More than half of Americans are either saving more or paying off greater chunks of their debt since the coronavirus outbreak began, as the pandemic continues to affect household finances in sometimes unexpected ways.
According to the latest research from The Associated Press-NORC Center for Public Affairs Research, 45% of those polled said they’re setting aside more money than usual, and 26% are paying down debt faster than they were before COVID-19 took a hold. And in total, 52% said they’ve either been able to save more than before, pay down more of their debt, or both.
The results represent somewhat of a paradox given that some 12.9 million Americans have lost their job due to the economic downturn resulting from the coronavirus. Most reasonable expectations have been that the vast majority of people would be plundering their savings to bridge financial gaps or taking on even greater debt, either using credit cards or personal loans to see them through such challenging times.
While significant numbers of workers have, of course, been affected as expected, what is surprising many is the number who say their personal finances have remained strong, and in some ways have even improved.
Why have some people's finances improved?
Key to the financial resilience and, in some instances, positive financial headway that many Americans have been making, are the support packages that were swiftly introduced in response to the health crisis. These include nearly $3 trillion in government aid in the form of stimulus payments, expanded jobless benefits and forgivable payroll loans, all of which have helped soften the impact of the rapid downturn in the US economy.
At the same time, concerns over contracting COVID-19 and enforced lockdowns have seen most US consumers spend far less on eating out, clothing and travel than they would normally have done. Indeed, the research reveals that about two-thirds of people have noted a reduction in their spending during the pandemic.
What about those in a less fortunate position?
On the other side of the coin, around half (49%) of those surveyed said COVID-19 has affected their household’s paychecks, whether by a layoff, reduced salary, or a cut in hours. And just over a quarter (26%) admitted they have been unable to make a rent or mortgage payment or pay some other type of bill.
So despite the positives seen amid the research, it is clear that just as many are experiencing difficulties already. With the original $600 a week unemployment boost having run its course, and any replacement scheme set to be for much less, significant risks obviously remain for the future too, with the financial reality of being out of work not yet having started to properly bite. One recent report suggested credit card borrowing will ultimately soar by $80 billion this year, while mortgage delinquency is rising at a record pace too.
Should you pay down debt if you can?
If you’re in the fortunate position that your income has remained relatively intact throughout the downturn, it could be that you too could be saving more or looking to pay off more of your debt. But what is the right thing to do?
Given the uncertainty that prevails at present, making sure you have enough emergency savings on which you can rely should you lose your job in the near future, or face reduced working hours, is a must. As a general rule, to give yourself a decent financial cushion it is usually recommended to have accessible savings that amount to at least three months’ essential outgoings - the idea is that you then have three months to find a new job. Of course, it may be sensible to put away a lot more if you can, particularly if you have concerns that finding a new job won’t be as straightforward as it might normally be.
Putting any extra money aside in this way obviously assumes that you are already meeting any debt obligations that you might have, but should you try and pay down what you owe even further if you can? Well, as long as you have a decent emergency fund of say three to six months saved up to fall back on, then the next step, before arranging longer-term savings, would certainly be to pay extra off your credit card or personal loan if you can. This is particularly true if the interest rate you’re paying on what you owe is higher than what you’d gain if the same money was sat in a savings account.
What if you're struggling financially?
For those in a less fortunate position, and who have probably seen their income recently take a hit, then the choices are likely to be less favorable. Don’t be afraid to make use of your savings if you need them to help see you through financially. Borrowing is a possibility too, but should be an option to which you turn only once other avenues have been exhausted. These will include talking to your mortgage lender if you’re worried about meeting your payments, and making the most of federal and state aid if it is available. Congress is still working through how best to provide extra support for those out of work going forward, but assistance will hopefully arrive soon, along with a second stimulus check of sorts.
If you do need to borrow, it is always best to see whether your family and friends might be able to help in some way. If they can’t, credit cards and the best personal loans are something to tentatively explore.
“If you are completely out of options, I would then consider a short-term loan - with the caveat that this is truly the last option,” says Jesus M. Salas, Ph.D. – Associate Professor of Finance, Perella Department of Finance, Lehigh University School of Business in a recent WalletHub report. “I would also look at credit cards. Perhaps find one such that the first payment is not due for six months. People need to find out what debt has the lowest interest rate and lowest payments. People should be very conservative right now.”
One form of borrowing that should almost always be avoided is payday loans, given they represent the most expensive form of lending, charging high interest rates and allowing borrowers little time to pay the money back before charges start to ramp up further.
And if your debt is already causing you concern, try and address the situation rather than hoping it will simply go away. Contact your lender to see if they can help, and try to work out a reasonable debt repayment schedule. Alternatively, you could seek the assistance of the best debt consolidation companies, which should be able to help you better manage your debts.