Paying Your Bills: Budgeting 101

Submitted by guest author Winnie Sun, financial advisor, founding partner of Sun Group Wealth Partners, and Intuit customer. In early March, everything still seemed pretty normal. That seems like a lifetime ago now. I was headed to Los Angeles, like I do every week or two to appear on “Good Day Los Angeles” to talk

Submitted by guest author Winnie Sun, financial advisor, founding partner of Sun Group Wealth Partners, and Intuit customer.

In early March, everything still seemed pretty normal. That seems like a lifetime ago now. I was headed to Los Angeles, like I do every week or two to appear on “Good Day Los Angeles” to talk about how best to manage your finances and prepare for those important goals like retirement.  But this time was already very different; the production team was noticeably leaner, the green room was empty and everyone was talking about the footshake video going viral on TikTok. That day, I mindfully skipped the makeup and hair treatment out of an abundance of COVID-19 caution.

We were already talking about what to do as we saw the stock market teeter totter more low than high. The question of what to do now was on everyone’s minds. Scramble to save for an emergency fund? Continue to pay down bills instead of padding the savings account? Stay the spending course and feel confident my earnings will still be there in the weeks ahead?

Warren Buffett, widely considered one of the most influential voices in the financial world said, “Cash … is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.”

Let’s look first at what you owe.  Like most Americans, you may have debt of some kind and it may have grown over the years as the costs of housing, automobiles and other big-ticket items have risen sharply.  And we’ve all gotten used to the booming economy in recent years, making us feel confident that we can take on more borrowing and still be able to pay for it all.

The New York Federal Reserve noted consumer debt has been steadily rising the last few years and it had approached $14 trillion (yes, that’s trillion) in mid-2019, months before the pandemic began impacting the world’s economies.

What happens when we find ourselves struggling to meet next month’s rent or mortgage payment?  A recent Pew Research Center survey turned up a statistic I find particularly troubling: that 35% of survey respondents said they would turn to credit cards to cover a financial emergency.

That’s exactly what I tell my clients not to do. With their high interest rates, credit cards should be the last thing they use to cover their bills!  Instead, turn to your savings accounts where possible (this is why that emergency fund is so important), seek personal loans from family or friends, borrow from your Roth IRA or Roth 401(k) or, if you own your home, take out a home equity line of credit. 

The National Consumer Law Center, a nonprofit focused on consumer advocacy, has an excellent publication, Surviving Debt, and it’s offering its digital version free during the coronavirus pandemic.

Here are a few tips we give our clients who are trying to weather this powerful financial storm:

  • If you have debts, make a list of them all, ranking them from the highest interest rate to lowest and give priority to paying down the highest-interest debts first.
  • Stop investing until you have whittled down your debts to a manageable level and have built an emergency fund. (I know this is tough, as it’s tempting to take advantage of some of the bargains to be had in a ravaged stock market now but you have to right your own financial ship first.)
  • If you’re a homeowner, explore the possibility of refinancing your home if you can get a lower interest rate and with little or no refi costs.  If your home is worth more than you currently owe on it, you might want to open a home equity line of credit (HELOC). Such a credit line allows you to borrow (and make payments and interest on) only the amount you tap, so it is more flexible than, say, a second mortgage. The interest rates are usually considerably lower than credit cards, so HELOC’s are a relatively cheap way to borrow money. Typically, they come with a 10-year “draw period,” during which you may borrow up to your limit (but will be making monthly payments to repay what you have tapped, with interest); they are often followed by another 20-year period during which you may no longer borrow but must pay back any balance owed.
  • If you find you can’t pay your rent or mortgage, have a straightforward talk with your landlord or mortgage holder. They know many people are hurting during this pandemic and many are willing to give you some flexibility if they can, especially if their own finances aren’t dependent on getting full rent or mortgage payments. Some states and cities have passed laws freezing evictions and home foreclosures during the pandemic, so it’s good to find out what the situation is in your own community before approaching your landlord or mortgage holder.
  • Don’t stop paying your utility bills! Check with your utility companies to see whether they have consumer assistance programs that can help reduce or cover the bills.
  • Sometimes you can negotiate with cable, Internet, and phone service providers. They don’t want to lose you as a customer and may be willing to offer you a better deal rather than have you stop the service or find a more amenable provider. You might also consider cutting auto insurance costs by accepting a higher deductible to lower your premium.
  • Comb your budget for even small ways to save money that can go toward your emergency savings fund. If you don’t buy the newest video game or a new outfit or an expensive home-delivered meal, you will have money to put toward your bills or your savings.
  • Think about adding an automatic amount that would be transferred each month from your checking account to your savings account. It’s an easy way to build savings and you can also transfer it back if you find you need it to cover your bills.
  • Explore your options for finding a temporary, second job, if possible. You can get a sense of what’s out there by reviewing some of the gig economy sites like Fiverr, Taskrabbit, and Upwork.

So now we’re here, in a much worse situation than any of us had expected. Many of us are still waiting it out at home and all of us are uncertain about the future. But our finances are one area in which we can exert at least some control, so let’s do our best until this cloud passes and we can pick up the pieces and move on.