Unexpected Financial Disasters: Natural Disasters

Natural disasters have the potential to be life-changing events. Even if you haven’t lived through one, you have likely seen the impacts they can have on communities and individual lives. Far too often we encounter stories of forest fires, major floods, earthquakes, and the like, and the victims of these disasters who are forced to rebuild their lives in the wake of the damage.

If this happened to you, would you be prepared, and would you know how to limit the financial impacts?


We are all at the mercy of mother nature, which means that we cannot directly prevent natural disasters. But we can prepare for them. Not only can we prepare for the physical aspects – having an emergency food kit on hand, boarding up windows before a storm, etc. – but we can also take certain steps financially to make recovery easier and mitigate damages.

Carefully Consider Your Insurance

Insurance plays a huge role in determining the eventual impact of a natural disaster. While it would still be a life-altering event to lose an asset, or suffer extreme damage to an asset like your home, having insurance coverage could eventually “make you whole” such that you don’t suffer a major financial setback.

Typical homeowner’s insurance policies cover many natural disasters, but not all. As Bankrate explains, a standard policy would cover losses “caused by explosion, fire, lightning, hail, windstorm, hurricanes, tornadoes, extreme cold, volcanoes and theft” but would not cover “earthquakes, floods, tsunamis or nuclear disasters.”

Be sure to familiarize yourself with your insurance policy to understand what is covered. Compare this to the risks you are most likely to face and consider extra coverage. Notably, flooding is the most common natural disaster in the United States. While you are required to have flood insurance if you have a federally-backed mortgage and live in a flood zone, you might also consider insurance if don’t meet those criteria.

Consider Preventative Maintenance and Repairs

Particularly in the case of flooding, there may be preventative steps you can take to mitigate flood damage to your home. These steps range from simple maintenance to major overhauls. FEMA has published guidance on this point.

Organize Financial and other Critical Documents

A natural disaster leaves a path of destruction. You don’t want that to include your most important personal and financial documents. Ensure that your important documents are protected, such as in a fireproof and waterproof box (safe). Additionally, you may want to create digital backups of your important documents and store them safely in the cloud.

Among these documents, it may also be helpful to keep a list of contact information for banks and any other financial accounts and your insurers. In the midst of an emergency, communication with these parties can be very important. Regarding creditors in particular, proactive outreach can help you explain the situation you are facing and enroll in any arrangement the creditor is willing to provide in response to the natural disaster


Recovery from a financial disaster relates to many of the steps above that you take in preparing for a disaster. Things like following up with your insurance company, and making arrangements with creditors can go a long way to helping you recover most quickly while minimizing negative impacts. Not taking these steps can drag out your recovery and potentially leave you burdened with additional debt.

Every situation is different and the most significant consequences of a natural disaster, like being displaced (losing your home) or suffering significant bodily injury, can make the fallout more severe, and the recovery more significant and complex.

Hopefully these tips will help you at least make an initial plan for natural disasters, but living through one will always be difficult and pose unique challenges, financial and otherwise.

If you would like more guidance about the impacts of a financial disaster to your personal financial situation, or need help recovering from a natural disaster that caused or worsened your debt, our credit counselors are able to help. Contact an NFCC-certified credit counselor today for a free session.

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How Paying Down Debt Helps You Save

This week is America Saves Week, a national campaign to raise awareness about the importance of savings, and a time to celebrate accomplishments related to saving money and working toward financial goals. Saving money—as simple as it may sound—can be a somewhat complex topic. It’s not particularly hard to understand, but there are many different ways to think about saving, and to build a plan for saving more money. Today, let’s take a look at the relationship between debt and savings. Specifically, how does paying off debt help you save?

The Basic Formula

To be successful financially, and to save effectively, you have to remember a basic mathematical goal: that your income should be greater than your expenses. To reflect that mathematically looks like this: Income > Expenses. That’s pretty simple, right? If that is not true and your expenses are actually greater than your income, then it will be impossible to save money.

That’s because your savings is generally what’s left over from your income after expenses. So that formula looks like this: Income – Expenses = Savings. Now, there are two things to note about this. First, how much “savings” is left over after you subtract expenses may be in your control. Think of it this way, all income will eventually become spending (expenses) or savings. In other words, don’t assume that “expenses” are only the mandatory items like groceries, utilities, and housing. They also include discretionary spending, which are expenses you don’t make because you need to but because you want to. By limiting those purchases of “wants,” you can increase savings.

The second thing is that “expenses” means your non-saving expenses, and income is your gross income. That probably sounds obvious, but it isn’t always. Many people save automatically from each paycheck, which is a great strategy of “paying yourself first.” However, you don’t want to forget about that savings coming out before you get the check. Those automatic savings funds are being deducted from your gross income, like an expense, but are actually part of your savings.

What About Debt?

A recent study indicated that the average American household has over $145,000 in debt. Now if that figure seems incredibly high, it’s because the figure includes many types of debt, including mortgages. But with the average household with student loans averaging over $55,000 in that debt, and the average household with credit card debt averaging over $7,000, we know that there are significant challenges facing millions of American households.

Debt throws a wrench into the formula we mentioned above, because debt increases your expenses, often significantly. As a result, debt makes it so that there is less money left after your expenses, if anything at all. Basically, debt and savings are at direct odds with each other.

Paying Off Debt to Save More

You’ve heard the old saying that “a penny saved is a penny earned,” and it’s also true that “a penny of debt paid off is a penny saved and therefore a penny earned.” That’s more of a mouthful, but hopefully you get the point. For every bit of debt you can erase, you will free up more room to save.

That is a very direct relationship between debt and savings, but it isn’t the only one. Paying off debt also has other benefits that can help you “save” more over time. Here are a few examples:

Paying down debt helps you contribute to an emergency fund, so that you may not have to take on more debt and wipe out your savings when faced with an unexpected set of circumstances.
Paying down debt helps you achieve other financial goals, like buying a house, that can help you build equity, which operates much like savings.
Paying down debt effectively makes your savings and investments lower-risk. When you don’t have debt to worry about, you can more easily take a set-it-and-forget it approach to investing and retirement planning, without feeling like you need to pull out funds early to pay a debt.

These are just a few examples. But the basic idea is that when you don’t have to worry about debt, you’ll have more money for savings each month, but also more flexibility for how you use that money and how it can work for you over time.

Hopefully you are making progress on these two important financial goals of paying down debt and building your savings. Now is a great time to take inventory of where you stand, and to make a plan for the year ahead. Remember that if you would like additional assistance, our counselors can help in a free counseling session, and we invite you to get started today.

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How to Set Realistic Financial Goals for 2021 and Reach Them, Despite Uncertainty

For most people, 2020 has been a challenging year. From the COVID-19 pandemic to the subsequent recession to the many unprecedented political and cultural events, this year has been one for the history books. While most are hoping that 2021 is nothing like 2020, the reality is that the future is uncertain.

As you think ahead to 2021—and having a clean slate in the new year—financial goals may be your top priority. Here are some tips for making realistic financial goals and reaching them, so that 2021 can be a major “bounce back” year for you.

Basic Rules for Goal Setting

You may have heard of the SMART goal system, but here’s a reminder. Goals should be:


We’re focusing on the “A” for attainable, but you will want to keep all of these in mind as you create goals. If you create an attainable goal—meaning that it is realistic and manageable—but you fail to put a time parameter on the goal, then it may not be very effective. Similarly, a goal could be realistic but not very specific. This could mean that you wouldn’t even be able to say with certainty that you completed your goal because it was not clearly defined. You get the idea—just keep this SMART system in mind and make sure each individual goal meets all the criteria.

What makes a goal realistic or “attainable”?

To be a realistic goal, the goal needs to be within reach. However, don’t fall for the temptation of thinking that only easy goals are realistic. It’s actually very important that you set goals that will motivate you, and very easy goals often are not motivating. On the other hand, you do not want to set a goal that is too difficult to complete, because that may not be realistic and could lead to burnout. You are really looking for the sweet spot of something that is challenging but not so difficult that you have a high likelihood of failure. When setting a realistic goal, it may be helpful to do the following:

Ask yourself if this is a relatively small or large goal. Is it short-term or long-term? For larger and long-term goals, you will need to make sub-goals, which are milestones along the way.
Research your proposed goal. Can you find stories or data about other people who have achieved the same goal? If no one has ever accomplished it before, then it may not be realistic.
Assess your starting point. Even if you know a goal is achievable, make sure that it is achievable from your starting point.
Find what motivates you. Motivation is the secret sauce when it comes to goal setting and goal achievement. When you’re motivated, you can do more than when you’re not. Use motivation to set harder goals than you would otherwise, but you also need to find ways to stay motivated as you work toward your goal.

Tips for Financial Goals

There are some specific strategies available that can help you achieve your financial goals. After all, financial goals are some of the most common new year’s resolutions. These include, paying off debt, building an emergency fund, and saving for a specific expense like college or homeownership. Using these strategies can help ensure you don’t fall short of whatever goal you set.

These are not sophisticated strategies by any means, either. Instead, think of them as basic habits you will need to implement in order to maintain financial success and stability

Budget Before, During, and After

We can’t overstate the importance of budgeting. When it comes to achieving your goals, your budget will be the ultimate road map. Hopefully, you already have a budget. If so, that will give you a clear “starting point.” But if not, the important thing is to maintain a budget moving forward.

A good budgeting system will give you a real-time way to check in on how you’re doing. Are you staying within your spending constraints in various categories? Has your income picked up or dropped off? Where do you need to cut back, or where can you put extra funds when your income changes? A good budget holds the answers to all of these questions.

Save as Much as Possible

Many, if not all, financial goals involve saving to different degrees. The more you save, the more flexibility you will have and the more purchase power you will have. Take a critical look now at the categories in your budget to see where you can make cuts. Every extra dollar you save will be an extra dollar toward your financial goals.

Have an Emergency Fund

Building on the previous point, it is important to build an emergency savings fund equal to six months’ expenses or more. You will want to do this as soon as possible, so it may even be your first major financial goal. Given all the economic uncertainty around us, this step can provide much needed stability.

Assess Your Credit

Many goals also involve credit health, directly or indirectly. Having good credit is an important piece of your financial puzzle. Remember that you can review your report for free at annualcreditreport.com. You should do this frequently to track your progress and ensure your reports are accurate.

Have Accountability

It is easier to stick to a plan when you have someone supporting you along the way. Find a trusted relative or friend with whom you can be open about your finances and goals. Ideally, this would be someone who has already achieved the goals you are working on, or who is on a successful financial path themselves.

Good Luck Achieving Your Goals!

Remember to make SMART goals. A major factor is that your goals should be attainable, which means they should be realistic and manageable for you. By implementing some basic financial strategies and habits, you will be well on your way. If you’d like help with your financial goals, particularly with credit or debt, learn more about credit counseling or get started today.

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Should You Access Your Retirement Funds Early Due to COVID-19?

One of the long-standing rules of personal finance has been that you should not take funds out of your retirement account early except as a last resort. The question now is whether the COVID-19 crisis has created a “last resort.” In other words, does it make sense to dip into retirement savings now? The CARES Act has temporarily changed the rules about accessing these funds, making it more favorable to do so before you are of retirement age. Let’s take a closer look at the changes and the considerations that should go into any decision about accessing retirement funds early.

Normal Rules for Distributions and Loans

There are generally two ways to access retirements funds early. You can take the money out of the account (a distribution) or you can borrow money from your account (a loan). Normally, if you take a distribution from a retirement account before you are 59 ½, then you will pay income tax on the distribution and be subject to a 10 percent penalty (or a 25 percent penalty in the case of distributions from a SIMPLE IRA within the first two years of participation). However, note that there are exceptions to this rule.

Distributions are available from any retirement account. However, loans are more limited. Loans are not available on any IRAs or IRA-based accounts. The IRS explains that loans are only available on “profit-sharing, money purchase, 401(k), 403(b) and 457(b) plans,” though not all plan administrators offer loans. Borrowing from a 401(k) or similar account is normally limited to $10,000 or 50% of the vested account balance, whichever is greater, with a cap of $50,000. You pay interest on a 401(k) loan, but the interest returns to your account. The biggest cons to using a 401(k) loan are that you may miss out on investment growth due to taking your money out of the market, and you may default on the loan, which could lead to the loan being treated as a distribution. For a good primer on these loans, read this article from Credit Karma.

Loans and distributions can both be disastrous to your retirement savings by triggering severe consequences in the form missed portfolio growth, increased tax liability, and penalties. That is why most financial experts warn against tapping into these funds early if you can help it.

Important Changes Under the CARES Act

These are not normal times. Anticipating that many Americans will be strapped for cash, the government changed the rules for early retirement distributions and 401(k) loans under the CARES Act. Here are some additional important details and further explanations about the law to keep in mind.

Early Distributions

Which retirement accounts are covered?

The option to take a distribution without paying a penalty applies to all retirement accounts.

Who can take a penalty-free distribution?

To avoid penalty, the distribution must be taken by a qualified individual. This covers someone who has tested positive for COVID-19 or who has a spouse or dependent who tested positive. It also covers someone “who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).”

How big can the distribution be?

The limit for penalty-free distributions is $100,000 per individual across accounts.

What time period is covered?

To avoid penalty, the distribution must be taken between March 27, 2020 and December 31, 2020.

How much will you pay in tax? How can you limit your tax liability?

This will depend on your tax bracket. However, the act allows you to spread the tax payment over three years. It also allows you to repay the money to an eligible retirement plan to avoid the tax liability.


401(k) Loans*

How much can you borrow?

The CARES Act increases the cap from $50,000 to $100,000.

What time period is covered?

The increase in how much you can borrow is in effect until September 23, 2020.

How much tax or penalty will you pay on the loan?

There are no taxes or penalties on the loan, but you will pay interest, which is returned to your account.

Does the law change payment obligations?

The law allows affected individuals to delay repayments for up to one year.

*Be sure to consult with your plan administrator to understand fully the terms of a potential loan and the impact of the CARES Act on such a loan.

Should you take a distribution or loan?

The CARES Act provides a unique opportunity to access your retirement funds with less financial penalty than usual. However, these new rules do not address the other main disadvantage of early withdrawals: limiting your investment growth over time. Timing the market, or predicting when investments will hit their peaks or bottoms, is practically impossible. The initial market response to the COVID-19 crisis has been negative, and markets may still be in the midst of a downturn. This means that your portfolio may be quite a bit lower today than it was even just a month ago. Cashing out of your retirement now may mean you take a loss or miss out on upcoming market rebounds. It would strip your funds of their growth potential

Withdrawing or borrowing from your accounts is still a last resort. Do not borrow from your retirement just because you think it is a rare opportunity to do so. You should only take money out of your accounts if you need the money for a financial emergency. Even then, consider the following funding sources instead, and then only return to the idea of taking your retirement money if the other options are not feasible.


Stimulus Money and Tax Refund

Make sure you have taken the necessary action to get your stimulus check. That money may help you meet your goals and eliminate the need to borrow from your retirement. The same is true for a tax refund if you have not yet received yours.

Emergency Fund

You have this fund for a reason. Consider using it now if you are in a bind. Consider growing it too. Now is the time to cut extra expenses and put more toward your savings for future uncertainties.

Personal Loans

Personal loans often provide better terms and interest rates than credit cards, especially to people with good credit. If a small personal loan can hold you over in a pinch, it may be a better alternative.

Of course if you are struggling and are unsure where to start, a certified nonprofit credit counselor can help you sort through your options and provide financial guidance that can set you up for success, now and in the long-term.


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How to Build Savings While in Debt for America Saves Week #ASW2020

In honor of America Saves Week, one of the themes this week was to save for the unexpected and build an emergency fund. Here at the NFCC, we really encourage building an emergency savings fund so that individuals have some cushion to prevent them from going further in debt when unexpected expenses pop up.

This week we had a Facebook Live event and answered several questions around the topic of saving while in debt. Below are the quick answers. For more in depth answers please check out the video linked below.

How much should you have in an emergency fund?

Ideally, you should save three to six months’ worth of take-home pay.

How can you save without hindering paying off your debt?

By having a plan. Be sure to always pay yourself first. Have a set amount that goes directly to your savings and then budget for your debt payments.

How does paying off your debt help with your savings?

Paying off debt helps you save in two ways. It saves you money because you are not paying as much interest each time you decrease the amount you owe. Also, once your debt is paid off you should put all of the money you had budgeted for debt into savings so that your strategy after paying off debt is to save, save, save.

Where should people keep the money? What types of accounts offer the best interest rates?

Money for emergency savings should be kept somewhere easily accessible so that if an emergency arises, you can get the money quickly. If you are building a savings for a home down payment, a car or just for retirement, consider other savings options with higher interest rates such as a money market account or a certificate of deposit account.

Should people be putting money in retirement savings while they are in debt?

Yes, if possible, people should not delay saving for retirement while they are paying off debt. The longer you can contribute to retirement, the more time the money has to compound interest and grow.

How can nonprofit credit counseling help people with a budget and building up their savings?

A nonprofit credit counselor can help you come up with a plan that works for you, to pay off debt and reach your savings goals. Each session is uniquely tailored to the specific needs of the individual.

What is America Saves?

America Saves is campaign managed by the nonprofit Consumer Federation of America that is focused on motivating, encouraging and supporting low- to moderate-income households in their goals to save money, reduce debt, and build wealth.

You can check out the live event to learn more by watching the video below! If you have any topics you’d like for us to cover in coming up #FinancialFacts chats, comment on the video with those ideas!


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Three Conversations You Should Have Right Now Regarding Coronavirus and Your Finances

The rapid spread of the latest coronavirus, COVID-19 has already impacted the financial lives of millions of American households and shows no signs of diminishing any time soon. Where does this leave you and your family in terms of your financial preparedness for the potential economic downturn? Have you reviewed your ability to manage on reduced work hours or to survive a layoff? What does that mean in terms of your current financial obligations like rent, mortgage, auto loan, credit cards and utilities? Successfully managing your available resources requires open lines of communication with everyone who has a stake in your financial health.

Here are three conversations you should have right now in order to minimize the financial impact of the COVID-19 crisis.

Your Family

Open and frequent communication about finances can help make a crisis much easier to manage among family members. Even if you are the only one in your household, it is important to review your savings and fine tune your budget based on your current needs and future goals. Your personal savings will play an important role in an emergency but having an emergency spending plan will help you make that savings go farther. Work with everyone in your household to determine what is necessary and what expenses can be cut. Discuss which alternative budgets will work best and consider going off script to develop the best plan for your unique circumstances. For example, the popular 50/30/20 rule may work well during normal times, but the 30% recommended for entertainment and other discretionary expenses would not be appropriate during a time of belt-tightening.

Your Employer

The prospect of having work hours cut or eliminated can add a tremendous amount of stress to an already unsettling situation. Job stress resulting from these unknowns can have a detrimental impact on how you manage through difficult times. Make sure you understand what options are available for the continuation of employment and any income adjustments that may result from staffing changes. Knowing those details can help you anticipate when you will need to implement changes to your household budget. The discussion should also cover your benefits and their status if employment is terminated or hours are cut. When possible, make use of your Employee Assistance Plan (EAP) to receive counseling and access to other support services that can help you manage during times of economic disruption. Also keep in mind that there are some industries hiring to meet additional demand as more people adapt and shelter in place. If loss of income seems imminent, explore ways to generate a supplemental income stream with an employer or in the gig economy.

Your Lenders and Utilities

Being proactive can make a big difference when dealing with all sorts of financial obligations ahead of a crisis. There are already lenders and service providers offering special assistance for people with questions about managing bills during the coronavirus pandemic. It is likely that there will be an increasing level of guidance as the virus continues to impact more communities. When you are certain that your wages will be reduced or eliminated, contact each of your financial obligations to make them aware of the situation. Be honest and as detailed as possible about how the change will impact your ability to pay your account. Even if they offer special recommendations in response, always ask if there are other options for you to consider. The more informed you are about your choices, the more likely you will find the most appropriate solution. Sometimes these discussions can be overwhelming, and you are provided a lot of information to process. It is reasonable to ask for some time to consider your options and review the information, and you should also request to have details provided in writing by text or email.

There is no shame in reaching out for help in a time of need, so don’t hesitate to contact a nonprofit credit counseling agency for guidance when you feel confused or overwhelmed. Trusted agencies like those affiliated with the National Foundation for Credit Counseling (NFCC) have been helping people overcome financial challenges since 1951 and are here to help you no matter your circumstances.

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Holiday Spending Without Adding to Your Debt

In 2018, over 39 million Americans had lingering debt from the previous holiday season—not only were they in debt, but they were still paying it off a year later. If you want to avoid falling into the same trap, you need to develop a financial plan heading into this holiday season. This means keeping track of yourself and your spending, as well as implementing some cost-saving measures. Here are three ways that you can avoid acquiring debt this holiday season.

Set a Spending Limit

Before you even begin to budget for different gifts, you need to determine your absolute spending limit based on your personal finances. Review your account balances and determine how much can you pull from these accounts without risking going into debt. The only one that can hold you to this spending limit is yourself. You must be disciplined and maintain the willpower to not exceed this limit.

Once you have set your spending limit, you can then decide how you will break it down between gifts, food, parties, etc. Rather than working in dollar amounts, try to turn your budget into percentages using an online budget calculator. For example, 50% can be spent on gifts for relatives, 25% on friends, and another 25% on food. This gives a more accurate representation of how much you can spend on various items, rather than overspending initially and then having to cut back later.

Avoid Overdraft Fees

One way to help you stay in line with your spending limit is by making purchases with a debit card, rather than your credit card. This way, you will be pulling from an account with money already in it. If you pay with a credit card and don’t have the funds to pay it back, you’ll rack up interest and make the debt worse. However, if you’re not careful with a debit card and overdraw your account, many banks will charge you an overdraft fee.

An average overdraft fee is roughly $34 and Americans spend roughly $250 on these fees annually—think of all the additional gifts you could buy with that money! Luckily, some online banks will let you overdraw your account without any charge, which could save you a lot of money around the holidays. Some accounts, like Chime Bank,  even let you overdraw up to $100 without a fee and simply subtract it from your next deposit.

Take Time to Comparison Shop

Even if you miss or pass on shopping holidays like Black Friday and Cyber Monday, you should still spend time researching the best deals. Prices can fluctuate a lot around the holidays, so it’s important to check multiple stores—both online and brick-and-mortar—to find the best deals. Not only should you compare prices, but you should search for coupon codes and promotional sales as well.

While the price may be higher at one store, oftentimes you can find better discounts and factor in shipping prices to get an even better deal. For example, stores like Best Buy and Bed, Bath & Beyond will price match with Amazon. This means that you can get these products cheaper in person if Amazon doesn’t offer free shipping.

If you’re willing to do your due diligence while shopping and stay committed to your spending limit, you should have no problem making it through the holidays without tacking on additional debt.

Check out this fun infographic on what behaviors will earn you coal and what actions you can take instead to reach your financial goals this season!


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