Like many large-scale hardships thrust upon society, Covid-19 has resulted in turbulent stock markets for the better part of 2020. Despite stimulus relief packages from governments, volatility abounds. Some microbial disease experts claim this pandemic could recur in waves lasting upwards of 24 months. The temptation to make financial decisions based on the strong emotions you are feeling is high.
Fortunately, you can make changes right now that will mitigate both short and long-term damage to your financial plan. However, before I elaborate, I should like to stress that the tips I will share in this post in no way diminishes the fear and severity of our current state. Too much of what is being produced across an array of media comes across as tone deaf in light of the real struggles so many are experiencing.
There are things you can do now that will help you and your finances weather the current outbreak. First, in addition to all the health-based protocols like hand-washing and social distancing, you should manage your stress. This is particularly difficult to do because we have been stripped of our usual stress-relieving techniques such as various forms of exercise or various leisure activities outside the home. Meditation, connecting virtually with friends and loved ones, and finding adequate substitutes such as pilates or yoga for physical activity will help. Stress causes premature aging and an assortment of health problems, which will not help your financial situation. Inviting unforeseen medical expenses into your life will devastate your financial plan.
The second tip is to monitor your spending. It is rare for consumers to enjoy a sudden shift in income-to-expense ratio. This usually happens only when you finish college and begin your career, move careers, or receive a major promotion at work. Eventually, however, most people reach a cap in their income where they will no longer see major step-ups. The challenge is keeping your spending at prior levels (or modestly increasing it) to create distance between your new, higher income level and your spending level. It is all-too-common for people to elevate their spending to match their new income threshold. As a result, people fail to save enough for retirement, have an emergency fund, or set-up proper protections against a variety of risks like long-term care needs or natural disasters. Now is one of those rare chances when spending naturally declines; Unfortunately, for many, so has their income. It is therefore important to create and maintain that distance between your spending and income levels. Take advantage of government services for which you qualify. Pay attention to state-wide mandates such as a moratorium on evictions. Look for charitable foundations and other organizations offering help. Revise your budget to take these changes into account. If you do not have a budget, create one. Now.
The third tip is to jettison certain expenses that would normally be important but, given present circumstances, no longer are. One example is to contact your automobile insurance agent to discuss options that can lower your monthly premium. Now that you are driving less (or not at all), do you really need to maintain the same level of coverage? To that end, check your homeowner's or renter's policy as well and inquire about overlapping coverage between your home and your car (specifically, if your car is parked at, in front of, or inside a garage at your home). For example, if your homeowner's policy covers your car when parked inside your garage, and you are no longer driving as much or at all, then you should speak to your agent about lowering your automobile coverage. Keep in mind that other forms of insurance will still be necessary such as life and long-term care.
While there was some warning about the virus in other countries and the risk of it spreading to America, shelter-in-place orders, school closures, and other substantial changes were abrupt. Almost overnight, many parents became school teachers, and countless employees became independent workers in all but name. Many habits and planning solutions can still be developed, but their benefits will not be felt for some time. Once a household's immediate financial concerns have been allayed, its members should begin planning for the long-term. Those who have been disciplined savers for years should have emergency funds as well as sizable retirement account values. However, the market has devalued--at least on paper--the retirement accounts, and the emergency savings, if spending is not closely monitored, will deplete within a matter of weeks or months. There are a plethora of cashback programs out there, which can result in substantial savings on purchases. Taking advantage of these will enable you to redirect some spending money to savings.
You will also want to review your cost bases in the various investments you hold. The cost basis is the amount you paid for an investment and does not include any gains or dividends. At some point, the market will rebound, and when it makes sense to do so, you should consult with your financial advisor about alternative asset classes and other things you can do to minimize your exposure to stock market volatility. The stock market is a helpful savings vehicle, but if you over-commit, you may be trapped between liquidating when the stocks' values are down and waiting until they rebound at a time when you wish to retire or use the money for other needed expenses. Unfortunately, due to the perpetually-low interest rate environment in which we find ourselves, bonds aren't really the answer. Yes, they provide greater stability than stocks, but the rates of return are abysmal, and there are better fixed income alternatives including annuities, private placements, and reverse mortgages. Consult your insurance agent or financial advisor to learn more about these and see if they are right for your situation.
Lastly, and this is going to sound bleak, please ensure you have your affairs in order. The prospect of passing away early is very real right now, and it's important that you communicate your final wishes with others--attorneys and other professionals as well as your loved ones. Your family members do not need the added stress of guessing what you wanted in addition to the high level of stress that Covid has placed on everyone. Wills, powers of attorney, healthcare directives...these are all important documents you should create and keep accessible. Be sure to inform at least one other person where you keep your important documents. Also, do not forget to inquire with your local hospital about HIPAA procedures should the need arise.
Where To Now?
Times have changed suddenly for the foreseeable future. It is imperative that your financial plan changes too. Most people cannot expect to survive on the same level of spending you had when it was safe to go outside or go to the store. Managing your finances will be critical to weathering the coronavirus. If you need help, ask someone. Remember, we are in this together, and it is imperative that we help each other through this difficult time.