How to Manage Finances During COVID-19
Updated: Apr 2, 2020
Growing financial concerns around COVID-19 better known as Coronavirus are understandably on everyone's mind and for good reason.
As of March 18th, there were 204,732 documented cases with 82,872 patients who have recovered and 8,270 deaths which equates to a 4% death rate worldwide.
With this virus seemingly cropping up out of nowhere the global financial system is seeing record swings, which leaves you (and I) guessing as to what's next for financial markets.
You may be pondering what to do with your finances during the crisis.
In this article, I will shed some light on what you can do (and what I do) to minimize financial impact during these confusing times.
While this article is tailored to the current crisis, it's important to note that most of these steps should be applicable all the time.
Let dive in to the specifics.
A Brief Background
Thinking back, there was a tremendous amount of uncertainty working at the second largest bank in the country during the #thegreatrecession of 2008.
I was just getting started in the banking industry and I honestly didn't know what "normal" was like since I had just graduated from college (lucky me). Seeing the downsizing and talking with clients was enough to see that things were far different then bankers were accustomed to prior to 2007-2008.
If we're being honest (of course we are) back in the pre-crisis days, it had become the norm for banks to carry fat payrolls, non-performing assets, and massive leverage (heavy debt) on the books and that was a recipe for disaster.
To understand the current market swings, let's talk numbers. The chart below shows the top 10 largest day-after-day swings in the Dow Jones Industrial Average, which represents the largest market value shifts the DJIA has ever seen. (from one market close to the next)
A quick scan shows major ups and downs in March with 4 of the biggest daily gains in the history of the stock market taking place in March 2020, while 4 of the largest day-to-day losses have also come in the same month.
*(Note: not the largest changes during the trading day)
Come again? We're seeing some of the largest swings in the 200-year history of the stock market and it's largely driven by uncertainty surrounding Coronavirus!
There are many questions to be asked about the impact of this pandemic but not many answers. The point of this article is to focus on the things you (and I) can control since you will likely have little control on the impact of the virus.
Knowing how to react to market downturns is essentially practicing techniques needed in any bear market.
The markets have been on a 10 year tear upwards so it wouldn't have been unrealistic to anticipate a bear market without the virus, but with it, a bear market total sense as investors struggle to understand the impact with restrictions on people and businesses happening across the world.
Financial Markets Now
Most financial advisers will tell you that financial markets are more adequately prepared to sustain during another bear market. We have The Great Recession to thank for that.
In response to the last financial crisis, all banks still see significant regulation, oversight, and monitoring from various government agencies, which has led to a stronger and more recession proof financial system.
In addition to a strict regulatory environment, banks today have much stronger balance sheets, less overhead from inefficient operations, less risk from carrying non-core assets, and better liquidity from improved capitalization models.
While these things alone cannot prevent a bear market, it certainly makes the financial system much more equipped to weather the storm.
For perspective, I can't overstate this point - financial markets were at all-time highs prior to Coronavirus:
What Should You Do Financially During Coronavirus?
Add to Your Savings
Shaky financial markets lead to a lot of uncertainty. The best prescription for a diagnosis of uncertainty is security, and the way to gain a sense of security in your financial life is to have a safety net, not just in times of trouble but at all times.
You should have a minimum of 6 months of expenses in savings, and it is recommended that you have 12 months of expenses parked in a liquid savings account.
This advice is critical as lack of adequate savings is a key contributor to financial issues, anxiety, and other woes that come from living in the modern world.
You cannot mentally make the type of financial moves needed to gain serious traction without a safety net, so do not skip this step.
If you have not saved 12 months of expenses, stop here and save before participating in any other investment activities.
Take a Break from Your Retirement Account
Stop looking at your retirement balances daily. Unless you are a day trader with professional experience in financial markets, now is the time to give your 401K a break.
For your own sanity, give your retirement portfolio a break as this is not the time to gamble with your life savings. As the market sell offs continue to drive down the value of equities a sale at this time would likely result in a major loss, which can likely be avoided if investing for the long-term.
A word from the wise:
Most people overestimate what they can do in one year and underestimate what they can do in ten years. - Bill Gates
By holding, you have the most favorable odds to realize gains over time. In normal markets, a 10% annual rate of return is standard and is expected to prevail in 10-year increments.
Pay Down or Refinance Debt
On March 16th, 2020, the Federal Reserve cut interest rates to 0%. By lowering the fed rate, banks are encouraged to drop rates and lend money to consumers further stimulating the economy.
By dropping the fed rate, this acts to stimulate lending via more attractive rates (and savings for you) on mortgages, auto loans, personal loans, credit cards, etc.
On the same day the Federal Reserve cut the fed rate to 0%, mortgage rates dropped from 4% to 3.375% on a 30-year FHA loan. Not to mention gas have also plummeted putting gas prices at record lows across the U.S. at an average cost of $2.25 per gallon.
These record lows mean more money in your pockets. Use the extra money to create additional savings by paying off or refinancing higher interest rate loans.
These moves will save the average person thousands of dollars with of interest in the long run.
Focus on Growing Your Career Skills
With questionable times comes uncertainty, which usually leads to people staying put even when unhappy with their current job. This can limit promotions as it relates to upward growth into roles that require more responsibility.
That coupled with the fact that mastering additional skills strengthens performance and resume, learning valuable skills are a sure-fire way to improve hire-ability and job performance.
There is a plethora of online books, training courses, seminars, etc. that are great ways to sharpen your existing skill set or add to it.
With businesses facing tremendous uncertainty from quarantines, to supply chain interruptions, to remote working arrangements, to full-on shutdowns, now is a time to really focus doing quality work, whether it be for an employer or for yourself as a business owner.
Now is not the time to relax. The smart play is to use remote working arrangements to do great work while finding time to gain skills.
This is not the time for increasing social media use, going on a month-long Netflix binge, or adding extracurricular activities that detract from performing work related task on schedule.
While we haven't seen mass layoffs at this early stage, we have seen record level furloughs, and we do not know how long this virus will last or what the long term impacts will be.
We can speculate with a fair amount of certainty that layoffs will come into play only if the virus quarantines and a lack of definitive cure continue on for a prolonged period of time as that will lead to further business disruptions which will be eating at the balance sheet of businesses across the globe.
For business owners, now is the time to assess operations, find efficiencies, and conserve cash.
The moral of the story is to focus on what you can control - gaining skills and doing great work while the other macro factors play out as they will over time.
Consider Investing Surplus Funds
If you've read this far, you know that it isn't recommended to invest until 12 months of reserves are held in savings.
If you have taken that important step, congratulations because you are on the road to financial freedom and peace of mind.
Bear markets create real opportunity given the reset that inevitably happens as values recess.
There is value to be had but there is no real certainty on how long the selloff will occur and how far down the markets will go.
My thinking is that a cure will need to be had before a real progression can take place in markets, so I would use that as the #1 signal of an upturn.
Do your due diligence, think long-term, come up with a plan, and execute and you can weather any storm.
So many people during this crisis who have been encouraged to self-quarantine don't realize that their current life is already a quarantine.
I will be making various investments with surplus funds above and beyond my 12-month buffer, and you can to. Put these tips to good use and you'll be ahead when the storm passes.
To keep your momentum you must continue to learn. We post regular content to help you unlock your true potential, including an e-book on how to "Hack Your Mind for Success". In this fantastic (and free) e-book you'll learn the #1 success strategy that’ll give you the clarity and confidence to build a business and life you love, on your terms.
Disclaimer: The above references and all information provided on this website is opinion based on research and is for informational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.