Many families and businesses are feeling the financial strains of the COVID-19 outbreak. In the past several days, the stock market has seen its worst day since 1987, Colorado has experienced an unprecedented surge in unemployment applications and businesses small and large have been forced to make cuts. Chris Hughen is an associate professor in the Reiman School of Finance at the Daniels College of Business, and he shared his expertise in an email conversation with the DU Newsroom.
What kind of emergency plans should families put in place when it comes to finances?
Families should use this as an opportunity to develop a long-term financial plan. The most important element of this plan is to eventually save at least six months of living expenses in cash. Put this money in a separate bank account and make a solemn promise not to touch it in good times.
In the coming months, how should cash-strapped individuals and families, who may not have enough money to honor all their financial obligations, prioritize paying their bills?
People need to prioritize their bills to ensure that they can provide for the essential needs of their families — food, medical care, and childcare. They also need to prioritize expenses that are necessary to keep or get employment. In this environment, lenders will hopefully be more understanding of a late payment on a mortgage or car loan. It is important to communicate with your lender when making a late payment; let them know of your plan to resume payments when possible.
What should individuals do with their investments during this pandemic?
The stock market is a great investment over the long term. Since 1900, stocks have returned 9.6% per year. Investors in a diversified portfolio of stocks have rarely lost money when they have held their investment for at least 20 years. The lesson is to ignore the short-term volatility and stay invested for decades, not days.
What’s your advice when it comes to 401(k) plans?
Focus on a long-term financial plan that includes making a monthly contribution to your investment portfolio. It is important to develop savings as a regular habit and increase your contributions over time. Pay yourself first by increasing your monthly investment contribution with each raise. Developing a long-term financial plan is the easy part. Sticking to the plan in both good and bad times is the big challenge.
The Federal Reserve cut interest rates to nearly 0%. What does this mean for the average individual?
The Federal Reserve set the target rate for short-term loans between banks at almost 0%. However, actual interest rates for consumers vary depending on the riskiness and length of the loan. Many homeowners will be able to refinance and save on their mortgage payments. However, mortgage rates may not drop as much as government bond rates.
What does the public need to know about the IRS deferring tax filing and payments?
Individuals may delay tax payments that were due on April 15 to July 15. At a time when many businesses have had to close their doors, a critical issue for our economy is liquidity (the availability of cash to pay day-to-day expenses). This extension in the deadline provides needed flexibility for many individuals while costing the government almost nothing at a time when interest rates are low. This is a valuable policy change that will [prevent] bankruptcies and foreclosures and allow our economy to rebound quickly after the crisis has passed.
There’s talk that the government will send checks to the American people to help with the financial burdens resulting from COVID-19. Does this make a difference?
Unfortunately, many of the government tools for combating an economic crisis have an extended delay in their impact. Direct cash payments are an immediate stimulus to our economy. Unlike tax cuts, direct payments assist people who have lost their jobs. Mailing out checks is one of the best ways to avoid an extended economic downturn.