During these unprecedented times, it's easy to forget what day -- or even what month it is. We're here to remind you 1) it's Monday, April 6th and 2) April is Financial Literacy Month. Launched by Congress in 2004, Financial Literacy Month was created to raise awareness about the importance of financial education and personal finance. While it may be daunting, promoting financial literacy is especially critical right now, as COVID-19 has brought about so many unexpected financial challenges.
But how do you navigate personal finances during so much uncertainty? We have a guest post from one of the experts at the Center for Advanced Hindsight's Common Cents Lab, a financial research lab at Duke University focused on helping low-to-moderate income households increase their financial well-being.
Read on for tips and resources from senior behavioral researcher Emory Nelms on how to budget and plan for an uncertain future.
Tips for budgeting and planning for an uncertain future
1. Budget for a shorter period of time. Even public health experts and informed policymakers are unsure how theCOVID-19 pandemic will unfold over the next two weeks, let alone a full month.Trying to set up an accurate budget that spans a full month is likely an impossible task. Worse, managing resources over a longer period of time makes trade-offs more difficult and licensing ourselves to spend unnecessarily easier.
a. Try budgeting a week at a time.That can make it easier to handle more volatile incomes and to smooth consumption over time.
2. Be realistic. Focus on what you are likely to spend rather than trying to set up goals for what you think you should spend, particularly for variable expenses like food and entertainment. This may seem counterintuitive because we often want our budgets to be tools to help us restrict spending and build savings. But research has found that people consistently underestimate actual spending, setting their budgets up for failure. There is a time and benefit to set lofty goals, but during an emergency it’s better to build a budget rooted in reality.
a. When setting your budget for the upcoming week, try to think about how your spent money last week. Then provide three reasons why the upcoming week’s expenses might be different from last week’s expenses. Research suggests this will help you be more accurate when predict your weekly expenses.
3. Put strategies in place to help you stick to your budget. We have good intentions when we set our budgets, but research has shown that we need support and structure to consistently followthrough on our intentions. Remember that you should choose the measures that best fit with your life and your willingness to adhere to them as rules.
a. To avoid lapses in self-control, try physically separating money for categories that might give you trouble, like eating out or online shopping. You could do this by separating spending into a separate account or onto a pre-paid card that you're load with a weekly budget.
b. Try to make purchase with cash– research has found that cash has the highest pain of paying, which makes you more aware of what you are foregoing by making a purchase.
c. Try identifying an accountability partner to provide oversight on your spending. Evidence suggests social accountability and oversight can help you curb your spending.
Tips for building emergency savings in a hurry
1. Look to reduce or cut regular expenses. Changing our behavior is especially difficult when doing so requires sustaining motivation over time. We are more likely to be successful when we can make just a single decision. So, while you are revisiting your budget, look for recurring, regular expenses that you can reduce or cut to divert that spending into emergency savings via automatic transfers.
a. Try looking for any subscriptions you can cancel. Most people have more than they know - There are likely subscription services that you have forgotten about – a 2018 survey found that 84% of people underestimated what they spend on digital subscriptions.
b. Think about if you can you downgrade your phone plan or negotiate a cheaper cable/internet bill.
c. Potentially look to community-based organizations that help in times of emergency. Think about visiting food banks and thrift shops to reduce your expenses.
a. Check with your utility providers and lenders for programs that will allow you to skip payments.
2. Repurpose long-term savings.Unlike long-term and retirement savings, there are not the same tools and systems – like automatic payroll deductions – that make it easy to build emergency savings. Instead of trying to create additional savings, repurposing retirement savings or contributions might be easier.
a. Try temporarily redirecting long-term savings contributions to short-term savings. Be sure to adjust down to the minimum that still is matched and redirect the rest into a liquid savings account.
b. It’s likely that the federal assistance legislation will include relaxed regulations around hardship withdraws from retirement savings. If you are over 59 ½, there are no restrictions for making withdrawals from your IRA or 401(k). If you are going to take a hardship withdrawal, pull out small amounts at a time. Try increments of $500 and move them to your savings account. It’s tempting to pull out more than what you need, just to be safe, which could create a false sense ofabundance and you will lose out on more gains if you had left the money in.
c. Don’t forget to change all of your contributions back once you financially stabilize again. Try putting a date on the calendar for when you are going to go back in and bring your retirement and other savings and debt payments back up.
3. Identify and use other tools to reduce your reliance on just emergency savings. There may be options to create supplemental income or to enroll on government benefits to offset economic hardship.
a. Apply for government benefits if you’ve seen a reduction or lost your income, like unemployment or SNAP.
b. Try and see if you can pick up gig work to keep a little bit of cash flowing in.If you’re healthy and not immunocompromised, you can run errands and deliver groceries via Instacart and Amazon or do online surveys on MechanicalTurk orusertesting.com. You might want to check out Steady too, a fintech that helps connect people to gig work opportunities. But beware of scams! If it sounds too good to be true, it probably is.
4. Put aside some or all of your direct federal assistance. Part of the federal assistance will include direct financial assistance to households. This direct financial assistance is intended not just to provide immediate relief but also to help prevent financial emergencies in the future.
a. After covering any immediate emergencies, try divvying your remaining assistance into a “weekly” amount.Past research has found that providing a “Recommended weekly budget” might help make the assistance last longer.
b. Try to “hide” a portion of your assistance away in one or multiple, separate accounts. Previous research has found that partitioning our available income into multiple parts or accounts can slow our spending and significantly increase savings.
c. Decide to save your assistance now.Research has found that pre-committing ourselves to save windfalls like tax refunds in advance significantly increases how much we save.
For immediate financial advice, counseling, and debt management:
- Money Management International
- GreenPath Financial Wellness
For financial coaching, workforce development, and training programs:
- LISC’s Financial Opportunity Centers
Fora trusted source to vet and connect with local resources and hardship relief
- Check your local United Way
For fair and affordable sources of credit
- Check with the Opportunity FinanceNetwork to find your local Community Development Financial Institution
- Check with your local credit union
- Oportun is a certified CDFI and has specifically stated support related to COVID-19 (https://oportun.com)
About Emory Nelms
Emory Nelms is a senior behavioral researcher at the Center for Advanced Hindsight's Common Cents Lab at Duke University. He focuses on better designing the financial products and services available to low- and moderate-income communities both in the United States and internationally. Prior to CAH, Emory earned his Master’s in Public Policy from Duke University after working at Prosperity Now.