April 17, 2020
NACA's Director of Finance & Operations
The world, as we have come to know it, has taken a sharp turn recently. The coronavirus, or COVID-19, has had an overwhelming impact on almost every aspect of our lives. In the process, it has provided reminders, painful for many of us, of the need to plan for disruptions in our lives. One of the most important reminders pertains to our financial resources.
April is Financial Literacy Month and it may be no coincidence that highlighting the importance of establishing and maintaining healthy financial habits occurs in the month tax returns are normally filed. It seems an appropriate time to examine how financial decisions impact financial health as well as your tax liability. Tax season is a normal time to reflect on finances, but with the COVID-19 pandemic, many find themselves in a situation far from normal. There are immediate priorities to be addressed to avoid or limit the financial impact the pandemic can potentially have on individuals.
Financial literacy is the ability to understand how financial decisions impact your personal finances and things you need to know to make informed decisions in using your financial resources. The consequences of making uninformed financial decisions can be high debt levels, stress and damaged relationships, to name a few. As we’ve recently been reminded, there are also circumstances beyond our control that may blindside us.
As we move past COVID-19, begin recovering and dealing with the aftermath, the opportunity for changing financial habits is open to us all.
Educating yourself is the key to understanding finances. Knowing the basics of budgeting, prioritizing savings, understanding how to avoid the cycle of credit debt, understanding interest rates and knowing how to reduce the risk of identity theft will help you avoid the pitfalls of making uninformed financial decisions.
Budgeting is planning for the best use of your financial resources. Tracking how your money is being spent can assist with meeting goals for saving, paying down debt and investing. Documenting spending over a period of time will help identify expenses that are fixed and need to be prioritized and those that are discretionary and can be reduced or eliminated. This is typically where unnecessary spending is revealed. Money spent in small increments as a matter of habit, such as morning stops at Starbucks, or eating out for lunch every workday, adds up to significant dollars over time. Tracking those types of expenses highlights excess spending and low-hanging fruit for savings. Once you outline a savings strategy, you can identify how to redirect those dollars.
Financial experts agree that saving is an essential part of sound personal financial management. As the pandemic has been shown us, one reason to save is to provide an emergency fund in case of loss of income or unexpected household or medical expenses. Savings also may be used for major purchases to reduce the likelihood of incurring lending or credit card debt.
These same experts also agree that paying off debt, especially high-interest debt, is essential for long-term financial health. With debt comes interest expense. Long-term or high-volume debt accrues interest that, over time, can far exceed the original amount of the loan or charge. Credit card debt, in particular, is known for high interest rates. Paying the minimum payment on a high-interest credit card traps you into the credit debt cycle. According to financial expert Dave Ramsey, “Debt steals from your future and keeps you stuck paying for the past.”
For many, the COVID-19 crisis will inevitably mean incurring additional debt to meet obligations in the absence of normal wages. This is a time to be prudent about how you manage any debt that may be required to pay for necessities. One option is to contact your credit card company to negotiate lower interest rates. Many credit card companies are willing to negotiate interest rates and waive late payment fees if you reach out to discuss payment terms.
But what if you have little or no savings and already have substantial debt, especially high-interest credit card debt? Is it better to pay down your debt first or build up an emergency fund? Paying off high-interest debt should be the first priority. Reducing debt is one of the most beneficial ways to use those saved dollars in terms of long-term financial health. The eventual goal should be to establish a savings fund with at least enough money to get you through three to six months if you were out of work. Paying off high-interest credit card and other debt will enable you to start building that fund faster.
Another important key to financial security is saving for retirement. Historically, the stock market, even though it experiences ups and downs, provides growth over the long term. Start saving for retirement as early as you start earning. If your employer offers a matching contribution, take advantage of at least the maximum amount offered. The more you can contribute toward a retirement fund, the more financially secure you will be when it’s time to retire.
Along with having credit cards, loans and bank accounts comes the risk that some nefarious person(s) may attempt to steal your identity. Financial identity theft can mean your bank accounts or credit cards are illegally accessed and money can be withdrawn or credit cards maxed out. Or, new loans or credit cards may be established in your name. There are a number of ways to protect yourself from identity theft. Freezing your credit, keeping an eye on your credit report, closely monitoring all your accounts online, and keeping your social security number safe are a few of the most common practices for preventing identity theft.
Long after Financial Literacy Month is over, COVID-19 will undoubtedly change the perspectives of many for years to come in terms of financial management and planning. As we emerge from this pandemic, there’s no better time to start planning for stronger financial health. Budget wisely, save for the unforeseen, minimize or eliminate debt, plan for adequate retirement income and guard yourself from identity theft. And, enjoy a financially secure future.
Brenda Baker is the director of finance and operations at the National Association for Campus Activities. Baker has dedicated her 40-year career to managing associations’ financial resources and services.
Related Professional Competencies: Fiscal Management