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The COVID era has rewritten so many rules of personal finance it’s easy to be confused about what your best bet is when it comes to your money. Read on to separate fact from fiction and receive guidance on what you should continue to do, despite the pandemic.
To date, the U.S. Treasury has given out three rounds of stimulus payments to eligible individuals. Singles who reported up to $75,000 in adjusted gross income and married couples filing joint returns who reported up to $150,000 generally qualified for the full amount of the stimulus payments.
Since the government gave you money, you might be wondering if you have to return it at some point.
Reality: If you received a stimulus check, you don’t need to pay it back
Though it sounds too good to be true, these funds were given to qualified Americans as spending money to boost the economy. The stimulus checks are part of a refundable tax credit for 2020 and 2021—it’s not an IOU between you and the government and won’t increase your taxable income for the year.
Bottom line: You won’t need to repay the IRS in the future if you were eligible to receive the checks in the first place.
In addition to not having to pay it back, if you haven’t received your stimulus payment or the full amount to which you’re entitled, you can still get it as a tax credit when you file your taxes.
Since taxpayers received the stimulus checks from the IRS, you might be worried that you’ll owe taxes on it. After all, anything associated with the IRS must mean taxes are involved, right?
Reality: The stimulus checks are part of a refundable tax credit and won’t be included in your taxes
Though the stimulus checks can feel like paychecks of sorts, the IRS thinks of it more like a refundable tax credit, so it follows a different set of rules than traditional income. Per the IRS, the stimulus checks do not count toward your gross income and you won’t have to include them on your income when filing your taxes.
In times of economic uncertainty, it can be hard to think about saving for the future, especially if cash flow is tight. On top of that, if you’re unsure about job security, it might seem like a good idea to scale back on your retirement contributions, or maybe even stop contributing all together.
Reality: If you’re able to, keep contributing
If you’re in a position where you have to choose between continuing your retirement contributions or paying your mortgage, then certainly go with the mortgage payment. However, if you’re someone with solid job security and you’re not worried about changes to your income, it’s probably a good idea for you to continue contributing to your retirement savings. That’s because the key to your retirement savings lies in the power of compounding.
Every time you add to your retirement account, that contribution has the potential to yield returns and help your nest egg grow. And pausing your contributions now could cost you in the future.
Let’s look at a hypothetical example that assumes an average rate of return of 8.8% for a portfolio comprised of 60% stocks and 40% bonds. A 35-year old who plans to retire at 65 and starts out contributing $500 each semi-monthly pay period will have over $1.7 million saved for retirement. On the other hand, someone who starts contributing the same amount at age 45 will have just over $655,000 saved.
To be sure, both are impressive numbers. But in this example, a difference of 10 years results in over a $1.1 million difference in savings—pretty significant!
Of course, this is just an example and your savings’ growth potential depends on a number of factors, including your investment portfolio, your account’s average returns and how much you’re able to regularly contribute (not to mention any employer matches). But hopefully these numbers show you that every little bit counts and starting contributions later—or skipping contributions during times of uncertainty—could have a significant impact down the line.
Thanks to the expanded unemployment benefits under the CARES Act, many people who’ve been terminated, furloughed or find themselves unable to work as a result of the COVID-19 pandemic can claim unemployment insurance. For some of these workers, their unemployment checks may have been more than what they were making before. That income boost could worry business owners, who may think that their employees will pass up work because they’re getting paid more through unemployment.
Reality: If an employee refuses to work when they are called back, they’re no longer eligible for unemployment
Unemployment benefits are typically only given to individuals who have been laid off or furloughed, under specific circumstances. The other important part: they must also be able and willing to work.
So when an employer asks a previously laid-off or furloughed employee to return to work and that person doesn’t choose to return (but can), they are no longer eligible for unemployment benefits, unless they meet certain exceptions.
To put it simply: someone can’t refuse to work in order to collect unemployment. (This is the case under both the CARES Act and with traditional unemployment assistance.)
Important to note: If you file for unemployment under the CARES Act and Pandemic Unemployment Assistance (PUA), you do have to pay taxes on those payments. However, in 2020, under the American Rescue Plan, individuals who have a modified adjusted gross income of $150,000 or less can exclude up to $10,200 of unemployment compensation from their taxes. If you’re receiving taxable unemployment assistance, you can either have taxes taken out every time you receive a payment, or you can make quarterly estimated tax payments.
In March 2020, you might have noticed that parts of your portfolio crept down and you were left with smaller balances in your investment accounts. This might have left you worried that, as a result of the pandemic, your portfolio might not recover.
Reality: Stocks have been up and down during the pandemic, and we can’t predict what will happen next
Investors have seen the unpredictable nature of stocks during a pandemic firsthand. As the COVID-19 outbreak became a global pandemic in March 2020, we saw stock prices plummeting.
Yet in June 2020, the stock market climbed back up for four consecutive weeks and the S&P 500 returned to where it had been at the start of 2020. All the ups and downs can make even the most confident investor nervous.
While it may look like stock prices react directly to COVID-19 (or any other type of economic uncertainty), it’s important to remember that they go up and down based on investors buying and selling. It’s difficult to try and predict what the stock market will do next, pandemic or not.
One of the most important things you can do is be aware and realistic about market volatility and its fluctuations. Investing is about playing the long game, so remember to stay the course and avoid making emotional decisions during times of uncertainty.
There are a few reasons why you might be scoping out homes right now. Maybe it’s the desire to move from your cramped apartment in the city to the suburbs where you can finally set up a real home office instead of working from your couch.
Or perhaps you’ve been eyeing the falling mortgage rates. As of January 2021, 30-year fixed mortgage rates dropped to their lowest percentage in the past 50 years.1 You might think now is the perfect time to score a deal on a home—people probably aren’t looking to make big purchases now, right?
Reality: There are a lot of other factors to consider beyond just the mortgage rate
Lower mortgage rates coupled with an itch for change may lead you to think this is the perfect time to buy. However, while mortgage rates have dropped, housing prices haven’t fallen with them—and people are looking to buy.
In May 2021, according to Redfin, home prices have shot up 21% from the pre-pandemic market.2 You might also be surprised to know that it could be harder for some borrowers to get a mortgage right now. Because of the shaky economic climate, lenders want to be extra sure that if someone signs for a home loan, they’ll be able to pay it off.
As a result, many have increased their credit score and down payment requirements, while some have stopped issuing certain loans completely. You can still become a homeowner right now, but you might be coming into a tougher housing market with stricter lending terms.
In pre-COVID times, when you could readily redeem points and miles for flights and hotel stays, you might have been willing to pay the high annual fee on some travel rewards cards. But right now, annual fees on these cards can feel excessive in a time when travel is restricted and many plans are on hold.
Reality: Check your terms before closing your travel rewards card
Before you cut up your card, find out how your rewards work. If your credit card gives you a flat number of miles or points for every dollar spent, it could be worth holding on to, especially if you can redeem those rewards for non-travel related expenses.
Some card issuers have also expanded their rewards offerings in response to the pandemic, so it’s worth checking in with them to see if anything has changed.
On the other hand, if your credit card only rewards you for specific travel-related purchases, it’s understandable that the high annual fee might not feel worth it right now. If that’s the case, or your rewards can only be used within a certain timeframe—or have other restrictions—you might want to consider if it makes sense to keep that card.
If you decide a certain card isn’t worth the annual fees, you could ask your issuer if you can downgrade your card to a no-fee, or lower-fee option. If you decide to downgrade your card or close it out entirely, be sure to ask your issuer if you’ll be able to keep the rewards you’ve already earned since the policy differs from issuer-to-issuer.
You should also keep in mind that closing a credit card may lead to a drop to your credit score.
The COVID-19 pandemic has brought many uncertainties to seemingly every aspect of our lives—and that includes our finances. With everyone from your neighbor to your social network shouting different (and often conflicting) bits of information, it’s easy to feel lost when it comes to money matters. Use these guidelines to tune out the noise and feel more confident in your financial choices.
If you have access to Ayco’s services through your employer, don’t hesitate to reach out to your coach or financial advisor to learn more about how to navigate your finances in these uncharted waters.
This article is based on an originally published article marcus.com.
This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared and approved by The Ayco Company, L.P. d/b/a Goldman Sachs Ayco Personal Financial Management (“Ayco Personal Financial Management” or “Ayco”) and based on an original article from Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Ayco or any its affiliates. Neither Ayco nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss.
By Brandon Ross
Insights from Ayco InnerCircle 2021