Juan Carlos Medina
March 23, 2020
The headlines about the coronavirus and reports of how it will impact the economy and potentially lead to a recession are all a cause for concern. The total impact of the extreme slowdown and virtual shutdown of many businesses is yet to be seen. However, many elements of how to manage any financial crisis still apply.
Success hinges on the financial planning you do before you feel the impact of the crisis, during the period if you are affected, and when things revert back to normal. The following provides some of the things you’ll want to do and avoid doing and how to handle changes, including the return to normal. (We will get there!)
If you are nearing retirement or any other goal that would require you to sell some investments anyway (aka you need to start spending your savings in the next 0-5 years, depending on your risk tolerance), then regardless of what experts are predicting, it’s probably a good idea to plan ahead for withdrawals. If you’re like me with many years to go until you’ll need that money, here’s just a quick reminder that investing is for the long haul and in most cases, trying to time the market is a losing game. You may want to follow the advice of many investing experts and just stay the course.
Evaluate your risk tolerance and rebalance if needed
You can then take this risk tolerance questionnaire to make sure you have the right amount of your portfolio in stocks, bonds, and cash based on your time frame and comfort with risk. If your money is invested in a target-date fund or other asset allocation fund, then this will already be done for you. If you’ve created your own mix, it might be time to reallocate between stocks and bonds. Here are 4 ideas to rebalance your portfolio if you need some guidance there.
Stay focused on the long term and your goals
Remember, the important thing is to stay diversified and focused on your long-term goals. When it comes to investing during a downturn, the answer is often not to do something. It is to just stand there (and maybe avoid checking your accounts too much). If anything, you might just get excited about the opportunity to buy investments “on sale” the next time you get paid and contribute to your retirement plan.
WHAT TO DO
Before an income loss: Planning
3 months of expenses saved for emergencies
In an emergency, cash is truly king. No matter how adequate your emergency savings are, you never know how long you might need to cover expenses in the event of a loss of income. The rule of thumb is to 3 – 6 months of expenses in a savings account.
The specific amount you decide is best for you and your family will depend on your personal comfort level, the availability of other sources of financial support, and how risky your income is. Regardless of the amount, make sure the money is easily accessible in a savings account or safely secured in your emergency kit.
Strategies for Success : Consider opening a separate emergency savings account, and setting up automatic deposits into that account. A site like bankrate.com can you give you some good online options.
Create a crisis budget
This budget eliminates any non-essential spending and drills down to exactly how much you would need for the essentials like food, shelter, and transportation. Knowing how much you need to survive will help prevent you from panicking because you know exactly what to cut back on and how long your savings would last.
Strategies for Success: Consider using budgeting software through your bank but also research other budgeting software programs like Mint.com or YNAB.com. If you are a pen and paper person, print out your statements and jot everything down or put it in a spreadsheet. Tracking your spending will help you understand exactly where your money is going so that you can stay on track for your financial goals.
A plan for preparing to work from home or having your kids sent home
This is a tricky one. My wife and I are experiencing this right now. She will soon be working from home as well, which will be an adjustment for both of us.
If your children are sent home, what do you do? Our district has alerted us that learning will occur virtually if they have to. Every child is issued an iPad with an app that allows for that in our district.
Check and see what the contingency plan is for yours. Make sure you think about how that might need to be worked out between you, (your partner if applicable), and your employer. Many employers are creating flexibility and instituting specific plans in light of the situation. Reach out to them to see what they are prepared to do to help you out.
In addition, review your benefits. Perhaps you have back up childcare benefits or a discount on that. Of course, if everyone is sending kids home, you’ll have to figure out a plan of who’s going to stay with the kids. Some employers provide benefits around a care provider that will come to your home or a nanny – a similar service to that of care.com.
A plan in anticipation of getting sick for a prolonged period of time:
Confirm if your employer might offer paid sick or family leave. Take time to review your company benefits. Contact HR to make sure you are taking advantage of everything they are prepared to and currently offer.
In addition, your state might offer unemployment insurance benefits during this period or assistance with necessities. For example, California recently announced measures to begin providing these benefits to their residents. There is also currently a bill being sent to the Senate to provide emergency relief across the board.
Loss of income: Implementing your plan
Contact creditors immediately
Even if you have an emergency fund, we have no idea how long a loss of income might last. As a safety measure, contact your creditors and inform them of your status. Hopefully, most of your creditors are well aware of the impact of the virus on their clients and will offer to work with you if you get to a point where you could no longer pay your bills. You might realize that the more you communicate with your creditors, the more willing they will be to work with you.
Adjust your lifestyle
Implement the crisis budget and immediately adjust your lifestyle to this new circumstance. Basically, any expense that does not involve the essentials such as food, shelter, and transportation should come to a halt. This will help you weather this transitional period.
The Return to Normal: Recovery
Resist the urge to splurge
After a crisis, there might be a temptation to immediately go back to your prior spending, but doing that will prevent you from rebuilding your emergency savings. Plan to stick to your crisis budget until your emergency savings are rebuilt.
Surviving the ‘stress test’
Making this decision now can help prepare you and your family and make this a minor blip on your finances rather than a life-altering crisis. No one’s financial situation is guaranteed, so we all must plan for unforeseen circumstances by:
- NOT PANICKING
- Focusing on the long term and your goals when it comes to investing
- Having an emergency savings account
- Having an idea of how much you need to maintain food, shelter, and transportation
- Being able to live off a spending plan
- Immediately adjusting your lifestyle when a crisis strikes
- Knowing your benefits to deal with the loss of childcare, workplace changes, loss of income and handling sickness
- REMEMBERING THIS TOO SHALL PASS