By Oliver O’Connell, The Independent featuring Julia K. Pham, CFP®, AIF®, CDFA®, Wealth Advisor at Halbert Hargrove
The economic fallout of the coronavirus pandemic saw many people furloughed or laid off, leaving them reliant on unemployment benefits and other government aid.
Despite the help available, many also found themselves dipping into their savings, whether that was money set aside either for retirement or to fund a big purchase such as a deposit on a home or a new car, or simply an emergency fund for exactly this situation.
This has been a challenging time and disappointing necessity for many people who have been fiscally responsible enough to have funds set aside. While it is disheartening to see a hard-earned nest egg whittled away, the rebound in the economy, wide availability of open positions, and increased wages, are now allowing people to get back on their feet and rebuild.
That makes now the time to think about resurrecting savings plans and seizing on the opportunity to reassess how you manage your money. Financial planners offered The Independent their top tips for rebuilding that nest egg once back in employment.
Check your budget
If you’re coming off a period of unemployment, it’s wise to review your budget and determine how your expenditures will change once you’re back in the labour force.
“After transition periods, it is always important to reassess your finances and make sure that everything is still working for you,” says Kerry Keihn, financial adviser and director of client services and operations at Earth Equity Advisors. “When you return to work, the best way to start rebuilding your savings is to look at your budget. Hopefully, your new income is higher, but it could be lower.”
Julia Pham, a wealth adviser at Halbert Hargrove, notes: “Things like transportation, gas, work attire, or work-related supplies and tools are examples of things that may need to be factored back into your expenditures as you re-enter work.”
She adds: “Also, if you have delayed or reduced any debt repayments, it is a good time to review how those will change, and accelerate them if possible – especially on the high-interest debt.”
Practice paying yourself first, and rebuild your emergency fund.
When rebuilding your savings after a period of unemployment, your first priority should be in making sure that you have between three to six months’ worth of living expenses saved in a liquid account that you can easily access, but separate from your day-to-day funds.
“Especially if you were unemployed for a while, then you’re probably well aware that having a cushion for any unexpected life events is crucial,” says Ms Pham.
“Once you have an idea of the cash you have leftover each month in your budget, start to funnel that with automatic transfers from your checking account to your savings account to rebuild your emergency fund,” concurs Ms Keihn. “This is a cushion to help you stay afloat for several months if your income is disrupted again in the future.”
Danetha Doe, the creator of Money & Mimosas, a financial wellness platform for the self-employed, notes that after a period of unemployment, you may have fallen behind on bill payments and credit card debt, and while those must be tended to, you should also prioritise your savings by paying a percentage of your income into a savings account before you tackle your other bills.
“Your savings account is your financial oxygen mask. Without your savings, you are putting yourself in a vulnerable position,” says Ms Doe.
Automate your savings.
Saving doesn’t just happen by itself – it’s much easier if it is done for you – so definitely look into automation, as mentioned previously by Ms Keihn.
“Arranging for a specific amount of your paycheck to be automatically deducted and periodically put into a bank account removes the manual task of having to transfer or deposit funds into a separate account each time,” says Ms Pham. “This also helps remove the urge to splurge on any purchases before you’ve prioritised saving.”
Open a high-yield savings account
These savings accounts, often offered by online banks, pay a higher interest rate than traditional products from larger traditional brick-and-mortar banks such as Wells Fargo, Bank of America, or Chase.
“Although the interest rate from a high-yield account won’t make you rich, every dollar does add up. To find a high-yield savings account, you can do a simple online search and choose from the options that pop up,” suggests Ms Doe.
Set a savings goal
Once you have a goal in mind – a specific amount you want to save, or a monthly goal – you are more likely to follow through on a plan to achieve it.
Determine how much you want to have saved and by what date, then take the steps you need to take to achieve it, says Ms Doe. Be rigorous in enforcing these steps and you will be surprised at how quickly your savings add up.
Take advantage of employee benefits
If your emergency fund is in good shape – at least three to six months of living expenses saved, depending on your situation – it may be time to start looking at your investments. Ms Keihn recommends starting with your new job’s retirement plan if one is available.
“Many retirement plans default to sitting in cash or extremely conservative investments and you have to opt-in to invest the money in more growth-oriented funds,” she says. “A lot of employees assume their funds are growing while instead, they are sitting in cash or bonds for years. Your retirement plan may also default to saving a smaller percentage of your income than you want.”
Make sure you look at your options and talk to HR about the plan’s offering. “Employee retirement savings plans – like a 401(k) – offer pre-tax savings and easy payroll deductions,” says Ms Pham. “Also, if your employer offers a 401(k) match, consider contributing at least that much to the savings plan. It’s like getting free money!”
If your new job doesn’t offer a retirement plan, or if you want to set aside more money to invest, you can open a personal retirement account like a traditional or Roth IRA, or a non-retirement account.
“We typically don’t recommend investing money that you anticipate needing in the near future (less than three to five years),” says Ms Keihn, “but if you have a longer-term horizon, it’s great to get that extra cash invested especially since savings rates are so low.”
Practice money mindfulness and get into good habits
Start as if you mean to go on and get into some good habits by making smart lifestyle choices and keeping yourself in check.
Research shows that having an accountability partner or a community for support makes reaching your financial goals that much easier. They help you remain motivated and you won’t feel pressured to overspend because they are also working towards similar goals.
After a period of unemployment, you may feel the urge to go on a strict budget. While it is necessary to reduce spending, it is not wise to deprive yourself.
“One money mindfulness practice is to have a weekly money date to review your spending. During your money date, reflect on whether or not you were proud of your financial choices,” suggests Ms Doe. “If not, adjust them the following week to align with your savings goals and personal desires.”
Ms Pham agrees, warning of the danger of lifestyle creep if you are truly committed to saving.
“With a new job and additional income, you may feel the desire to jump back into the old spending habits you formed prior to being unemployed,” she says. “Remember to make sure you’ve re-built a good financial foundation before you resume your daily Starbucks runs or dinner and drinks out with friends. It’s always harder to go back and cut out those expenses once you’ve gotten used to them.”
Register for Fearless Money Talk and conquer the 3 roadblocks to achieving financial freedom: www.fearlessmoneytalk.com
