
It’s easy to lose track of your spending, especially when using credit cards. Compounding the problem is the false sense of financial liquidity created by the financial assistance provided by the government. The problem is, when the bill or bank statement comes around, it can be shocking to see how much you’ve spent. Keeping track of your spending in the first place can really help reduce the stress and anxiety you feel when it comes time to check your account.
Mistake #4: Using Credit Card Debt
Having too much credit card debt goes hand-in-hand with letting your spending go unchecked. While it’s nice to build good credit, and many credit cards offer reward points based on how much you use it, you still need to track your spending.
Credit card debt can rack up quickly. If you can’t pay off your credit card, interest will grow - and quickly. Credit card companies make millions off the interest of unpaid balances, meaning paying at least the minimum payment each month should be a top priority of yours. Credit card debt can creep up quickly, and nipping it in the bud is much easier than trying to tackle it later down the line.
Mistake #5: Paying for your Children’s Tuition Without Addressing Your Other Financial Needs
College tuition is always on the rise. In fact, the cost of college has increased by more than 25 percent in the last 10 years.2 This is a huge financial stress on many families, especially those with multiple children. While it may be a goal of yours to pay for your child’s education, it just isn’t always possible and it can put your other goals, such as your retirement in jeopardy.
Many students have to take out student loans and apply for financial aid, which adds to the mounting student debt around the country. More than 40 million people collectively have over $1.5 trillion in student loan debt.3 To help reduce the amount of debt your child may have to take on in the future, you can start working now to help save. Options like a 529 plan are designed specifically for funding future education. Work with your financial advisor to determine how else you may be able to prepare.
Mistake #6: Not Preparing for Healthcare Expenses
You never know when a sudden medical emergency will arise, and when one does, it can be a major financial stressor for many families. Aside from the general doctor visits and prescriptions, an unexpected hospital visit can really set a family back, and it can take months or even years to pay back these expenses.
If you have health insurance, take the time to reevaluate your coverage. Run through potential “what if” scenarios to determine how much you could be left paying out of pocket for you and your dependents. If you know you’ll be responsible for paying a significant amount in the event of a medical emergency, focus on padding your emergency fund. Add to it regularly and determine if you’re in a position to be contributing even more.
Mistake #7: Not Understanding How Much It Costs to Meet Family Needs
In a recent survey, 53 percent of those with dependent children say they are financially stressed.4 Beyond funding their education, other costs include:
- Diapers and formula for infants
- Childcare for younger children
- Doctor visits
- Family vacations
As any parent knows, the list goes on and on. You want nothing but the best for your children, and for many families, this may mean spending more than you have to support them and provide for them in the best way that you can.
To help alleviate some of the stress, revisit your family budget - or make one if you haven’t yet. Laying out all upcoming expenses on paper can help make them feel more manageable, and it can give you a sense of how much you should expect to spend. Budgeting puts you back in control of your family’s finances, especially when it comes to caring for your kids.
Getting your finances in order is not an easy feat. Start by identifying your own financial stressors and determining how you can start to address them. Doing so can help you and your family in the long run by providing a stronger financial future and peace of mind.
Mistake #8: Canceling Insurance Policies
If money is tight due to the pandemic, it may seem that insurance premiums are less important than other items on your list. Some states and even insurers have made provisions to alleviate the burden by extending grace periods, providing refunds and banning insurers from canceling coverage but it some of these policies are no longer in effect. Canceling your policy can leave you exposed at a time when you are already vulnerable. If you needed the protection against risk before, you most likely need it even more now.
Mistake #9: Taking Distributions from Your 401(k) Prematurely
Although the CARES Act allows you to take a penalty-free loan from your 401(k), doing so will increase your taxes and more importantly push your retirement goals by years. While many seem perplexed about the future of the economy and the markets, focusing on your long-term retirement goals requires you to stay disciplined in contributing and maintaining your retirement investments. If you are concerned about the level of risk you are taking, you can simply dial down the risk by investing in less aggressive assets. This is another area where a financial advisor can help.
Mistake #10: Focusing On What You Can't Control
During transitional times it is hard to deal with the uncertainly since we feel out of control. Instead of focusing what you can't control, consider spending your energy on the things you can control. Increasing your saving, reviewing your budget, building up your emergency savings, creating a financial plan are all positive actions that can help you gain a sense of control while investing in your future, regardless of how it unfolds.
If you have questions or concerns about your finances, then please feel free to reach out. We're here to help.