Even with a possible vaccine on the horizon, no one knows exactly how or when the coronavirus outbreak will end. Millions remain unemployed as the effects of the recession due to the pandemic linger. Several major pandemic relief programs are ending soon, and there’s no guarantee that additional help is on the way.
One thing that’s not uncertain anymore, at least, is the outcome of the U.S. presidential election. But how will the new president’s policies affect people’s finances? Will they have a measurable impact at all, for example on taxes or student loans?
At least one expert says that, President Joe Biden or not, people should focus on the basic tenets of sound personal finance regardless of what may be coming.
“I don’t really think it’s going to change the core concepts of everyone’s financial life,” says Jill Schlesinger, a business analyst for CBS News and host of the “Jill on Money” podcast. “We ascribe way too much fault, blame, and glory to presidents and administrations about the economy. This is a period of time where getting back to the basics really does work. Have an emergency fund of six to 12 months of living expenses, whittle down outstanding debt, and prepare for retirement.”
Is there anything you should do for your personal finances to be ready for political change? Five experts were asked for advice on how you can take control of your finances under a new administration.
You shouldn’t let the outcome of the election dictate your next money move, says Larry Sprung, founder and wealth advisor at Mitlin Financial.
Rather than making decisions based on what politicians have promised, focus on what you can control and make adjustments to your financial plan as your life evolves. That includes maintaining a monthly budget to help keep your expenses in check, having a debt payoff plan, contributing to your emergency fund and retirement savings, and managing your investments.
Having a financial plan also means adjusting it to reflect changing priorities. If you’re investing for the long term, for example, occasional reviews of your portfolio are important – and should lead more to tweaks than full-scale overhauls.
“You really have to break down your goals into short-, medium-, and long-term, then assign some financial numbers to those, and be able to create a timeline of how you’re going to reach those goals,” Sprung says.
While markets could be volatile, don’t react. As long as you have long-term goals, you’ll be able to ride out the ups and downs.
But don’t completely ignore what’s happening in politics, either. If certain federal policies are passed under a Biden administration — specifically about taxes or student loan forgiveness, for example — then you can take those changes into consideration and possibly adjust your financial plan.
“If you didn’t have a financial plan together, now’s the time to understand the importance of one. Get one in place, so that if and when the next recession or economic event comes, you can mitigate some of the effects,” Sprung says.
Farnoosh Torabi: Focus On Saving And Don’t Pay Down Debt Too Aggressively
One thing Torabi says you should not do now? Prioritize your debt over your savings.
“Nothing should be assumed, nothing will happen automatically. And even if laws are passed, it’s still incumbent upon the individual to make sure they’re taking advantage of them,” says Farnoosh Torabi, a personal finance author and host of the “So Money” podcast.
While that might sound unconventional, 2020 has changed a lot of things, among them traditional financial advice. To maintain your financial health right now, you might have to do things a little differently. Saving should be your top priority especially if you’ve lost your job or don’t have an emergency reserve, Torabi says.
If you have federal student loan debt, you should avoid paying off it too aggressively in the next year, just in case new relief arrives, Torabi says.
Part of Biden’s $750 billion education plan is to forgive $10,000 in student debt for all borrowers, and the rest of the debt for those who attended public colleges or historically Black colleges and universities and earn less than $125,000 a year.
“There’s a lot that’s been proposed and a lot to give us hope, in terms of job creation, employment, student loan forgiveness,” Torabi says. “But I think the smart money move still bets on the individual. What I mean by that is we still need to hold ourselves accountable for our finances.”
Torabi also recommends taking advantage of the federal student loan deferment program from the CARES Act, until it expires at the end of the year. But be proactive, she says. Stay up to date on any student loan relief and reach out to your lender first to discuss what your options are if relief isn’t extended into next year.
Private student loans are a slightly different story. If you’re struggling to pay private student loans, talk to your lender immediately and try to get ahead of financial troubles by asking to refinance or modify your loan.
“Whatever an administration promises, we should just kind of think about it like icing on the cake,” Torabi says. “We have to hope for the best, but plan for same old, same old. That means doing all the same things that we’ve always done to protect our finances.”
Opening a Roth IRA or converting from a traditional to a Roth could be your next best move, says Schlesinger. It’s a tax-advantaged investment account that’s free to open and lets you contribute up to $6,000 a year if you’re under 50, or $7,000 for those 50 and over.
Here’s why, according to Schlesinger: The U.S. deficit has grown even bigger during the pandemic-induced recession. There’s going to be pressure on the government to eventually raise taxes on all Americans, not just the richest, she says.
“You could envision a scenario, for example with Social Security, where people who make more money have to pay more into the system,” Schlesinger says.
Whether it’s Biden’s administration that raises them or another one down the road, that’s where a Roth IRA can come in handy.
“Tax rates are historically low. The better assumption to make would be, ‘I make a certain amount of money today. It’s entirely likely that the tax bracket I’m in right now could change and it may be higher than I imagine,’” Schlesinger says.
With a Roth IRA, you’ll pay taxes at today’s lower rates and your dollars will grow completely tax-free, forever. That means the Internal Revenue Service won’t come knocking on your door once you withdraw at retirement, even if tax rates are higher in the future.
“If you’ve seen a loss of income this year, it’s better to pay taxes while you’re at the lowest possible tax bracket, which would argue for using a Roth instead of a traditional retirement account,” Schlesinger says.
If you have extra savings laying around, it’s a great time to put that money to work in the stock market long-term, says Katia Chesnok, founder of personal finance blog and Instagram platform Economikat and CNBC contributor.
Everyone has different long-term investing goals. Maybe you’re focused on retirement or paying for your children’s college education or building up a home down payment. What matters is creating a strategy that matches your risk tolerance, timeline, and investment goals and staying the course, Chesnok says.
“I wouldn’t day trade right now. I’d focus only on longer-term investments,” Chesnok says. “Over time, because of compounding interest, you’re going to recoup your investments. You’re going to increase your money that way.”
Spread your portfolio across a variety of assets to hedge your bets and boost the odds of having higher returns over a long time horizon. For example, index funds or target-date funds are a great start for most investors because they allow you to build a portfolio with wide exposure to a lot of individual stocks and bonds.
You can tailor your asset allocation to your preferences and make adjustments over time, but you’d be wise to avoid knee-jerk reactions to market dips and election news. Historically, the stock market has generally trended up, regardless of which party controls the White House or Congress.
Hopes for another round of COVID-19 relief are reviving since the Democratic victory. Many experts including Nikki Dunn, a certified financial planner who founded the She Talks Finance online community, expect another round of government help to happen.
President-elect Joe Biden has proposed a stimulus plan that includes funding for direct stimulus payments, but Congress has not taken that discussion up yet, so rely on your own savings first and foremost, Dunn says.
If and when a new stimulus check does arrive, what you should do with it will depend on your financial situation. First, you’ll need to evaluate your budget. If you still have income and your necessary expenses are covered, but you haven’t started building an emergency fund, stash the extra money away. A second stimulus check could also be a good opportunity to pay down high-interest debt if that’s a priority for you.
“I think the general perception is that Biden will be more generous with stimulus, and (that) may help the House and the Senate cooperate a little bit more,” Dunn says. “So we may get what everyone is hoping for, which is more money in our pockets, more money in our savings account, more money to pay off debt.”