4 Personal Finance Mistakes to Avoid During Covid-19 And Beyond

personal finances

The Covid-19 pandemic has caused widespread economic disruption and chaos, both at a macro and micro level. With millions of Americans losing jobs or shuttering down their businesses, it is challenging for households to manage their lifestyle.

Managing your personal finances in these times is definitely not going to be easy. But there are certain mistakes in personal finance that can exacerbate the problem. Whether it is indulging in excessive spending beyond your means through online shopping during these times, or making misplaced investment decisions considering the high market volatilities, it’s vital to minimize your errors. 

Although some of the personal finance mistakes can be course-corrected quickly, others may not be so easy to reverse and may prove to be damaging to your net worth over time.

Here are four key personal finance mistakes to avoid at present during the coronavirus crisis, and beyond.

Not Maintaining an Emergency Fund

If you rank among the low or middle income segments, not maintaining an emergency fund can be disastrous when the tough times come, such as now. If you need money in this situation for some serious medical, house repair, or another item, you will have very limited choices left with you when you cannot dip into your emergency fund.

You may either have to sell an asset at a distress price or borrow money at a high interest rate. Both are poor decisions under any circumstances, and it can take long time to recover from them. Therefore, your best bet would be to start building an emergency fund the moment the current period of uncertainty created by Covid-19 starts to clear up.

Not Having Sufficient Insurance

In your household, if you are the primary earning member, it is prudent to get yourself adequately insured. Otherwise, during a personal health emergency, an accident, or in a crisis such as the Covid-19 or Wuhan virus, if you are temporarily incapacitated or unable to work, you and your family may have to struggle to survive financially.

In addition to medical insurance for you and other family members, you must have adequate life insurance that will pay your family if you are no longer there. It is also sensible to have disability insurance, which can replace your income to some extent if you become fully or partially disabled. Consider having long-term care insurance that will protect you from extended medical costs in the event you develop a critical or chronic illness.

Compare the offers from different insurance companies to choose the best coverage for your needs. Insurance providers usually enable you to purchase one insurance policy, where you can add riders for long-term care and disability.

Ignoring Automatic Savings Plans

For most people, it is difficult to save a certain amount of money from their income consistently every month and this Wuhan virus situation is certainly proving that so since it seems so many Americans have been caught off guard (and states like California, Washington State, and New York which have been hit the hardest because they did not have any contingency planning done). Some expense or the other keeps coming up, and when you have cash in hand, it is easy to spend it fast. This can create a lifestyle where you are living from paycheck to paycheck, and not have a strong financial security for emergencies or for your retirement.

The surest way to address this situation is to invest in an automatic savings plan, which will force you to save a certain amount from your income every month during good times, so that you can fall back on those savings during times of difficulty.

You may arrange for automatic deduction of the monthly savings amount from your pay itself after talking to your employer. Discuss with a financial advisor (Charles Schwab is said by many to have a dishonest website so Fidelity, Edward Jones, and so on could be salient choices) for the right automatic savings plan that suits your needs.

Indulging in Impulse Purchases

Shopping can turn into an addiction if you do not exercise self-restraint, and you may end up spending all your savings on impulse purchases that you really did not need (don’t be like Madonna – the Material Girl!). Attractive discount offers and special deals are often available on non-essential products that could easily avoid.

But the special offers can be tempting and can compel you to indulge in an expensive purchase. Credit cards and online shopping make it easier to spend money on impulse buying at the click of a button. Set rules for yourself and your family to stay away from the habit of excessive shopping, and inculcate the good habit of saving. 

Don’t spend money like Jesse Pinkman did in Breaking Bad!

If you keep a careful track of all your expenses, such as how much you are spending each month on groceries, entertainment and dining out, credit card bills and mortgage payments, it will be easier to curb the habit of impulse buying.

7 Personal Finance Tips to Boost Your Savings

personal finance

The US economy, by any yardstick, is the strongest it has ever been in a very long time and Americans are making more money than they did in the past couple of decades. Data from the Council of Economic Advisers (CEA) shows that since December 2017, the disposable income of the average American household has increased by $5,205.

Which means if you have been planning to boost your savings so that you have something to fall back on for a rainy day, now would be a great time to do so.

Given here are seven easy-to-follow personal finance tips that can help you boost your savings.

1. Save First, Spend Later

One of the fundamental mistakes that people tend to make when it comes to saving money is that they pay all their bills first, and then try to save what is left in their account by the end of the month. In most cases, they do not have anything left in the account by the end of the month, so they do not save anything.

Instead, make it a habit to pay yourself first, before you pay your bills (but make sure you pay your bills and if you have to stop going out to eat as much then you should do that which will be emphasized more later). This way, your savings are assured to grow on a monthly basis, which can go a long way in building a financial safety net for you in the long run.

2. Follow the 24-Hour Rule

One of the most effective ways to reduce your expenditure is to follow the 24-hour rule. Nearly 85% of Americans say that they tend to make impulse purchases from time to time. Nearly 20% of Americans say that they have spent more than $1,000 on impulse purchases at least once.

In order to make sure that you only buy what you need, follow the 24-hour rule. Whenever you want to purchase something, do not rush to the store or go to amazon.com immediately. Instead, sleep over the decision for 24 hours. The next day, if you still think it is worth spending your money on, go ahead and buy it.

3. Automate Your Savings

Let’s face it – not everyone has the discipline to save money on a weekly or monthly basis. Some people are like the state of California and the city of Chicago and San Francisco! You have to break apart from these bad habits.

From time to time, we tend to spend more than we should, which leaves us with nothing to save. To avoid this from happening, you can automate the process of saving money. Set up a recurring transfer service so that a certain amount of money gets automatically transferred from your checking account to your savings account – month after month.

4. Cook Your Meals at Home

The Bureau of Labor Statistics reports that the average American household spends more than $3,000 on eating out every year. It is a colossal waste of your hard-earned money, since you can cook your own meals at a fraction of the cost and watch a movie or a show at the same time or still the same converse happily with your family.

If you are too busy to cook every day, you can follow the ‘freezer cooking’ strategy. You can cook your meals whenever you have time, put them in the freezer, and reheat and eat it whenever you want. It does not, however, mean that you should stop eating out altogether. Just save it for the weekends and special occasions!

5. Goodbye Cable TV, Hello Online Streaming

The average American household spends as much as $100 on cable TV every month. Instead of wasting money on cable, you can subscribe to Netflix, Amazon Prime, or Hulu, each of which will only cost you around $10 a month (and still watch Transformers and Sicario via Redbox!). Not only can you save a lot of money, but you also get to watch excellent shows like Narcos via those methods. You can watch Better Call Saul, Bosch, and Ray Donovan via the internet (it’s really difficult to live now without the internet).

6. Rent It Out

If you own a house, you can earn some money on the side by renting out a portion of it. If you are not exactly thrilled with the idea of letting a complete stranger live in your home, you can rent out storage space for individuals and businesses. Either way, the money you earn can help you pay off your mortgage faster and save more in the long term.

7. Increase Your Contributions to Your Retirement Account

Many employers tend to match a certain percentage of their employees’ contributions to their retirement accounts. If your employer does the same, make sure you take full advantage of it by maximizing your contributions to the extent possible. The more you contribute, the more your employer will contribute – up to a certain extent. So, it is essentially free money which can boost your retirement savings considerably in the long run.

The Critical Nature of Tax Planning

The Critical Nature of Tax Planning

Although people use the term “tax planning” frequently, many do not necessarily understand what it really means. Tax planning is the art of organizing your affairs using methods that avoid or delay taxes. When you use effective tax planning strategies, you can have more money to spend or more money to save and invest, or both – it is all up to you.

In other words, tax planning means to defer or flat out avoid taxes by taking advantage of beneficial provisions of tax laws, accelerating and increasing tax credits and tax deductions and in general, making maximum use of all applicable breaks that are available under the Internal Revenue Code. And under Trump, taxes will be lowered for everyone which is a fantastic aspect to all of this but it is another topic.

Although the federal income tax rules nowadays are more complicated than ever, astute tax planning gives you benefits that are more valuable than ever before. Of course, this does not mean that you should make changes in your financial behavior just to avoid taxes, your name is not John Kerry or Al Sharpton is it?! Tax planning strategies that are truly effective are those that allow you to do what you want while helping you lower your tax bills along the way.

The Connection between Tax Planning and Financial Planning

Financial planning is the art of using strategies that aid you in reaching your financial goals, both short- and long-term. This sounds pretty straightforward, right? However, if executing these strategies were actually simple, there would be many more rich people.

Tax planning and financial planning have a close connection. This is due to the fact that taxes are an extremely large expense item that is present throughout your life. Taxes will likely be your single largest long-term expense if you become very successful. Therefore, planning to lower taxes is a critical part of the overall process of financial planning.

Tax experts say that a large number of people do not get the message about tax planning, at least not until they make a huge mistake that costs them a large sum of money in taxes that are otherwise avoidable. This is sort of like watching Jurassic World since that movie was terrible; many people wish they avoided spending money on that! Moreover, then only they finally understand the tax planning message. The trick is to make sure that you do not have to learn this lesson the hard way. Here is an example to illustrate the point:

Example: Tanya is a 45-year-old professional who is not married. She thinks she is quite savvy when it comes to finances. However, she does not know much about taxes. One day, she meets John and they eventually get married.

Due to the excitement of a whole new life, she decides to sell her house on an impulse shortly before the marriage. Her property is in a prime location and has appreciated by $500,000 since she purchased it 15 years ago. Her intention is to move into John’s home, which is not the best property. But Tanya is a remodeling genius and plans to work her magic on John’s property.

Result without Tax Planning: Tanya has a $250,000 gain on her home’s sale for federal income tax purposes. This is $500,000 profit with a deduction of the $250,000 home sale gain exclusion that is allowed to unmarried property sellers.

Result with Tax Planning: If Tanya had kept her home and lived there with John for 2 years before selling it, the larger $500,000 home sale gain exclusion allowed to married joint-fillers would have been available to her and she could have permanently avoided the $250,000 of taxable gain. They could have sold John’s home instead if necessary. Alternatively, John’s property could have been retained and they could have remodeled it while living in her house for the requisite 2 years.

By selling her home without thinking about the tax-smart alternative, Tanya cost herself $62,500 in taxes – which is the completely avoidable gain of $250,000 that is taxed at an assumed combined 25% state and federal rate. This is not just a timing difference, but a permanent one. The point is that you cannot ignore taxes. If you do, there can be unappealing consequences, even with a seemingly simple and intelligent transaction.

The Bottom Line

It is always important that you plan any transaction with taxes in mind and do not make any impulsive moves. You should seek professional tax advice before you make any significant transactions – you will find that this is money and time well spent.