In March, when the pandemic caused major shutdowns all over the world, my finances shifted drastically (like so many other people). My income was reduced and a lot of my projects as a freelancer and business owner were cut.
I found myself not meeting any of my monthly income goals and wondered if that meant I should ditch my financial planning for 2020. Should I stop funding my retirement? Take the money I was putting in my SEP IRA every month and put it toward bills and rent now?
To help make this decision, I turned to financial experts who gave me the following advice.
Don't stop funding your retirement account and miss out on investment opportunities
Before I paused my retirement transfers, I took the advice of Joseph M. Favorito, CFP and managing partner at Landmark Wealth Management , who made it very clear that delaying funding your retirement is never a good idea, unless you absolutely have to because of something extreme, like losing your job. I didn't fully lose my job, just took a major hit to my income, so I decided to listen to Favorito's advice.
"Rule No. 1 in financial planning is: The first bill you pay is yourself, because your creditors will always be there," said Favorito, adding that the time value of money and the power of compounding are key to building long-term wealth.
"Additionally, difficult economic times tend to present the greatest investing opportunities. If you stopped investing in your retirement plans in March due to declining markets, you quickly missed allocating money just before the 50 best days in market history," he said.
Favorito's advice made me realize that not putting a penny into my retirement account would be a bad idea.
Preserve your savings habit
I decided that I wouldn't stop contributing to my retirement fund, in part because Lauren Anastasio, a CFP at SoFi , pointed out that I may take a long time to get back into the savings habit if I stop now and that would be very bad for my long-term plans.
"Saving for retirement is a very important habit, one we should maintain throughout our careers, regardless of what's happening in the economy," she said.
Consider lowering your investment amount without pausing completely
While states are moving into (and out of) different phases of reopening, there's still a chance my freelance projects and business might take a hit in the months to come. If things get worse and I can't afford to contribute the max to my retirement account, I will put less in than I am right now and make sure I don't go into debt because of that decision.
Anastasio said she's worked with many people who work diligently to save for retirement while carrying credit card balances, which is not an ideal way to manage your money.
"It's admirable to be saving money, but it's unrealistic to expect your investments to return more than the interest your credit cards are likely charging, which means each dollar would actually be more valuable paying off your credit card debt instead of going into retirement investments," she said. "If you fall into this category, lower your retirement contributions temporarily (but not below a level where you may be entitled to an employer match) and focus the extra funds on getting rid of your credit card debt. You can always ramp up your savings contributions once the debt is gone."
Shifting around my budget (by keeping spending low and budgeting for fixed expenses) will let me continue to contribute to my SEP IRA as planned every month, for right now, though I'm open to lowering that amount if need be. It's a habit I've committed to and a plan that I don't want to give up on even though my finances are a little off the path I hoped they'd be on in 2020.
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