The Coronavirus (Covid-19) outbreak took a concept many investors love, compound growth, and turned it against us. What started as a distant problem overseas is now scaring nearly every person in the United States. Personal finance lessons aren’t the only things we learn from this humbling virus…
Primarily the impact it is having on the health of ourselves, loved ones, and neighbors.
Though the pandemic is also impacting in many other ways, including everyone’s social life, ability to move around, and the economy.
Local businesses are struggling, the S&P 500 is highly volatile, and everyone’s financial situation changes daily.
Given all the uncertainty, I thought it would be helpful to share seven things for sure. That are seven known personal finance lessons from the Coronavirus that we can learn from and act upon.
7 Personal Finance Lessons from the 2020 Coronavirus (Covid-19)
1- You Need an Emergency Fund
An emergency fund is exactly what it sounds like – cash set aside for emergencies.
Vanguard has one of the best and most straightforward definitions: “An emergency fund is a stash of money set aside to cover the financial surprises life throws your way.”
These financial surprises could be any number of things, including:
- A large medical bill
- An unexpected job loss
- Or, more applicable, a pandemic that cripples the global economy
Your emergency fund is the first place you can pull money from when needed, which saves the need to dip into your investment accounts. This is especially powerful when the market is down double digits like it is now.
This is best viewed in a simple example.
Let’s say two people had $1,000 as of January 2020. Person A put $200 into an emergency fund and the remaining $800 into an S&P 500 index fund. Person B put all $1,000 into an S&P 500 index fund.
Personal A can use their emergency fund, keeping the original $800 (now $560) in the S&P 500. Person B must take from their index fund, leaving them with only $500 after it’s all said and done. Then, both people are faced with a $200 emergency 2 months later, after the market has dropped by 30% (and taken 30% of your portfolio with it).
Outcome:
- Person A: $560
- Person B: $500
The emergency fund acted as a valuable buffer for Person A, and that will only be more apparent as the market begins to rebound. This benefit will also be amplified as the investments grow more extensive and the emergencies increase in impact.
Most experts recommend having 3-6 months of expenses saved up in an emergency fund, if not more. Though your risk tolerance will help inform how much is right for you and keep in mind, some people do actively decide to not have an emergency fund.
2- The Importance of Liquid Net Worth
Liquid net worth is defined as the amount of net worth you could convert to cash today if needed.
In calculation form, it would look like this:
Liquid net worth = liquid assets – liabilities
Liquid net worth becomes more critical in a crisis because it measures how prepared you are to handle one. Essentially, it takes your emergency fund one step further.
Someone with liquid assets, like a brokerage account, will be better prepared to handle a crisis after their emergency fund is depleted.
You should not try to increase your liquid net worth at the expense of saving for the future, but it is an important metric to understand nonetheless.
3- Timing the Market is Impossible
Are you ready to take a look at the S&P 500 returns for the week of March 16?
Let me warn you, it’s quite the rollercoaster:
- Monday: -11.98%
- Tuesday: +6.00%
- Wednesday: -5.18%
- Thursday: +0.47%
- Friday: -4.34%
Just as I expected, it would come in…
…kidding! Of Course.
No one knew this would happen, and no one knew what would happen tomorrow!
The market could rebound with promising news of the virus being stemmed, or it could continue to tank as cases spread throughout the US.
The bottom line is no one knows what will happen in the market tomorrow, let alone a week or month for now. This is why having a long-term plan is so important.
4- Having a Long-Term Investing Plan is Necessary
Whether there is a crisis or not, a long-term plan for investing is necessary. In fact, building a long-term plan before a problem is usually better – it helps prevent you from getting distracted by short-term noise.
For example, if your plan is to hold 90% in equities and 10% in bonds for the next 10 years, should you shift to 100% equities to “take advantage” of the current market downturn?
No, probably not.
You should stick with your long-term plan, reallocate your portfolio to match your project, and continue to invest as you can.
A crisis also makes it clear that a simple plan is often the best choice.
There is no need to overcomplicate things, which becomes apparent when the world seems to be caving in from every direction. I think building a simple 3 fund portfolio is one of the best investment strategies to choose from.
5- Understanding Your Budget Inside and Out Can Help
Not everyone will, or even should, have a budget.
However, in a crisis, when cash is short and saving money is critical, knowing your financial situation inside and out can help. That’s where a budget comes in.
If you need to save a few extra dollars to get by, building a budget can help show you exactly where your money is going, which will likely lead you to some prominent places to save and cut back as needed.
6- Buy Things You Value
Perhaps one good thing about cutting back on expenses, as many of us are doing right now, is that it will show you what you truly value and don’t.
Maybe, to save some money, you stop online shopping for a few months. And just perhaps, you realize that the things you were buying online are things you could live without.
On the other hand, giving up a weekly latte from your local coffee shop might be out of the question (even during a crisis). Some people just love their gourmet coffee.
Disclaimer: please don’t @ me for the online shopping example! It was just one example, and if you love buying things online, please continue to do so as long as it fits your budget.
7- Help Where You Can
Last and certainly not least, the Coronavirus is hitting some people’s wallets much harder than others.
Many restaurants are closed except for carry-out, gyms have shut down, movie theaters aren’t open, and even your local dentist’s office can no longer operate and generate income.
If you can afford it, consider continuing to buy takeout, donating to a local business you love (I know a ton of me are asking for help), or schedule your regular dental cleaning for a few weeks down the road – then follow through.
Summary: Lessons from the 2020 Coronavirus (Covid-19)
The Coronavirus gives us a lot of time to sit at home and reflect.
And believe me, I’ve been watching my fair share of The Office, but I’ve also been using the time to learn from the points above and make sure I come out of this pandemic as financially healthy as possible.
I hope you can do the same!
