COVID-19, 3 Personal Finance Items Everyone Should Review

COVID-19, 3 Personal Finance Items Everyone Should Review

This post will be short and sweet.  I have been on call this last week, leaving me less time to write.  It has honestly been really nice to be back to work performing surgeries.  You don’t realize how much you enjoy something or miss it until it’s gone (or limited).  For me, it’s so nice to feel like I am helping people again and doing what I’m trained to do.  

But just because I have had less time to write, it doesn’t mean I’ve had less time to think.  As things have settled a bit and we are all adjusting to this new normal with the coronavirus pandemic, I’ve been thinking about personal finance with regards to what changes our family should be making, and what I would recommend other people do as well.  

I’ve continued my normal daily money habits of reviewing recent transactions, reviewing upcoming expenses, reviewing our financial goals, and continuing financial education.  As I’ve done so, I’ve noticed some significant changes in our money habits as our world has been flipped upside down.  This has prompted me to review various aspects of our finances in the context of this new normal.  Here are 3 things I recommend everyone review in their own personal finances.  

Review Your Budget

As we have had to socially distance ourselves from one another and shelter in place, I’ve noticed some dramatic changes in our spending habits.  I can understand why this pandemic is having such a devastating effect on the global economy.  

We are spending significantly less on essentially all non-fixed expenses.  We are spending less on gas because we aren’t going anywhere.  We are spending less on food because we aren’t going out to eat.  We are spending less on travel because we are sheltering in place and canceled all upcoming trips.  We aren’t shopping for anything other than a few things on Amazon.  All of these things combined means that the money we normally spend overall has gone down quite a bit.  

So why should you review your budget?  Regardless of whether you have lost a significant portion of your household income or not, your spending habits have likely changed in a similar manner as a result of these new social circumstances, at least for the foreseeable future.  When expenses and circumstances change, it is wise to adjust your finances accordingly.  

For those that have lost some or all of their household income at this time, it is imperative that you review all of your expenses and see what can be cut during this period of financial hardship.  Next, you need to prioritize the most important expenses necessary for supporting yourself and your family, and pay those first, moving in descending order.  Cut everything else out.  I would also recommend you access all of the recently legislated government aid to help you through this difficult time.  You could check out my post last week about the federal stimulus package as a starting point.  

For those that are blessed enough to still have a job, you might find you have some extra money on hand as your spending habits have changed.  I think it is important to make a plan for this money and put it to something useful.  Money without a purpose tends to burn a hole in our pockets.  Options could include further building your emergency fund, paying off debt, saving more for retirement, or helping those in need that have been hit so hard by this public health and financial crisis.

Because I work in healthcare, and provide services necessary to preserve people’s lives and their neurologic function, I am fortunate enough to still be working and earning a paycheck.  My wife and I have decided to do a combination of these things as we revise our budget.  We are increasing our emergency fund, continuing to save for retirement, and increasing our charitable contributions to help those in need.  

Review Your Emergency Fund

I’ve touched on this in each of my last two posts, but this global pandemic has impressed so strongly upon me how important it is to have a strong emergency fund.

No one is immune to financial hardship, including you and me.  So many people I know have lost their jobs or their businesses are failing, and just a few months ago they were thriving.  Even many of my friends who are physicians are losing some or all of their income.  Many have had to lay off their staff because their medical specialty is considered elective during this pandemic.  You’d think that in the middle of a public health crisis, if anyone’s jobs would be safe it would be healthcare workers.  But that is just simply not the case.  That is why it is so important to have an emergency fund.  

So, the second thing I recommend you review is the state of your emergency fund.  

If you don’t have an emergency fund, start building one right away.  If you are still earning an income, this would be the perfect use for some of that extra money you may find you have.  

If you’ve lost your job and will be receiving the ~$1000 per week in unemployment insurance, I would try to cut as many expenses as possible and save a little of that money in an emergency fund.  We still don’t know when society will go back to normal and people can return to work.  

And if you already have a 3-6 month emergency fund, ask yourself what would happen if you lost your job next week in this financial climate.  Would you wish you had more?  I would.   

I honestly don’t know what the future will bring.  So even though we have an emergency fund and feel like I have a secure job, we are building our emergency fund a little more.  Hope for the best, prepare for the worst.  

Review Your Asset Allocation

Most people that read my blog have some money invested.  For many, this will likely be in the form of their employer sponsored retirement plan.  Some may have IRAs.  And some may have taxable brokerage accounts.  Each of these types of accounts allows you to invest in paper assets, primarily stocks and bonds.

How have you stomached the recent volatility of the market?  Have you been losing sleep at night, frantically checking your account balances every day?  Or have you been cool as a clam amidst the financial turmoil?  They say you can’t tell what kind of investor you are (meaning your risk tolerance) until you have gone through a bear market.  Given the record 11-year long bull market we just went through, many investors, including myself, have yet to go through a significant financial downturn.  

Well, now we’re definitely in the middle of one.  With no clear end in sight.  How have you weathered the storm?  Is your risk tolerance what you thought it would be as you watched your retirement accounts drop 20%, 25%, 30%, with more probably to come?

If this has been an emotional nightmare for you, then maybe your investment portfolio is more aggressive than it should have been.  If you are 90-100% invested in stocks, you’ve certainly seen more losses than someone only 50% invested in stocks.  Maybe you don’t have as long a time horizon as when you first started investing.  Maybe your risk tolerance isn’t as high as you thought it was. 

For these reasons, the third thing I recommend you review is your asset allocation.  

At the simplest level, your asset allocation is the ratio of stocks to bonds (or funds that hold these assets) in your investment accounts.  The higher the percentage of stocks, the more aggressive your portfolio.  Remember that there is always a balance between risk and reward.  Stocks have a higher potential reward, but you pay the price by accepting more risk and volatility.  In the long run (think 10, 20, or 30 years), the stock market has historically had the highest returns of any asset class, but it can be a bumpy ride in the short term (think last month, the Great Recession, etc.).  

So if your current asset allocation doesn’t match your risk tolerance or financial goals, this would be a good time to assess that.  With that being said, however, I wouldn’t recommend you make any immediate changes by selling your assets.  Specifically, as I recently emphasized in my post a few weeks ago, you don’t want to sell in a down market, because that is when you lose money.  You only lose money when you sell! Rather, just assess right now if your asset allocation is appropriate for you.  This is extremely important to understand in your investment decisions moving forward.  

If you feel like you need to change your asset allocation to a more conservative profile, like changing from 90% stocks/10% bonds to 60% stocks/40% bonds, and you are still in your wealth accumulation phase of investing, I would recommend changing which investments you purchase moving forward, and avoid selling off your stocks when they are down.   For example, in your future 401(k) contributions, simply purchase more bonds and less stocks until you reach your new desired asset allocation.  

On the other hand, if you are happy with your asset allocation, or want to move to a more aggressive asset allocation, a bear market is an advantageous time to increase your holdings in stocks.  You are essentially buying shares of these companies on sale.

In our portfolio, just like everyone else, our stock holdings have decreased in value, which has decreased their percentage value in our overall portfolio.  I’m happy with our current asset allocation, given our long time horizon and personal risk tolerance.  Thus, moving forward we will purchase proportionately more stocks (in the form of index funds) while they are priced lower to maintain our previously determined asset allocation.  

Conclusion

We are in an unprecedented time.  As our behaviors change, so do our personal finances.  I recommend you review your budget, your emergency fund, and your current asset allocation as you make important financial decisions moving forward.  

Thanks for reading.  Please stay healthy and safe.  I hope you are doing well in your progress towards reaching FI, even amidst a global pandemic.  If you have any questions or experiences that might help or inspire others, please leave them in the comments section below.  In the meantime, keeping working towards Freedom Through FI!

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