Due to the immediate situation of the 2019-20 Corona virus pandemic and how you should react financially, we will be postponing our blog series about actions to take when you are approaching a certain age. The most important thing to avoid during a crisis is panicking — even though it is difficult to maintain a level head with everything you are hearing. Take a long-term view of your financial life by taking short-term actions to get you through the crisis.
A foundation of a solid financial plan is to have an emergency fund exactly for times like this where there is uncertainty in the financial markets and the economy as a whole. The overall purpose of an emergency fund is to have accumulated funds available when unexpected financial strains occur to your financial well-being. Even if you have a good employment situation there is a concern about significant business interruption and the potential for furloughs, layoffs, and additional expenses from preparing for social distancing. You should not hesitate to use your emergency fund if your expenses increase, or you have employment interruptions due to the virus. The second option is to use non-retirement accumulated funds to cover short-term increases in financial needs. If you do not have an emergency fund, or other non-retirement funds to access then short-term borrowing may be an acceptable option including from your 401(k), or credit card as a last resort. Some credit card companies and banks are offering no, or low transaction fees for balance transfers and interest rates on borrowing, so that may be a viable short-term option for increased expenses, or income interruptions.
If you are employed in a job where you can work remotely, or you have limited contact with customers on a daily basis, then you should do everything you can to stay safe such as telework. If you rely on customer contact for your employment, your employer is temporarily closed, or other disruptions to your employment, then you should keep track of relief options that are starting to be made available from governments and employers. Your children may be off from school now and not go back for an indefinite time period, so you may need day care in order to work during this time causing those expenses to increase temporarily. You have all heard the common sense actions from public officials and health care professionals to keep yourself and others safe as you interact with individuals in the workplace, so please listen.
If you have unsecured debts then continue paying at least the minimum monthly amount to maintain your financial flexibility in the long-term and mitigate your risk of default. If you do not have an emergency fund to cover six months of your living expenses then you should consider putting the amount above your minimum payment into an emergency fund to plan for the possibility of less employment income, or higher expenses in the short term. You should not make any unnecessary purchases during this time of uncertainty and avoid incurring additional debt. You will likely be presented with opportunities for spending your discretionary income on luxuries, travel, discounted assets, or other sales, as businesses try to stay afloat during a downturn in business activity from the pandemic. However, unless you have a significant amount of non-retirement accumulated funds, six months of funds set aside in an emergency fund, and a solid employment situation then you should not be lured into spending your limited funds on unnecessary items at this time of uncertainty. The focus of your spending now should be on the basics such as food, shelter, transportation, and health care. It is not your personal responsibility to boost the economy by spending money on non-essential items, or incurring debt by making large purchases. It is a time for a conservative approach to your financial decisions.
Many of you are wondering what to do with the investments in your brokerage, or retirement accounts. The first thing to do is not to panic and move all of your investments out of the stock market. This is a very common response to high volatility in the stock market and it results in large losses of wealth in the long run by individuals that overreact. The stock market has already gone down overall from historic highs, so it is too late to anticipate the decrease and your assets to safer investments. During the financial crisis of 2008, many individuals pulled all of their assets out of the stock market, then they were hesitant to start investing in the stock market when the crisis was over. Those individuals delayed investing in stocks until the market had already gone up substantially, so they lost a significant opportunity to buy stocks at lower prices.
Second, unless you are already in retirement take a long view of the stock market and know it goes up and down over time. If you are already retired then the only change you should make to your portfolio is to re-balance your asset allocation based on your overall financial plan. You should take this action similar to your periodic asset allocation re-balancing by moving funds from one investment to another. If you are not retired, then you have a couple of options to re-balance the asset allocation of your portfolio based on your overall financial plan. One option is to re-balance the asset allocation percentages based on your overall financial plan by moving funds from one type of investment to another until your asset allocation matches your financial plan. A second option is to maintain your current asset allocation percentages and change your current contribution asset allocations to purchase more new shares in the assets that have decreased recently. In addition, if you are still contributing to a retirement plan and your employment is not at risk you could use this as a buying opportunity by investing a higher percent of your periodic contributions into the stock market. At the same time, you will want to keep in mind your overall financial plan asset allocation percentages.
If you need immediate advice, confirmation, or a second opinion about any of the topics discussed in this article during this time of crisis, please reach out to Lydford Financial PLLC,George@lydfordfinancial.com, for a free one- hour consultation now through May 31, 2020. After this short-term crisis is over, then we would be happy to help you with a comprehensive financial plan that can prepare you for the next strain on the financial system and your personal financial situation.