What to do with your money in a crisis: Life Kit: NPR
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Navigating a financial crisis can be overwhelming. How do you decide which expenses to prioritize? Should you dip into your retirement accounts? How about asking your friends or family for financial help? Should you apply for a personal loan?
Understanding your basic needs is the first step in creating your emergency plan. âTraditionally, financial experts say, ‘Try to pay all your bills, pay them on time’. And we just force that through people’s heads until they lose their jobs. “Personal finance columnist Michelle Singletary says.” When you don’t have enough income, you only pay what you have. need a roof over your head and food on a table. “
His new book, What To Do With Your Money In A Crisis: A Survival Guide, is an emergency field guide for your money. It is meant to help you with the issues you would likely face in the event of job or income loss, which many people have encountered during the ongoing pandemic.
âThere are many great books on personal finance,â says Singletary. “But when you’re in the middle of a crisis, when you’re trying to figure out what to pay, you’re not going to take a book on retirement savings and read it, you know, 200 pages of that.”
In the book, Singletary also explains her approach to managing money like it’s in perpetual recession. It’s not so much about living in fear, but rather being prepared to face financial crises at any time. âI always have to be prepared for the worst and hope for the best,â she says.
Life Kit spoke to Singletary about her new book and her tips for dealing with financial crises. Highlights from our conversation are below, edited for brevity and clarity.
JannÃ¨se Torres-Rodriguez: Friends and family are one of the first places people can turn to for financial support. When is the right time to apply for a loan vs. a financial donation?
Michelle Singletary: There is never a good time to apply for a loan. If you are in a financial crisis, go to the people who love and care for you and say, âI lost my job. I don’t know when I can pay you back. I don’t want a promise that I’m going to break and damage our relationship. “I think you people will be surprised at how many people in their lives are absolutely willing to help.
What’s the best way to respond when someone asks you for financial help?
If you find yourself on this side of the conversation, relieve people of the urge to repay you. Every time someone walks up to me, I say right away, “This is not a loan.” If I write them a check, I write on the memo line in all caps, NOT A LOAN. Just to remind them it’s OK that you came to see me. I had the resources. I won’t give you what I can’t afford. I release them from this obligation and we don’t talk about it again. If you are going to help someone, don’t keep talking about it, because if you do, the person will feel obligated to pay you back. So don’t say anything.
People might be tempted to turn to predatory loan options like payday loans or title loans. Why avoid them at all costs?
Payday loans are loans given to people based on their next paycheck. Title loans use the title of your vehicle as collateral to secure the loan. What happens in this situation, is say you have a car that is worth $ 5,000 and you borrow $ 500, but you miss it? Now they are taking your $ 5,000 for that $ 500 loan.
Securities lending is particularly dangerous for two reasons. First, when you take a look at the fees and annualize them and turn them into an interest rate, you’ll see that those fees translate into interest rates ranging from 300% to 1000%. If you were in trouble and someone was like, “Hey, I’m going to lend you 300% money,” you wouldn’t. Second, if you’re in a mess and you don’t have enough money right now, pledging money on your next paycheck, you’re already late. How are you going to make up for it? Studies show that many people find themselves in a cycle of debt with these loans.
How about taking 401k loans or early withdrawals from your retirement accounts in order to make ends meet?
In the book, I talk about where to go before reaching this point. But if you have taken advantage of everyone you can or there is no one to take advantage of, if you have no savings, then this is a source of money that you can tap into. It is not ideal. I hope and pray that you don’t have to. But if you do, go ahead and do it, because sometimes you have to do what you have to do. Now don’t take a lot of money. Take it little by little as you need it.
Can you explain the order of succession to us when it comes to who you should go to, what resources you should have access to when you are in a financial crisis?
First, review all of your savings, all of them. That’s why he’s here. Then go see your friends and family and ask them to help you. Many churches, synagogues, and religious organizations have funds that they set aside for members in need. Tap state and federal funds, apply for unemployment benefits if necessary, apply for social assistance, Medicaid. Use these resources. Thatâs why theyâre here. If none of this is available, you can dip into your retirement funds. It will cost you dearly. But it is there.
I think there is a lot of confusion as to whether an emergency fund is sufficient for savings. How many types of savings accounts should people have in order to be able to adequately cope with emergencies?
I like having my money in different âjarsâ of savings. It’s a way to organize my savings and also prevent me from using money that I shouldn’t be using. I have something called a “Life Comes Pot”, which is different from the emergency fund. “Life is Coming” is the pot of money for when life is coming, like your car breaks down. That’s the pot that you hit in those situations, because often times people don’t have emergency funds when they’re in crisis because they’ve drawn on it.
People always ask me, âI have all this money, but it’s not making money. This is not the purpose of this money. Don’t worry about it. Its job is to be there safely. I make sure that I invest and grow in my other âpotsâ of money like my retirement account and my children’s college fund.
What are some common financial scams we should watch out for?
In many communities, especially minority communities, there are Ponzi schemes and pyramid schemes like the sou-sou, which is a savings technique used by many immigrants where people pool their money and someone else. one gets the savings pot every month. Now, people used that to create these pyramid schemes where, say, you put five hundred dollars and they promise you four thousand dollars. If they say “I can guarantee your return” you are about to get ripped off. Scammers know that people feel like they are late. They know people are eager to grow their money. They know people are behind in saving. And so they are eager to find a quick fix, a quick way to make money. And they play on it. They play on your confidence.
Do you have a final tip?
I don’t want you to feel guilty. I want you to feel energized. I want you to feel motivated. Don’t just say, âOh, that’s right,â then go back and do the same. Go slowly. I’m telling you a whole bunch of stuff that takes a lot of money and discipline. Once you have developed this habit, when you start to make money or get back on track, it will become easier because you have more money on hand. We are all going to encounter some kind of financial emergency. And if you’re ready next time around, you may find yourself in a much better situation.
The audio portion of this episode was produced by Clare Marie Schneider. Technical support was provided by Patrick Murray.
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