Mother’s Day happened a little less than a month ago and I’m sure many of us took time to reflect on all the lessons that we learned from our Mothers. We probably also thought that we would be better off today if we had paid more attention to those lessons. Out of the myriad of things our Mothers told us, the advice that comes to mind with our finances, especially during the current economic and public health crisis, is: “Just because you can do something doesn’t mean that you should do it.”
You can temporarily stop payments on student loans and interest is suspended until September 30, 2020. If you can afford to, you should continue payments – every dollar you pay will go straight towards the principal.
Most utilities are suspending collections and shut offs, so you can stop paying and won’t have your electricity, gas or water shut off. But you will still owe the money for your utilities (including those that you are using during the crisis) once the crisis is over, so you should continue to make payments if you can afford to do so.
There are changes to retirement plans that are available for those who are affected by the coronavirus. This means that you must be suffering a direct effect (e.g., be diagnosed with the virus, had a family member diagnosed with the virus, etc.) or be facing economic hardship due to the virus (e.g., been laid off, had a family member laid off, had to stop work to take care of children, etc.).
If you meet the above definition you can take a hardship withdrawal from a retirement plan and have the 10% early withdrawal penalty waived if you are under the age of 59 ½. The withdrawal will be taxable for federal income tax purposes over a three-year period and, if it is paid back within three years, no federal income taxes will be due.
You can take a loan of up to $100,000 from your retirement plan, rather than the normal limit of $50,000.
But should you do either of the above? If you can afford not to – don’t. You run the risk of depleting your retirement savings and ending up behind the proverbial eight ball. If you cannot afford not to – make every effort to pay back the money withdrawn or borrowed as soon as you can in order to avoid unnecessary taxes.
Federal employees have had two financial shocks since late 2018. First, we had the partial government shutdown which left many employees without pay for 35 days in December 2018 and January 2019. The good news is that we were paid for the shutdown after it was over. This created an increase in the number of hardship withdrawals from the TSP and shocked at least some federal employees into starting emergency funds or shoring up their already existing emergency funds.
Second, we have the current COVID-19 crisis. Even if the vast majority of federal employees are not directly financially affected, many of us have family members who are taking a serious hit in the pocketbook. If we had an emergency fund – we’re now hitting it. If we didn’t have an emergency fund – we’ll be taking advantage of a lot of the above things that we can do.
One thing we all should do is, once the crisis is over and we are putting our financial lives back together again, build up an emergency fund so that we will be prepared for the next crisis that comes.