COVID Cash Flow Check-UpSubmitted by Mission Financial Planning on September 18th, 2020
Financially, it has been an unusual and stressful year. We are doing a series of “check up” articles to look at different areas of your finances to see what has changed, and what you might need to check up on to be sure your financial plan is still on track. The focus of this post is cash flow; many clients’ cash flow was affected significantly this year.
When businesses were mandated to shut down, many missed paychecks and some relied on unemployment, but either way it has created the need to re-check pay stubs now for the following:
- 401k contributions may need to get back on track to maximize salary deferrals, and
- Income tax withholding may need to be changed because of the changes in this year’s income.
Most saw a reduction in cash flow with the “mandated belt-tightening” of not being able to dine out or travel, but some spent more money than usual on online shopping, and food and incidentals with grown kids coming back home (we have a blog about that). For a few with younger kids at home, hiring tutors or nannies became necessary and expensive.
- If you had to hire a nanny or tutors, be sure to read this blog post about how to pay them.
Some people have accumulated savings through deferred student loan payments and decreased spending, this extra cash should be kept on hand as an emergency fund if there wasn’t one already. The value of having cash-on-hand have become very clear over the last months.
- If you spent down your emergency fund, as cash-flow improves, or stimulus arrives, begin to re-fill that bucket.
What if you need more cash and the emergency fund is empty?
- As you evaluate your sources of cash, think about liquidity and taxes.
Liquidity speaks to how easy something would be to cash out. Real estate is not as “liquid” as a bank account. Real estate has value, but it can be difficult to access. Generally, investment accounts are liquid within a couple of days – you may not want to sell them, but it’s possible.
Taxes must always be considered when you are cashing out investments. There wouldn’t be much of a tax consequence for cashing out a bank account. A non-retirement, after-tax account may experience capital gains, but they are generally lower than income-tax rates and only paid on the growth of the investment, so probably a relatively low tax bill. IRAs can get expensive to liquidate. There are some specific COVID exceptions, but there is usually a penalty for taking money out of an IRA before age 59.5, PLUS income taxes on most (probably all) of what you cash out.
- Find out the tax cost of cashing out investments before you do it.
If your investments aren’t liquid or taxes are too expensive, short-term borrowing is always an option, but if there is uncertainty of when cash-flow might improve,
- we’d like borrowing to be a last resort, but there are some strategies if dire circumstances warrant them. Give us a call if that’s the case.
If you’re a practice owner, hopefully PPP, EIDL and HHS/Cares money helped shore-up the practice and kept you out of the woods, but it may be a good idea to do a cash flow projection to be sure. If you received PPP, an EIDL grants, or HHS money, remember that these can create taxable income.
- Talk to your CPA about the effects of COVID on your practice. The extra income of PPP and HHS may be offset by lost revenues and additional expenses, but it is important to revisit tax projections.
- Know the ins and outs of your personal (and practice) cash flow; what you can count on coming in, and what your obligations are going out.
Things are looking up, but you may still want to be conservative in your spending, protecting the nest egg and planning for the possibility of another rainy day.