So the Feds are about one emergency meeting away from calling our current state of things an official recession. They announced Sunday March 15, 2020 that rates will be dropping to near zero.
The Federal Open Market Committee (FOMC) lowered the federal funds rate to a target range between 0-0.25 percent. It’s the largest emergency reduction in the Fed’s more than 100-year history, and it’s the first time the U.S. central bank has reduced rates at an unscheduled meeting within 13 days of each other.
On top of that, the reserve requirement has been set to zero. This means that if a bank wants to loan you money(mortgage,auto loan, etc), the bank no longer need to keep 10% of that amount on hand before issuing a federal backed loan.
Corona Virus Outbreak + Recession
The virus outbreak will affect every industry, some much worse than others. What to expect:
- Food and entertainment industries will be limited even after a vaccine is developed.
- Vaccines take at least 18 months to develop and even longer to administer.
- Vaccines are not profitable to pharma companies, as we have seen over the past 20 years. They are in no rush.
- Schools will not be able to adapt as fast as other industries. Long after the vaccine is created there will be a catch up period. Parents of grade school kids will have to adapt, it will be costly.
- Public transportation will be affected in some cities.
All of these things and more mean that it could take at least 2 years to recover from.
What are your financial priorities?
- Emergency fund! Absolutely need $1000 just sitting your savings account as of yesterday. Get to it.
- Again..Emergency fund! Once you have $1000 sitting, start saving 3-6 months worth of income. any thing over your initial $1000 needs to go into a very liquid account. Better-spending recommends a high-yielding online savings account with no fees or minimums.
- Tax Returns – Save every single penny of it. Do not invest it, not yet. Do not apply any of it to debt either.
- High Interest Debt– Honestly, consider paying minimums until you 1st have $1000 saved and also for the next 90-days, until you have a better idea of how the outbreak affects your local economy. That way you don’t resort to using credit and digging a deeper hole.
- Investments– If you already contribute before taxes to a retirement account, no need to make any changes. do not take money out either, right now that will do more damage than good.
- Buying a house– We get it, interest rates are low. Better-spending recommends only buying real estate if you were already on the market for one before the outbreak. Don’t chase low rates, they will not skyrocket all of a sudden. Prices in many area are on the rise because of low rates, and you may be overpaying.
- Refinance your home? – If you recently bought a home within the past 5 years this may be a good idea if you rate is lower and the term is not extended. Why? You don’t want to restart the clock on a loan, it will mean more of your monthly payment goes to interest rather than the principal balance. Better-spending recommends refinancing a 30 year mortgage into a 15 year mortgage if you payment winds up being close to the same, without extending the period.
- Refinance Your car? – We despise car payments here. If you can land a lower rate, and a lower payment without extending the term, great. Also if you can lower the rate but your payment is the same, and without extending the term, do it. The goal is to get rid of the payment asap, it is a burden of your finances. Car payments have no benefit whatsoever, no equity, and depreciation comes to all.
- Student Loans– Pay the minimum for the next 90 days. We hope the feds can ease things for those of us paying them, with maybe some sort of suspension or grace period. That’s what we wish they would do to help breath life into the economy short term; but let’s be real, probably won’t happen.
- HSA– By all means toss some funds into your health savings account, but only after number 1 listed above. Make your first benchmark $500- $1000. If you have kids, you’ll want to at least double that. We have a feeling this will be used entirely this year, just a hunch.