ORGANIZING FINANCES TO DEAL WITH THE COVID-19 PANDEMIC

By: Joey Vance, CPA, CGMA; Managing Director - Southeastern Tax & Accounting, P.C.

The COVID-19 pandemic has put the world into uncharted waters.  With a national emergency declared and the state of Tennessee having enacted a stay at home order coupled with educational facilities and non-essential businesses closed, the economy has been brought to a halt.  With that in mind, here are some thoughts and ideas that each household should consider in arranging finances during these uncertain times:

1. Cash in King – It has been a long standing practice for financial professionals to advise having three months of cash available.  Now is the time to adjust the household budget prioritizing essential needs (food, utilities, automobile, communications, etc.) and deferring other expenditures to stretch your available cash as far as you can.

2. Communicate with Creditors – You’d be surprised how easy it is to work with creditors to reduce and/or temporarily eliminate payments that don’t have to be made.  This is due to the business that creditors are in.  They’re in the money business.  They don’t want to be burdened with owning the stuff people can’t pay for.  Consider these three areas for credit payment reduction.

            A. Federal Student Loan Payments – The U.S. Department of Education has announced that the interest rate of all Federal provided student loans will drop to 0% for at least 60 days and borrowers have the opportunity to suspend payments for at least two months.  Contact your student loan servicer for more details.

            B. Mortgage Payments – Most mortgage lenders offer some kind of relief during and economic hardship.  A common practice is for mortgage lenders to defer up to three months of payments by tacking them onto the end of your loan term.  This is usually the single largest household payment a family faces.  Call your mortgage servicer and ask what options you may have.

            C. Credit Card Payments – Many credit card companies have already implemented COVID-19 crisis relief.  The phone call is worth your time since a credit card represents unsecured debt.  The credit card company is very motivated to work with you because they really have no assets that they can repossess.

3. Look to Taxable Brokerage Accounts – If you find yourself running low on cash, consider liquidating necessary living expenses from your taxable brokerage accounts.  Work with your broker to select investments for liquidation, and if possible, liquidate those investments where those with losses can be used to offset those with gains.  This will minimize any tax consequences.  For those who have been invested for a long term where losses would not be available to offset gains, consider a securities based loan.  Usually these can be obtained by allowing your dividends to pay the interest the broker would charge on the loan.

4. Self-Employed and Small Business Should Seek a Paycheck Protection Program or an Economic Injury Disaster Loan – The Small Business Administration is offering two programs that small business and self-employed should pursue.  The Payroll Protection Program offers a loan of up to 2.5 times of your average monthly payroll and if at least 75% of the funds are used for payroll and no more than 25% are used for rent, mortgage interest, or utilities, the loan will be forgiven.  (As of April 17, 2020, funding for the PPP had run out, but banks are still accepting applications in anticipation that Congress will provide further funding.)  The Economic Injury Disaster Loan is a program to provide funds for small business working capital needs.  The term of the loan is determined on a case by case basis accounting for the ability to repay the loan.  (As of April 16, 2020, funding for the EIDL had run out and the SBA has suspended accepting applications pending further appropriations from Congress.)  See sba.gov for details.

5. The Last Lines of Defense are Home Equity and Retirement Funds – The family’s home is the family’s castle.  While it is very easy to tap into home equity, this should be the next to last line of defense.  If you absolutely have to unlock some of your home equity, two options you could research include a reverse mortgage, or a home equity line of credit (HELOC).  Another option which takes advantage of today’s low interest rates and the relatively strong housing market of the last decade would be a cash-out mortgage.  Finally, the last line of defense should be your retirement funds.  The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has enacted provisions making it easier to access retirement funds during the pandemic under certain conditions.  First there has to be a qualifying event to withdraw retirement funds.  Those events include being diagnosed with COVID – 19, having a spouse or dependent diagnosed with COVID – 19, or experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19.  Be prepared that you will have to have proof of one of these qualifying events.  You could then access up to $100,000 free from the 10% early distribution penalty, but not free from the income tax consequence.  The main reason that retirement funds should be the last line of defense is that they grow tax-free; retirement funds are taxed as ordinary income upon distribution.  The other reason is that retirement funds are designed to maintain a desired quality of life from the day of retirement to the day of death.  An attorney friend of mine explained this to me by defining his version of the perfect life.  He said “the definition of a perfect life is when the doctor pronounces that you’ve passed away; the next check that tries to clear your checking account bounces.”

Stay safe and remember, American will overcome.