Question: J.F. in Campbell County: Please help. I was just furloughed. How can I get through this? Money is going to be tight.
Answer: We’re sorry to hear you’re one of the workers now swept into the thousands upon thousands of employer furloughs across the country. If there is a silver lining to the situation, it’s the fact that, typically, furloughed employees usually keep their benefits – and will likely return to work at an agreed upon time. But we know that in the immediate future your concerns are more pressing, so, here are some critical steps to take right away.
First, evaluate your current situation as it stands. Using a spreadsheet, list out all your sources of income (examples include spousal income, investment income, rental income, side businesses, part-time income, etc). Then, list out savings, assets, and debts.
Second, add up your monthly expenses including mortgage/rent, car payment, health insurance premiums, cell phone bills, utilities, club memberships, groceries, etc. This will tell you how much money is actually going “out” each month. Also use this as an opportunity to cut anything that isn’t essential.
Third, if needed, take advantage of mortgage forbearance courtesy of the CARES Act. Determine if any other debts can be extended as well.
And fourth, will you be getting a CARES Act stimulus check? And don’t forget unemployment benefits. Combine these amounts with your other income listed above. Now, you should have a ‘big picture’ view of critical expenses and how much is needed to cover them.
The Simply Money Point is that we know this is a difficult time for you. But before you can take any action, you need to know where you currently stand. For more guidance, we’ve just created brand-new educational resources dedicated to helping anyone who’s going through an unexpected employment change during this coronavirus crisis.
Q: Teri in Hamilton County: My son has about $10,000 in his 401(k). But he also lost his job due to the coronavirus. Should he use that money to help pay bills?
A: In times of desperation, we completely understand the urge to consider doing something like this. And the CARES Act recently made it easier (and less expensive) to pull cash out before retirement: Anyone impacted by COVID-19 (in the form of a diagnosis, layoff, or furlough) can now withdraw up to $100,000 from an employer-sponsored retirement account and the ‘early withdrawal’ penalty (usually in place for anyone younger than 59 ½) is waived for 2020. The distributions will still be taxed, but this obligation can now be spread out over the next two years. (Note: Employers and 401(k) plan sponsors are not required to follow the new law.)
However, as we like to say, just because you can do something doesn’t mean you should do something. In pretty much every single situation, taking money early from a 401(k) should be an absolute last resort. This is true even in your son’s case. It sounds like he’s fairly young, so that $10,000 still has decades to grow if he can leave it untouched in his account.
Here’s The Simply Money Point: While it’s tempting to look at a 401(k) (or IRA) as money that’s just “sitting there,” it is serving a purpose. Help your son understand that his future, while still years away, will be better off if leaves that money alone.