If we learned anything from the pandemic, it’s that life is unpredictable and that its unexpected twists and turns can dramatically affect our finances. The key is to keep focused on the changing trends and use them to your advantage. Experts suggest these tips to make today’s financial landscape work for you.
1. Make a plan to pay off your credit card debt.
Many Americans were forced to go into deeper credit card debt during the pandemic because they were working fewer hours, had been furloughed, or were laid off.
Although many physicians did not seem to be financially affected by the pandemic, a fair number experienced temporary financial setbacks, as shown in the 2021 Medscape Physician Compensation Report and the Medscape Physician Wealth and Debt Report 2021.
An article in Business Insider advises that you create a timeline for paying off the debt you may have accumulated during COVID-19 — or any other credit card debt, for that matter.
Start by determining where your money was spent during 2020, or even during the past few months, so you can zero in on where to cut costs. Then set up a budget using an app such as Mint or some other type of budgeting software to help you categorize your spending.
The app will help you stick to your budget limits. Of course, you need to figure out what expenditures you can cut back on so as to use that extra money to go toward the debt. Once you have done this, set up a debt repayment plan. One approach (sometimes called the “snowball method”) is to pay off the smallest debt first, and then transfer that payment to the next larger one and in this way work your way up to the highest debt.
The other is a more “top-down” approach (sometimes called the “avalanche method”). With this method, you target debts that have the highest interest rates first and then use the money that has been freed up to pay off the next debts. Choose a strategy that works for you and stick to your debt repayment plan.
If you are unable to stick to your debt repayment plan, consider consolidating your debt onto a balance transfer credit card or personal loan. This will to enable you to have all of your debts in a single place with a lower interest rate and only one monthly payment.
If you’re unable to make payments on time or meet the minimum payment, another option is to call your credit card provider. Many companies will work with you to give you more flexibility on payments as well as lower interest rates.
It can also be helpful to consult a financial advisor, who can help get you on the road to paying down debt.
2. Invest wisely in real estate…location, location, location.
Investing in real estate has classically been seen as an “accessible, reliable way to create passive income and be prepared for unexpected changes in the economy.”
But not all real estate is created equally, and the property that was supposed to cushion your bank account shouldn’t drain it. So you want to look for properties with increasing rates of appreciation.
An article that appeared on Yahoo Finance (and that originally appeared on Insider Monkey.com) lists the 15 best states in which to invest in real estate during 2021, with real estate appreciation as the “key metric.” The appreciation rates take into account mortgage rates as well as cost of living data, which provide an indication of how interested potential buyers or tenants would be in living in these areas.
The article lists the 15 most lucrative states. Idaho is number 1, boasting a total real estate appreciation for the past 2 years of 28.49%. Arizona is number 2, with an appreciation rate of 20.43%, followed by Utah, Maine, Montana, New Hampshire, Washington, Rhode Island, Tennessee, Oregon, Ohio, Indiana, Connecticut, South Dakota, and California.
3. Stock market volatility isn’t necessarily a bad thing.
After a lengthy winning streak, the stock market took a sudden downturn last year, driven by concerns that an uptick in COVID-19 cases could damage the world’s economic recovery.
Experts offer some advice not only about riding out market volatility but even about using it to your benefit. They point out that market relativity is a normal part of the investment process and that it is in fact the best way to outrun inflation. Market upticks and downswings are opportunities to review your asset allocation. If you are worried about a precipitous decline, you can rotate part of your portfolio into safer stocks. That way you’re protected against a potential market correction, which is defined as a drop of more than 10%.
A downswing is not a good time to sell stock because selling when the market goes down means you’ll miss out on the benefits of the rebound when things improve. In fact, perhaps counterintuitively, the downturn is a good time to buy more stocks, thereby setting the stage for future gains, because stocks are likely being traded at a discount.
During a market slump, you can protect yourself from needing to augment income or replenish losses by always having an emergency fund. Experts say it’s better to spend the money in your emergency fund than to sell assets at a loss.
4. Take advantage of lower mortgage rates.
This might be a good time to finance a home because 15- and 30-year fixed mortgage rates have come down. The average rate for a 30-year fixed-rate mortgage (the most frequently used loan term) is 3.03%. A 15-year fixed-rate mortgage is 2.38%. Both are reasonable options, but the 30-year mortgage usually has a lower monthly payment than the 15-year — although it often has a higher interest rate.
But despite the higher interest, it’s still a good option if you would like to keep your monthly payment low. On the other hand, if you can afford the monthly payments, you’ll end up paying less in the long run for a 15-year loan, since the interest is typically lower and you’ll be finished paying it off in half the time.
Although many people prefer fixed mortgage rates, 5/1 adjustable-rate mortgages might be an option to consider — especially if you plan to sell or refinance your home before the rate changes. The average rate has also declined recently, and you may also end up paying less interest than you would for a 30-year fixed mortgage. But keep in mind that, depending on the terms of the loan and market rates, you may end up paying more interest after that time.
Before you jump to avail yourself of these lower rates, take a step back, think about your personal needs and financial situation, and make sure to do your homework and compare different lenders to find the one that’s best for you.
5. Maximize your IRA contributions.
There are all kinds of benefits for opening and IRA and maximizing your contributions to an existing IRA if you have one. With a traditional IRA, you can have an immediate tax deduction or deferred income, in hopes that your bracket will be lower in the future, according to an article that appeared in Kiplinger’s Finance. This might be helpful if you expect to retire shortly or believe your income will be lower in future years.
However, the downside is that you will eventually have to pay taxes on this type of IRA; and if you withdraw the money before age 59½, you will pay a hefty (10%) penalty. You also have to take minimum distributions after age 72.
An alternative is a Roth IRA, to which you contribute after having paid taxes. The good news is you can withdraw money without paying further taxes or penalties once you have owned it for 5 years and are older than 59½. In addition, there are no required minimum distributions.
At present, the maximum amount that can be contributed to either IRA or both IRAs combined in 2021 is $6000, which is what it’s been for the past 2 years. However, if you are 50 years of age or older, you can add an extra $1000, bringing the maximum contribution to $7000.
Batya Swift Yasgur MA, LSW, is a freelance writer with a counseling practice in Teaneck, NJ. She is a regular contributor to numerous medical publications, including Medscape and WebMD, and is the author of several consumer-oriented health books as well as Behind the Burqa: Our Lives in Afghanistan and How We Escaped to Freedom (the memoir of two brave Afghan sisters who told her their story).