08 Apr 2020 How to Survive a Financial Crisis (Personal or Business)
COVID-19 aka Coronavirus is affecting us all in different ways. Some of us are continuing to work our regular jobs (either at the office or at home), having been deemed essential employees. Others, however, have been furloughed or even worse, laid off! These are certainly trying times for us all.
For those of you who have been impacted financially, whether personally or as a business owner, you are likely trying to figure out how you will get through this time of uncertainty.
“How long will I be out of work?”
“How much money do I have saved?”
“Which bills have to be paid? Which bills can be pushed off?”
“How will my business survive this?”
Att Berry Insurance, we know you are grappling with trying to find the answers to these and so many more questions. We know, because we’re going through the same turmoil as you.
The government has tried to come through with several levels of assistance for individuals as well as corporations with the CARES (Coronavirus Aid, Relief, and Economic Security) Act. But is that enough?
While we don’t promise to have all the solutions. We reached out to our tax accountant, Steven Thebodo, CPA, shareholder of O’Connor, Maloney & Company out of Worcester, MA to get some tips for everyone to use today.
Personal Financial Tips during a Crisis
As an individual, there are a few things to consider to help you get a better handle on your finances and reduce your expenses during the coronavirus pandemic.
The April 15th tax deadline for filing personal tax returns has been extended to July 15th. This extends any amounts due with the tax return as well as any retirement contributions such as IRA and SEP contributions. First quarter individual estimated tax payments are also now due July 15th.
Required Minimum Distributions (RMD) can be waived for 2020. (An RMD is the minimum amount you must withdraw from a retirement account based on your life expectancy after you turn 70 ½ .) If you are old enough to have an RMD, you can defer it for 2020. Individuals with inherited IRAs can also defer their RMDs this year.
Retirement plan borrowing has been made much more flexible with the CARES Act. Individuals can now borrow up to $100,000 from their retirement accounts and repay it within a 3 year window without tax implications.
This is typically not advisable by financial experts for several reasons. Most especially, if you borrow the money now while the market is so low, you may be paying it back after the market has recovered, causing the long term financial impact to be much worse.
As part of the new stimulus package, most individuals will receive a $1,200 rebate check. Married couples will receive $2,400. For each child dependent, you will receive an additional $500.
Before you get too excited, there is an income limit. If you earned over $75,000 as an individual or $150,000 as a married couple (based on your 2019 tax return), your rebate will be reduced, possibly to $0. Note: If you have not filed your 2019 return, they will use your 2018 return to calculate your rebate amount.
Check out the CARES Act rebate calculator to determine exactly how much you can expect.
11 Tips for Managing Your Personal Finances
There are many ways you can manage your personal expenses right now. Here are a few options to consider, though this list is certainly not exhaustive.
- Figure out which bills are essential and which bills can wait. Reach out to the vendors to inquire about delaying payments or setting up payment plans. (Many insurance companies are offering extensions on policy payments right now. Be sure to call your insurance company to inquire!)
- If you are of retirement age and not yet collecting social security, you can opt in if you need the cash.
- For credit cards, be sure to make at least the minimum credit payment. Don’t skip a payment unless absolutely necessary! The additional fee charged and potential impact to your overall credit isn’t worth it. (It may be worth a call to the credit card company to see if they will defer payments. While interest will likely accrue, you can avoid the late charge.)
- Mortgage payments may be deferred up to 3 months by your lender. Call your lender and inquire if your loan qualifies or if the bank is participating. (But be careful of mortgage forbearances, as the costs could be devastating when payments begin again.)
- Car loans may also be deferred. Contact your lender to see if they are participating. Again, interest will likely still accrue.
- Utility bills can usually go a couple of months before being shut off. We wouldn’t recommend starting here, but if cash gets tight, it may be an option for a month or two. Be sure to call your utility company to inquire if they have any deferment options or to see if your state has enacted a law to prohibit them from being shut off during the crisis.
- Cut back on your retirement contributions. This will help with cash flow, but overall it’s not a great investment move. The market is at its lowest in years, which means if you continue to invest, you will be buying low and have a lot of upside if you can continue to contribute. (However, like you, if it comes to feeding my family or saving for retirement, I’m feeding my family.)
- Cut out non-essential spending. Do you really need to purchase that toy for your kid? In a time when it’s easy to overspend on things to fill the void (or childhood boredom), it’s better to take advantage of all the free tools and resources out there right now instead.
- Cut out non-essential travel. Just stay home and don’t waste the gas. Only go out for groceries, doctors, and necessary supplies.
- As part of the CARES act, for federal student loans, there is no interest, and loans are automatically put into administrative forbearance until September 30th. You do not have to pay and any auto debit payments won’t be taken (although, you can still keep paying them if you want to bring down the balance of course.)
- If all else fails, look to untapped home equity loans which could provide temporary cash relief.
Remember, these are just options and may not be the best for your personal situation.
Also, as you reach out to vendors for deferred payments, be sure to find out what the terms are. Some vendors may require you to repay all the deferred bills at once, or may spread out the payments, which could increase your normal payment over a period of time.
It may be that you end up saving now, but creating a greater burden later. For more answers about how COVID may affect your personal insurance, check out COVID-19 FAQs: Business & Personal Insurance Coverages.
Where to Cut Business Expenses During a Crisis
As a business owner, you are not only worrying about your personal finances, but those of the business as well. Making sure your business survives this pandemic is a top priority for you.
Here are few ideas to help you deal with cash flow issues you may be experiencing.
There are several business loans/grants available:
- Economy Injury Disaster Emergency Relief Funding – $10,000 advance that does not need to be repaid if you qualify. This is to provide a quick influx of cash to cover immediate need for payroll and other expenses due to lost revenue. Funds may be available 2-3 days after approval.
- Paycheck Protection Program Loan (PPP): Will provide 2.5 times your monthly payroll costs. Must be applied for through an approved SBA lender. This loan is potentially forgivable and may not be required to be paid back. This is supposed to be an expedited process to get funds to you quicker.
- Economic Injury Disaster Loan Emergency Advance (EIDL): An SBA program that existed prior to COVID-19. You may receive up to $2 million in loans at a preferred interest rate. This process is more involved and takes longer.
- Employers paying employees while they are not working are eligible for a 50% refundable payroll tax credit, up to $10,000 on wages paid during this crisis.
- Local lenders like Massachusetts Growth Capital Corp offer Economic Disaster Injury loans at low interest rates.
Keep in mind: you cannot utilize both the PPP Loan program and the EIDL Loan program. However, you can request the $10,000 relief funding and apply for the PPP and/or EIDL program.
11 Tips for Managing Your Business Finances
While there is no perfect solution for expense management during this time, there are a few quick ways you can make an impact to your bottom line.
- Talk to your landlord about a rent reprieve. Keep in mind that each landlord is in a different financial situation and may or may not be able to help.
- Utilities can be postponed a month or two. Again, we wouldn’t recommend starting here, but if cash gets tight, it may be an option for a month or two. Be sure to call your utility company to inquire if they have any deferment options or to see if your state has enacted a law to prohibit them from being shut off during the crisis.
- Mortgage/loan payments may be deferred. Contact your lender and ask if it is possible and if there are any negative effects of deferring payments.
- Shareholder/owners reducing or eliminating their salaries for a period of time.
- For retirement plans with optional matching contributions, you may be able to opt not to match until the pandemic ends.
- Temporary reduction in salary for employees. We’ve heard of a few companies that have instituted company-wide pay cuts on a temporary basis during the crisis.
- Reduction in operating hours. Moving full-time staff to part-time, or to working from home completely may help reduce your overhead costs. Things like utilities and office supplies automatically decrease if your office is not occupied.
- Employee layoffs or furloughs. While it’s unpleasant to think about, it may be necessary to survive. Keep in mind however that many of the government assistance programs outlined above were designed to help businesses continue to pay employees and keep employees working. In addition, the CARES Act creates additional relief for unemployment benefits.
- Review your budget. Analyze all general ledger expenses for items that can be eliminated or cut back. Examine your service contracts, and speak to vendors to try and renegotiate terms where possible.
- Freeze company/employee spending accounts, requiring all purchases to go through a pre-approval process first.
- If necessary, reduce spending on company perks. (Be careful here though, as to not reduce employee morale in an already incredibly trying and stressful time.)
Don’t forget to run a break-even analysis to plan for reduction in revenues. Knowing what your forecasted figures are for various reductions in revenue will allow you to better determine how extensive your cust reduction efforts need to be.
Honestly, we have no idea. Our best advice is to take each day one at a time. Be sure to stay up to date on the latest government programs and be vigilant with your spending as best as possible. Also, check out “Business Insurance: Where to cut costs in a crisis (and where not to)” for more suggestions.
But don’t forget, even during times of crisis, you may have to spend in areas where you weren’t planning. For example, my utilities and food expenses have increased now that we’re all at home all day. Be sure to plan for areas in your budget that may increase as well. Remember, the process of evaluating your finances, whether personal or for business, will continue to be a fluid process.
Also, be sure to check out our COVID-19 resource page for a list of all the local, state, and federal coronavirus resources.
Stay safe, stay healthy!