Markets: The Freeze

If people stop investing, they miss out on the chance for their money to grow. This could mean having less income at their disposal during retirement. For example, if you had invested $10,000 in the S&P 500 at the beginning of 1999 and left it untouched, it would have grown to nearly $30,000 by the end of 2018. However, missing out on the 10 best-performing days during that 20-year period would have cut your returns in half.

While it is impossible to predict what stocks will do next, research shows that missing out on the best-performing days of the market can significantly impact long-term returns. This is because the easiest way to miss out on gains is by fleeing the market after being spooked by a downturn.

Additionally, if you own stocks that pay dividends, you will also miss out on those periodic payments.

People may stop investing due to debt

High-interest debt, such as credit card debt, can be particularly detrimental to an individual's financial situation. Credit card interest rates can be very high, often around 20%, and missing payments can negatively impact an individual's credit score. This can make it more difficult to borrow money in the future, rent an apartment, or open utility accounts.

Additionally, debt can cause individuals to lose sleep and worry, which may further impact their overall well-being and decision-making. As a result, some people may choose to stop investing and focus on paying off their debts first.

However, it is important to note that investing can be a way to grow one's wealth over time. Therefore, individuals may want to consider their risk tolerance, interest rates on their debts, and financial goals when deciding whether to pay off debt or continue investing.

In some cases, it may be possible to do both by creating a detailed budget and finding ways to increase income, such as through a side hustle. Seeking advice from a financial advisor can also help individuals make informed decisions about their money.

No emergency fund

Not having an emergency fund can be detrimental to your financial health. An emergency fund is a bank account with money set aside for large, unexpected expenses such as unforeseen medical expenses or home appliance repairs. It acts as a financial buffer, ensuring you have the necessary funds to cover important costs without having to rely on credit cards or high-interest loans.

High-Interest Debt:

If you don't have an emergency fund, you may be forced to turn to high-interest credit cards or loans to cover unexpected expenses. This can lead to a cycle of debt that is difficult to escape, impacting your financial stability and well-being.

Loss of Financial Stability:

Without an emergency fund, a single unexpected expense can disrupt your financial stability. For example, if your roof caves in and you don't have savings, you may have to dip into your retirement fund or incur credit card debt, affecting your long-term financial goals and increasing your financial burden.

Stress and Anxiety:

Not having an emergency fund can cause significant stress and anxiety. Financial uncertainty and the constant worry about how to cover unexpected costs can take a toll on your mental health and overall well-being.

Missed Opportunities:

By not having an emergency fund, you may miss out on opportunities to build wealth. For example, if you're focused solely on retirement savings and an emergency arises, you might have to pause your retirement contributions, hindering your progress toward financial freedom.

Inability to Take Risks:

Without an emergency fund, you may feel hesitant to take calculated risks, such as starting a business or investing in new opportunities. This can limit your potential for financial growth and restrict you from pursuing ventures that could improve your financial situation.

Impact on Retirement:

Retirement planning is crucial, but without an emergency fund, you may find yourself in a predicament. If an unexpected expense arises, you might be forced to choose between your retirement savings and covering the immediate cost. This can disrupt your retirement plans and delay your financial freedom.

In summary, not having an emergency fund can lead to high-interest debt, loss of financial stability, increased stress and anxiety, missed opportunities for wealth creation, hesitation in taking calculated risks, and a negative impact on your retirement plans. It is essential to prioritize building an emergency fund to ensure financial resilience and security.

Saving for a home

Start Saving Early:

The sooner you start saving for your home, the better. As soon as you consider buying a home, begin setting aside money. This will give your savings a solid head start and bring you closer to your goal.

Understand the Costs Involved:

Before you begin saving, it's crucial to break down the costs associated with buying a home. Typically, homebuyers need to cover the down payment, closing costs, and moving expenses.

• Down Payment: This is usually the most significant cost and can range from 5% to 20% of the purchase price. FHA loans for lower-income earners may require as little as 3.5% down, while conventional loans often require at least 3%-5%.
• Closing Costs: These are the additional expenses incurred to finalize the sale, typically ranging from 2% to 5% of the home's value.
• Moving Expenses: Don't forget the cost of actually moving your belongings, which can be in the hundreds or thousands of dollars, depending on various factors.

Create a Separate Account:

Consider opening a separate savings account dedicated solely to your home-buying fund. This will help you track your progress and ensure that the money is easily accessible when needed.

Automate Your Savings:

Set up automatic transfers from your paycheck or primary bank account to your home-buying fund. This way, you save effortlessly without having to remember to transfer funds manually each time.

Cut Down on Expenses:

Examine your monthly expenses and identify areas where you can cut back. Downsizing, reducing entertainment costs, cooking at home instead of dining out, and cancelling non-essential subscriptions are all effective ways to save more.

Increase Your Income:

If possible, consider taking on a side hustle or picking up freelance work to boost your savings. You can also look for opportunities to earn bonuses or raises at your current job and dedicate this extra income towards your home fund.

Remember, while you may need to pause investing temporarily to save for your home, it's important to get back on track with your investment plan once you've achieved your home-buying goal.

Loss of a spouse

Losing a spouse is a difficult and emotional time, and it can be hard to know what to do next. It is important to take time to grieve and not make any major financial decisions right away. Your financial picture will change, and you will need to reassess your finances, particularly from a tax perspective.

First, you will need to determine how your income has changed. With the loss of your spouse's income, you may find yourself in a lower tax bracket or eligible for new deductions or credits. You may need to tap into a retirement account, and it is worth noting that with a lower income, the taxes may be less than anticipated. You may also now qualify for certain tax deductions or credits that have income caps or phase-out rules. Local jurisdictions often have income-based property tax breaks that may now be available to you.

Your filing status will also change. A joint federal tax return is allowed for the year your spouse passes away if you do not remarry. The qualifying widow/widower status may be an option for two more years if there is a dependent child. After that, as a single taxpayer, you will usually pay less favourable tax rates and have a lower standard deduction.

You may inherit a traditional IRA, and this will affect your taxes. You can be designated as the account owner, roll the funds into your retirement account, or be treated as a beneficiary. This decision will affect required minimum distributions and your taxable income.

As a surviving spouse, you will also receive a stepped-up basis in other inherited property. If assets were held jointly, there will be a step up in one half of the basis. If an asset was owned solely by your spouse, there will be a 100% step up. In community property states, the total fair market value of property, including the portion belonging to the surviving spouse, becomes the basis for the entire property if at least half its value is included in the deceased spouse's gross estate.

There is also a special rule that helps surviving spouses who want to sell their home. Usually, up to $250,000 of gain from the sale of a principal residence is tax-free. However, a surviving spouse who hasn't remarried can claim a $500,000 exemption if the home is sold within two years of their spouse's death.

Finally, there is an unlimited marital deduction and an estate tax exemption. If the deceased spouse's estate is below this amount, the surviving spouse should still file Form 706 to elect "portability" of the deceased spouse's unused exemption amount. This protects the surviving spouse if the exemption is lowered.

Other major life events

In the case of a job loss or major medical event, you may find yourself relying on your emergency fund. If you don't have one, now is the time to start building one. It's recommended to save three to six months' worth of expenses. This will ensure you're covered in the event of an emergency without having to dip into your retirement fund or put the expense on a credit card.

Once you're back on your feet, you can resume investing. If you have to stop investing through your employer's retirement plan, inform your human resources department, and they will provide you with the necessary forms. Similarly, contact your investment advisor if you need to pause your contributions. Remember, this should only be a temporary measure.

It's important to strike a balance between investing and having some assets in a safe place, such as a savings account. This balance will enable you to weather any financial storms that may come your way and give you peace of mind.

Frequently asked questions