Picking Up the Pieces - The Financial Consequences on Households Due to COVID-19

Picking Up the Pieces – The Financial Consequences on Households Due to COVID-19

The COVID-19 outbreak didn’t just bring major health risks and force the public to observe social distancing – it also has had massive economic impacts, causing job losses, business closures, and financial distress globally. The spread of the novel coronavirus threatens the financial stability of millions of Americans who find that their household spending has changed dramatically.   

When businesses close and employees stop getting paid or take a pay cut, the bills for unpaid consumer loans, debt payments, mortgages, rents, and utilities quickly accumulate. Economic survival is many people’s primary concern. While unemployment insurance may cover some expenses (for a while), the households of wage and self-employed workers that live from check to check are at great financial risk.

Therefore, we’re witnessing two overlapping crises – the COVID-19 outbreak and the economic crisis that threatens our debt-fueled economy. Households (especially those at the lower end of the wealth and income spectrum) urgently need debt relief. In order to treat the economic fallout, the government needs to assume the debt of high-risk households and try to incentivize financial institutions to modify the terms of existing loans (like it did after the 2008 financial crisis with the Home Affordable Modification Program).

Recent data suggests that U.S. citizens are worried about their finances. As consumers are tightening their spending habits and adapting to the financial uncertainty of the months to come, bill payment behavior is changing quickly. Americans have a good reason to worry because 69% of households don’t have enough money saved to cover basic living expenses for more than 4 months.

What the Numbers Are Saying

Since the onset of the coronavirus pandemic, Americans are reporting significant changes in their household financial situations. Even those who haven’t experienced a negative impact on their personal finances are anticipating them in months to come. Economists claim that we’re on the brink of a global recession, while people believe that we are either in a recession right now or will enter it within six months.

According to the doxoINSIGHTS COVID-19 Impact Report:

  • Late payments are occurring twice as often as before the pandemic – 36% of U.S. citizens are already paying bills late or will have to soon.
  • 59% of American households are worried about staying current on utilities, mortgage, auto loans, and rent bills in the coming months.
  • People will be turning to credit card spending – 40% of consumers say they’ll decrease their usual installment payments or will begin paying off their credit with installments, while 33% say they will most probably start relying on credit as the only way to pay bills.

The COVID-19 pandemic has had an immense direct impact on bill payments because consumers are facing the challenge of lower income and managing household cash flow. Household bills usually include the most critical financial obligations our consumers carry and comprise more than 50% of total spending. To achieve greater financial health and stay on top of their bills, consumers should rely on transparency, data, economic help, and debt relief options.

Impact of the Pandemic on Household Debt

The coronavirus pandemic will definitely change our society (it already has in many ways), but it will not end society as we know it.. Governmental bodies and creditors have offered short-term financial help (coronavirus aid like The CARES Act) and debt-relief options, but things will return to a new normal. If your debt payments have become too much for you, look into debt relief immediately. Debt management and debt settlement programs are tried and proven over the years.

In the first quarter of 2020 (before the worst months of the COVID-19 crisis), U.S. consumer debt ballooned to a record. According to the New York Federal Reserve, total consumer debt increased by 1.1% to $14.3 trillion throughout March. The largest component of the report, mortgage balances, recorded a $156 billion increase and now top at $9.71 trillion. The $15 billion increase in auto loans and the $27 billion increase in student loans were offset by a decline in credit card and other forms of debt, while non-housing debt balances were mostly flat. In the first quarter, credit card balances decreased by $34 billion, while other forms of debt declined by $5 billion.

In late March, the American consumer was severely affected when President Trump declared a national emergency, and the country went into lockdown to prevent the spread of the coronavirus. People began losing their jobs, nonessential businesses were banned, and people were staying home. Amid coronavirus restrictions, U.S. consumer spending declined by 7.5%. As for the good news, there was a notable $34 billion decrease in credit card balances, which gives some breathing room to financially strapped people who are turning to credit cards to cover their expenses, particularly if they don’t have cash reserves, liquid assets, or emergency funds.

Budgeting for the New Normal

As a consequence of the spread of the virus, about 39 million people lost their jobs in nine weeks. But even with unemployment skyrocketing, the direct impact on most U.S. households may be temporary in scope and relatively limited. Many people have retained their jobs, current salaries, and regular income. However, those who have lost their jobs or taken pay cuts will expect to receive financial assistance or stimulus payment, placing pressure on government agencies. We’ve seen millions of people running around to stockpile everything from toilet paper and hand sanitizer to canned goods. But how wise is it to tap into your emergency savings fund to buy supplies for this unprecedented situation?

Emergency savings funds are there to help you if you don’t have any income, so tapping into savings makes sense only if you’re missing work or are unemployed due to current economic conditions. Until either of these situations occur in your household, the best thing to do is leave your savings alone and sit tight. As the virus outbreak reaches all U.S. states and most major communities, you should have a plan for spending your financial resources wisely. It will benefit you now and into the future, and if you don’t have a budget (spending plan), now is the time to sit down and create one. To prepare for unexpected expenses, you should divert some spending from things like subscription services, vacations, and dining out, then put that money into an emergency savings fund.

When prioritizing expenses, the money typically goes toward utilities and housing, food, communications and transportation, and probably some clothing first. In times of crisis, households must re-examine their priorities. Does the money you spend go to the most important things in your life right now? In times of crisis, the essential things in life come into focus.

More About Savings and the U.S. Household

In past recessions, the decline in employment was reflected in a drop in personal incomes because government unemployment benefits did not completely replace the wages lost. As a result, consumer spending decreased while savings changed a little. The 2020 recession is different – more than 40 million have lost their jobs in the past 9-10 weeks, and real disposable income experienced a decline. However, that happened partly because payments of unemployment insurance benefits were delayed due to administrative bottlenecks.

JPMorgan forecasts that the support from the CARES Act and unemployment benefits (including tax cuts) will restore a significant part of the drop in personal income. It is estimated that 75% of recently unemployed people will receive more in these government support payments than they previously earned. Despite this supplemental income, there’s been a change in household spending, and the savings could rise to about 20% of household income.

In April, the personal savings rate hit 33% (the rate shows how much people save as a percentage of their income), which is the highest rate ever since the department began tracking it in the 1960s. These economic situations caused by the coronavirus resulted in an unprecedented societal and economic disruption, leading households to amass savings. And since the virus was declared a pandemic, more than 40 million people filed for unemployment in the U.S. Opportunities to go out and spend money were reduced – many nonessential businesses and shopping centers were closed, and people were staying at home, which led to a demand shock.

As long as they have a regular source of income, households should continuously contribute to their emergency savings funds throughout the pandemic. Also, you should consider looking at funding accounts for your short-term goals. Avoid maxing out your credit cards and income to stock a one-year supply of healthcare products, hand sanitizer, or toilet paper – we have already seen that those products won’t run out. 

Financial Stress Caused by COVID-19

There are several main drivers of financial stress and fear people have experienced during these tough times, and they are:

  1. The fear of the unforeseeable financial future. How long will the coronavirus outbreak last? When will I be able to find a new job? When will I get back to work from furlough and work at full pay? Will there be work for me to return to? These fears are spurred by the current economic and health crises.
  2. Loss of income. A major disruption that elicits fear of need for basic provisions. Self-employed people and wage workers fear that the coronavirus will collapse their businesses or take away their income, negatively affecting their livelihoods. These losses come as a result of circumstances that we don’t have any control over.
  3. Urgent expenses and needs. People need to decide which expenses are essential and nonessential. Which groceries need to be purchased? Which bills should be paid now, and which can be delayed? Which debts must be kept current? All these decisions lead to stress because the pandemic has taken away the primary source of income from millions of people. On the other hand, the stream of expenses is ongoing.

Research conducted by the Tulane University shows that 88% of the total of 276 respondents feel stressed and nervous, 95% are worried about the future impacts of the coronavirus, and 88% of them are generally very worried about the state of the economy.

Being worried is normal. However, when we are worried, we create a phenomenon in our brain that actually blocks our ability to think rationally and make logical decisions. Many are still grappling with this economic crisis, but people must continue to focus on applying for benefits, managing their personal finances, and communicating with creditors when they experience issues with paying their bills.

How to Survive the Pandemic from a Financial Perspective

Now is not a time to panic. It is time to hustle, barter, and resort to debt relief strategies. It is time to be as pragmatic as possible. If you lost your job or live on a reduced income, if you’ve been working on a reduced schedule or are furloughed, we advise you to cut all nonessential expenses immediately. Reframe the travel ban and school closure as opportunities to regain personal financial stability.

Understand that you are your biggest asset, and since so many people filed for unemployment in the last nine weeks, everyone is on the lookout for jobs. The competition on the job market is fierce, so prepare to work your networks and compete when looking for work. Even if you find jobs that you have no prior experience doing, put in more work to learn and acquire new skills.

On the other hand, if you do have a job but no money on hand, it’s time to reassess your financial health. We suggest that you contact a credit counselor. Counselors offer money-saving and credit counseling options, such as debt management programs. They can work with you on a short-term or long-term budget that will get you out of debt, as well as consolidate your bills into a single monthly payment that will be lower than the amount you owe currently. With help from a good counselor, you can develop better financial habits that will pay off after the crisis.

Find ways to make smart investments and limit your risk exposure. The U.S. Congress passed the CARES Act – a $2.2 trillion stimulus package that will provide a cash influx to those who need it the most. However, people who have lost their jobs won’t make much of that $1,200 stimulus check, and it will take weeks or even months for most of them to receive that check. It is not wise to rely on the government or any other institution to save you. These provisions are there to partially fill a need, while the financial survival for this situation is completely dependent on your ability to get your expenses and debt under control. Find other ways to earn and secure an income to survive.

Debt Management as a Viable Solution

To lower your monthly payments and get some immediate financial relief, you should consider debt management. For example, if you cannot manage to pay your current bills, lowering your monthly payments could put some money back in your pocket. You can pay your debt through payments to your credit counseling agency that will distribute the money to your creditors.

A quality debt settlement program is tailored to your financial situation to serve your specific needs. Churchill Credit Solutions is a debt management company that provides everything from credit counseling to debt management programs. If you choose us to help you consolidate your debt, we will act as your representative in negotiating your debt with your creditors. We will negotiate with them to reduce the amount you owe in exchange for paying out that debt with a lump-sum or multi-month payment plan . Then, you will continue to pay the debt in lowered monthly payments and a reduced balance.

You will reduce the stress and anxiety by simplifying things – you will only have one monthly payment to make. With a debt management plan, it typically takes about 3-5 years to repay. You will get a chance to get over your debt and set yourself on the right path to improving your financial and mental wellbeing, which is especially valuable during times of global pandemic.

Churchill Credit Solutions is a credit counseling agency that can help you assess your financial situation, provide valuable debt management guidance, and offer various debt relief options that will remove your debt and allow you to focus on more important things in life – finding other sources of income and surviving the pandemic. Debt consolidation is something you should consider if you’re looking for a stress-free way to get out of debt. Stress and anxiety caused by heavy debt is a burden that makes your life even harder, so feel free to contact us for more information. We would be happy to hear from you and help design a debt consolidation plan that fits your financial situation.

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