How to rebuild your personal finances during an economic recovery

how-to-rebuild-your-personal-finances-during-an-economic-recovery

Strong jobs gains and falling unemployment point to progress in the U.S. economic recovery from the coronavirus pandemic.

In June, the country added 850,000 jobs, more than expected, and is now 7.13 million below the February 2020 level. And by the end of June, weekly jobless claims slumped to 364,000, a coronavirus pandemic low, according to data from the Labor Department.

“More jobs, better wages — that’s a good combination,” President Joe Biden said Friday of the June jobs report. “Put simply, our economy is on the move, and we have Covid-19 on the run.”

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Yet for many people, the damage will linger for many years as they look to reenter the workforce and pay off debt they might have accrued during the last year and a half.

Even those who didn’t lose a job due to Covid may need to revisit their finances as prices have risen and spending habits may have shifted.

Here’s what experts recommend people focus on to get back on track.

1. Rebuild emergency savings

The pandemic took the nation by surprise and showed many Americans just how unprepared they were to withstand an emergency. Now, as the U.S. rebuilds the economy and more people are going back to work, improving emergency savings should be top of mind.

“The best financial practices pertain through bad times and good,” said Mark Hamrick,  senior economic analyst at Bankrate. “We’d strongly counsel to make emergency savings a priority.”

A rule of thumb followed by many financial experts is that people should have three months to six months of living expenses in an emergency savings fund. But 13 months into a pandemic that’s left millions unemployed, people may be rethinking their savings goals.

If you took on $25,000 of debt, you can’t manage your finances like you don’t have $25,000 of debt to pay off.

Tania Brown

CFP and coach at SaverLife

“That should make people think a second time about using the rule of thumb, and actually think of their own specific situation,” said Dana Menard, a certified financial planner and founder and CEO of Twin Cities Wealth Strategies in Maple Grove, Minnesota.  

“There were people making $200,000 a year standing in food lines,” said personal finance expert Suze Orman during a June CNBC + Acorns Invest in Pride: Ready. Set. Grow event. “So you have got to put yourself in a situation that no matter what happens, you can pay your bills.”

Depending on their career, industry, family and specific needs, some people may want to save more — or even less — in an emergency savings fund to prepare for the next event.

“Three months is just the starting point,” said Tania Brown, CFP and coach at SaverLife, a nonprofit focused on saving.

2. Pay down debt

Another high-priority financial goal that experts recommend is reducing debt, especially for those who added to what they owe to keep themselves afloat during the pandemic.

“If you took on $25,000 of debt, you can’t manage your finances like you don’t have $25,000 of debt to pay off,” Brown said. That means people should come up with a game plan using one of many strategies, such as eliminating high-interest debt first or focusing on the debt that’s easiest to get rid of.

Now is a good time to plan for debt management, according to Brown. In the last few months, with a third round of stimulus checks and tax refunds going out, families could have thousands of extra dollars to deploy.

Of course, some people may want to pay down their debt before they build up emergency savings or work towards both goals simultaneously.

If people can afford to work towards multiple financial goals at once, they should, said Menard.

3. Rework your budget for the new normal

Last year was unusual, and for many that resulted in drastic changes to their budget. Whether people lost work and had to find other sources of income or found that they had extra money from canceled trips, budgets may need updating.

This is also important as people begin to reenter the world as it opens post-pandemic. They should be extra careful not to let their excitement lead to overspending, Brown said.

Really factor in what that inflation is going to be — what you think that you had budgeted before might not be enough

Marisa Bradbury

Investment advisor at Sigma Investment Counselors

It’s also a good idea to check to see if the cost of certain goods and services are the same or have changed due to the pandemic.

“Be mindful of inflation creeping in — things might cost more,” said Marisa Bradbury, CFP, CPA and investment advisor at Sigma Investment Counselors in Lake Mary, Florida. “Really factor in what that inflation is going to be — what you think that you had budgeted before might not be enough.”

If you do have money to allocate to fun things such as entertainment, shopping or travel, Bradbury recommends checking back in with your budget and setting aside a specific amount to guard against overspending. This is especially important for those in retirement living on a fixed income, Bradley said.

4. Recalibrate and revise your financial goals

People should also reassess their long-term financial goals. The past year set millions of Americans back in many ways, and for some that meant pushing off milestones such as buying a house or car.

“If they were hammered by 2020, they may have to push out retirement for a couple of years; that’s OK,” Brown said. “They may have to get some of those financial fundamentals taken care of first.”

Even as the economy recovers, however, getting back to pre-pandemic finances won’t happen overnight, according to Brown. And, people should be aware of that and adjust their expectations accordingly.

“What worked in 2019 or even 2020 may not work now,” she said.

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