The coronavirus pandemic has changed nearly every aspect of our financial lives. Many of us have lost jobs or work hours, seen our investments swing from highs to lows and changed the way we spend money, with many of our usual expenses (commuting, vacations, etc.) now off the table. With so much uncertainty still looming about how the pandemic will affect the economy going forward, it’s important to make smart financial moves that can weather whatever is to come.
While some golden rules of money management still stand, other advice has changed due to all the uncertainty we’ve been facing in recent months. I spoke to financial planners to find out what tips they’ve been giving their clients to ride out the current crisis and be prepared for whatever the future may hold. Keep reading to check out this advice for yourself.
Focus on What You Can Control: You can’t predict or control how the pandemic will impact the market. You can control how you manage your investments, your savings rate, having a financial plan and how you react to events.
Create a Budget to Maximize Your Resources: Creating and sticking to a budget is one financial tip that always applies; however, you may need to revisit your budget to account for any changes in your lifestyle due to the pandemic. If you can, rethink your needs and wants, reprioritize your expenses and plan better for the future. Put what you don’t spend on ‘extras’ toward the future — whether that’s your emergency fund, retirement or education.
Keep Your Expenses Low: Managing expenses during this time is very important. Job stability is a very big issue and can dramatically affect people’s lives. Living within one’s means is always a good practice — now is no exception and could potentially allow a family to reduce the negative impact of a job change.
Build an Emergency Fund: We don’t know how things are going to unfold or how long all of this will last, It’s smart to have a little extra cash on hand for these times. With so much volatility in the job market and the stock market, it’s important to be financially prepared for whatever crisis you may face.
An emergency fund helps make sure you can stay secure no matter what happens.
As a buffer, you ideally want to have enough cash handy to cover three to six months’ essential expenses. Figure out how much you can afford to put toward your emergency fund each month and have that amount automatically deposited in a savings account especially earmarked for that purpose. When you reach your goal, you can put these savings toward something else.
Remember that Emergency Funds are for Emergencies: You might be tempted to dip into your emergency savings to cover nonessential purchases but this is a mistake.
Consider your savings as you would your face during the pandemic: Don’t touch it!
Take Advantage of Any Employee Benefits You May Have: If you’re still employed, make sure you are taking advantage of any employee benefits that may be offered to you. There’s probably hidden money in your paycheck. If you’re still lucky enough to work for a company that can afford to give you a 401(k) match in any dollar amount, take full advantage of that benefit. That 401(k) match is free money but you’ll only get it if you contribute.
Also evaluate healthcare-related benefits like HSA accounts. Health Savings Accounts are the only savings vehicles that are triple tax-free. The money you contribute goes into the HSA account pretax, the funds grow tax-free and are tax-free when used to pay for healthcare expenses. You can also invest and grow these funds throughout your lifetime. Think of an HSA as an IRA for healthcare or medical spending. The money in the account gets invested and you can choose, depending on your provider, to invest in your favorite low-cost index funds or ETF.
Make an Investing Plan and Stick To It: Use any period of financial uncertainty to reassess your risk tolerance and confirm your investments are compatible with both your time horizon and risk tolerance. It’s easy to let your emotions get the best of you when it comes to investing, but you should avoid panic buying and selling. The urge to do something can be overwhelming, but this can often make things worse, either by selling too low immediately after a market downturn and missing out on future gains or by chasing performance after markets take off.
Often, the Best Strategy is to do Nothing: A good financial plan is strategic but not written in stone, and it can evolve as your goals change. If you don’t have a financial plan, it’s not too late to create one. You can make one on your own or with an advisor.
Diversify Your Assets the Right Way: Diversification should be a part of your investing plan. Most people might think of diversification as it applies to traditional asset classes. That doesn’t accomplish what many think it does, since traditional asset classes are a broad category of their own, For example, people might think of large- and small-cap domestic equities as being diversified, when the truth is that they’re highly correlated. For better diversification, look at assets like real estate, commodities, hard assets, foreign credit, long- and short-hedging strategies, and mergers and acquisitions arbitrage. It can be hard for individuals to access some of these, but the idea remains the same for the individual investor — seek opportunities outside of traditional asset classes.
Re-evaluate Any Fees You May Be Paying: Consider auditing all of your investments for extra fees that may be going out the window. Recapture that money into more efficient investments. Be sure to look at funds in your 401(k) plan and consider alternative options with better investment fees. This audit should also include your insurance, such as property insurance. Take a good evaluation of the premiums you are spending and be aware of where your money is going.
Abide by the 'Five-Day Rule:' Use the five-day rule to help differentiate between a need and a want, if you can go five days without buying something, it is a want, not a need. This will limit COVID at-home online shopping impulse buys that you may quickly regret.
Retirees Should Prepare for Short-Term Volatility: Retired individuals should have at least five years of their cash needs allocated in fixed income and/or cash equivalents to plan for short-term volatility. This is a suggestion that remains unchanged from before the pandemic but is even more important today.
Ask for Help: Pandemic or not, it’s always useful to get an outside opinion to ensure that your financial decisions are serving you.
Contact Brien and his team at Traditions Wealth Advisors. You don’t have to figure it all out on your own. Having an outside voice and perspective can help you to stay grounded and make clear confident decisions. Brien@TraditionsWealthAdvisors.com or 979-694-9100.