Life Kit - How To Navigate A Financial Crisis
Episode Date: July 6, 2021Whether you lose your job or the economy is in a recession, weathering a financial crisis is tough. Personal finance expert Michelle Singletary guides us through tough decisions to get through money s...truggles.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy
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This is NPR's Life Kit, and I'm Janice Torres-Rodriguez.
Usually, I'm hosting my own show about all things money, Yo Quiero Dinero.
I'm here on Life Kit to talk with personal finance expert and author, Michelle Singletary,
about her new book, What to Do with Your Money When Crisis Hits.
For me, the first thing I thought of when I was reading the book was like that pamphlet
that you see in the airplane before you're going to take off. Like it's not going to tell you how to drive the plane, but it's going
to tell you how to survive if something goes wrong. Oh, I wish I had thought about that because
that so explains this book. There are plenty of great personal finance books out there,
but when you're in the middle of a crisis, when you're trying to figure out what to pay,
you're not going to grab a book on retirement savings
and read it, you know, 200 pages of that.
You want a quick answer that will get you on the right track.
In this episode of Life Kit, buckle up.
We're going to help you weather financial turbulence,
like when the country's in a recession or you lose your job. And we'll answer those hard questions about where to turn
when you've hit a financial crisis, when is it okay to ask for a loan, and what bills you should
prioritize. If you're thinking this isn't for me. We're coming through the pandemic right now.
This crisis hopefully is ending. But guess what? There's going to be another one after
it and you need to be prepared for it. So get ready for takeoff. It might get a little bumpy,
but we'll have a smooth landing.
In the book, you say that you manage your money like you're in a perpetual recession.
So I'm curious why you decide to take that approach and how we can let calculated caution
not turn into fear about money, right? Because that's the thing that so many of us are dealing
with. That's exactly right. In my head, I have to always be prepared for the worst and hope for the best.
The time in which I have the hardest to get people to save is when they're doing really
well.
And you would think that when you're doing really well, that's the time you're going
to be saving and doing all the things.
But you just think the happy days are going to continue forever.
And, oh, I can get to that saving tomorrow.
Or yeah, I'm going to eventually increase my retirement account when I do all this other
stuff.
But I need you to concentrate right now on what you can do to better your finances to
prepare for that next crisis.
Not out of fear, but out of preparation.
Yeah, I love that advice. So if
someone is currently facing the layoff or a furlough, how do they decide what bills should
be paid first? Traditionally, financial experts say, oh, you know, you try to pay all your bills,
pay them on time, and we just drill that into people's head until they lose their job and
there's such limited income. Yes, I want you to continue to pay your debts, but when you don't have enough income, you just pay for what you need, a roof over your head
and food on a table. And in some cases, it's just the food on the table because you might have a
little bit of breathing room to not pay your rent or even your mortgage. And I know that hurts people.
They try to pay a little bit on everything
and then they don't have enough for the food on the table. And so I need people to release
themselves from that guilt. So you pay for the food, you pay keeping that car going so you can
look for a job. Those are the things that you haven't concentrate on. Don't worry about your
credit card bill right now.
We can fix that later.
And while that is an obligation that I want you to be concerned about, not when you don't
have any income.
One of the first places that people might turn to for support financially is friends
and family.
So when is the right time to ask for a loan versus a financial gift? So there is never
a right time to ask for a loan. You shouldn't ask for a loan. This is just going to blow people away
because they're just like, what? I got to pay this back. I really need people to talk their pride.
And if they're in a financial crisis, go to the people who love them and care for them and say,
I've lost my job. I don't know when I can pay you back. I don't want to make a promise that
I'm going to break and hurt our relationship. So if you can afford it, can you help me out
with X? Listen, I don't have enough for rent and groceries. I can cover the rent. Can you help me with my groceries? And you got to come at
people that way. And I think people will be surprised at the number of folks in their life
will say, absolutely. But we come to them with a loan because we feel like we have to have that
obligation. It's the right thing to do. Except when you can't pay them back, then that ruins the relationship. And I need people
on the other side of that conversation to relieve people of that need to pay you back. So whenever
anybody approaches me, you know, family or friends, I say right away, this is not a loan. And if I
write them a check, I on the memo line, and this happened recently, I said,
this is not in capital letters alone.
Just as a reminder to them that it's okay that you came to me.
I have the resources.
I'm okay with that.
I wouldn't give you what I can't afford.
And I released them of that obligation.
And we never speak about it again.
That's the other thing.
If you're going to do that, don't keep bringing it up.
Well, you know I helped you out when.
You need to give and forget.
Because then if you keep bringing it up, the person feels like they have to pay you back.
So just don't say anything.
Yeah, that level of transparency, I think, is the difference between money getting in the way of relationships or actually fostering them and making them even deeper. Right. Okay. So in a pinch, right, people might be tempted to turn
to predatory lending options like payday loans or title loans. Why should we avoid these things at
all costs? So payday loans are loans that are given to people based on their next paycheck. So all you have to have is a
paycheck. And title loans is like, say your car is paid off of, and you use the title as collateral
against that loan. Now, what happens in that situation is, say you've got a car that's worth
$5,000, and you borrow $500, but you default on that. Now they take your $5,000 car for that $500 loan.
And that's why those title loans are particularly dangerous.
When you look at the fees and you see that those fees translate to interest rates
of anywhere from 300% to 1,000%. And so if you were in trouble and someone said,
hey, I'm going to lend you money at 300%, you wouldn't do it.
Think about this. If you're in a jam and you don't have enough money, now you're pledging money from your next
paycheck. You're already behind. How are you then going to catch up? And studies show that many
people end up in a debt cycle with these loans. Something we saw with the pandemic was the IRS
allowing folks to withdraw money out of their retirement accounts in order to deal with emergencies that came up as a result of COVID-19.
What are your thoughts on taking 401k loans or early withdrawals from your retirement account in order to make ends meet when you're experiencing a financial emergency?
Yeah, you know, I can sit in my nice cushy job in my home office, having never lost my job to say,
don't dare touch that retirement account. That is just cruel. I think it is a pot of money that
many people felt like they had to touch as a last resort. So in the book, I talk about where to go
before you reach that point. But if you've tapped everybody that you could, or there was nobody to tap,
if you had no savings, and I definitely want you to skip going to get a payday loan,
then that is a source of money that you can tap. It's not ideal. I'd hope and pray that you don't
have to do it. But if you do, go ahead and do it. Because sometimes you got to do what you got to do. Now, don't take a lot of
the money. Take it little by little as you need it. So you don't want to take out $2,000 when
you only really need $1,000. Can you walk us through that order of succession when it comes
to who you should be talking to, what resources you should be accessing when you're in a financial crisis?
Yes. So first of all, go through all of your savings, all of it, right? Because that's why
it's there. And then you go to friends and family and do just what I said before, ask them to help
you out. And then community groups, church organizations, many of churches and synagogues and religious organizations have
funds that they set aside for members in need. And then obviously state and federal funds,
apply for unemployment benefits if necessary, apply for welfare, Medicaid, use those resources.
That's what they're there for. If all of that's not available, then you can tap, if you have it, your retirement funds.
It's going to cost you, but it's there.
And I'm not even going to mention those other things because I don't even want you to get
down to payday and title loans.
I just want you to take those off the list completely.
So you mentioned savings.
And I think there's a lot of confusion about, is an emergency fund enough as far as savings, right?
Because there are other things that we want to save for.
What do we do?
How many types of savings accounts should people have
in order to be able to adequately deal with emergencies?
So I like to joke that I'm a pot person,
but not that kind of pot.
I like to have my money in different savings pots.
It is a way to organize my savings and also prevent me from tapping money that I shouldn't
be tapping.
And so I have an emergency pot.
I have something called a life happens pot, which is different from the emergency fund because the emergency fund, that's your dire,
that's fun. That is the money you've lost your job. You've had income disruption. That's like
the emergency, emergency hatch, right? And life happens is the pot of money. When life happens,
your car breaks down. If you've got kids, they're going to break something. That's the pot of money when life happens. Your car breaks down. If you've got kids,
they're going to break something. That's the pot that you reach for in those situations.
Because a lot of times people don't have the emergency funds when they get in a crisis
because they've been dipping into it. I call it really a slush fund. Because money slushes in,
money slushes out, and then it's not there when you truly need it.
And so that's where the life happens pot comes from. If you're super disciplined,
you can have all the money in one pot. That's fine. I'm not even like that. So
if I'm not like that, I think you mere mortals should have a lot of pots.
What's your take on the type of savings account? Should we be using high yield savings accounts?
Is it okay to just use your local bank or credit union? What's your opinion on that?
That's such a great question because people are always asking me, I've got all this money,
you know, they're very fortunate to have an emergency fund, but it just is not earning
anything. And I just go, and? Because listen, that's not that money's purpose.
That money's purpose is just to be there.
And right now, interest rates are just crazy low, right?
You almost have to pay the bank to hold your money.
Don't worry about that.
It's job is to be there risk-free.
I'm not trying to grow the principle. I'm just trying to make sure it's there if I need it.
Now, I do search for it and make sure that I'm investing
and getting growth in my other pots of money,
like my retirement account, like my children's college fund.
Those kinds of things.
You certainly can set up a system where you're trying to earn as much as you can,
but don't worry about what
those other pots are earning. All right, let's talk about financial scams and schemes. I feel
like every time I turn on the news, there's some new thing that we have to be worried about.
What are some of the most common schemes that we should be looking out for? Well, right now in many
communities, particularly minority communities, there's Ponzi and pyramid schemes.
So the big thing is like the SUSU, which is sort of a savings technique that many immigrants use where people pool their money and somebody gets, you know, the pot of savings every month.
But now people have used that to create these pyramid schemes where, say, you put in $500 and they promise you $4,000.
Now, you know that's scam.
Come on now.
If they say, I can guarantee you return, you're about to be scammed.
If they say, I got something that nobody else knows too, you're about to be scammed.
And so just pause.
And if you just pause and do due diligence, you'll find that you won't be
scammed. But lots of people trust folks because say your sister brings them to you or your uncle
or even your pastor. I don't trust nobody. I don't even trust my husband. If he brought something to
me, I'm like, dude, I'm checking this out. I sleep with you, but I'm checking this out.
And that's what you have to do because the scammers know that people feel like they're behind the curve.
They know that people are anxious to grow their money.
They know that people are behind in savings.
And so they're eager to find a quick fix, a quick way to make money.
And they play on that.
They play on your trust. Don't give anybody any information who initiated a call to you. Just trust no one. Yeah. Excellent advice.
So if you're finding yourself right now in a financial crisis, what are your top tips for
preparing, handling, and getting through that emergency? The number one
tip I have is to forgive yourself, right? You feel so guilty. You hear me say all this stuff.
I'm like, I didn't do none of that stuff. That's not what I want. I don't want you to feel guilty.
I want you to feel energized. I want you to feel motivated. I'm trying to motivate you. I'm not
going to beat you on the head. You did what you did.
And maybe you didn't even know what you were doing.
That's okay.
But once you know better, I need you to do better.
Right?
That's the thing.
You're listening to me.
I'm giving you some great tips.
Don't just say, oh, that's right.
And then go back and do the same thing.
And then, you know what?
Take it slow.
Yeah, I'm telling you a whole bunch of stuff that requires a lot of money and discipline. But if you can only save $25,
just save $25. If you can only save $5, just save $5. You'll just be better for it. And once you
develop that habit at the lower levels, when you start to make money or you get back on track, then it'll become easier because
you've got more money at hand. Yeah. I think it's an important reminder that nothing bad lasts
forever. And if you're prepared next time around, because it's not if, it's when. That's right. You
can find yourself in a much better situation the next time. That's right.
For more episodes of Life Kit, go to npr.org slash Life Kit.
We have one on how to boost your credit score and another on how to be a better listener,
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This episode was produced by Claire Marie Schneider. Special thanks to Andy Tagle and Claire Lombardo. Megan Cain is the managing producer.
Beck Harlan is our digital editor.
Beth Donovan is our senior editor.
And David West is our intern.
I'm Janice Torres-Rodriguez.
Thanks for listening. Thank you.