5 Ways to Rebuild Your Finances, Even During COVID
To many, 2020 has felt like the plot of a bad, post-apocalyptic movie, one in which the main characters are long overdue for a reversal of fortune. While it’s true that, as of writing, the stock market is back in the green, and unemployment rates are falling from their highs earlier this year, the grim reality is that, for many of us, the coronavirus impacted our financial livelihoods in a very real way. Some lost income via layoffs, reduced hours, or pay cuts. Some had to use hard-earned emergency or retirement funds to pay for health expenses, rent, childcare, or groceries. Others panicked as the stock market fell, and sold their stocks for less than they were worth earlier in the year. If that’s you, you’re likely asking, where do I go from here? While everyone’s situation is unique, there are a few principles that can help you get back on track.
1. Take advantage of assistance.
Legislation passed over the past six months has temporarily increased unemployment assistance, waived interest on federal student loans, increased the amount that you can borrow from your 401K (warning: last resort!), and more. Look into what help might apply to you, and take advantage of it. You might even try giving your private student loan lenders or credit card companies a call to ask whether they might offer temporary relief. The worst that they can say is no.
2. Take a deep breath and remember that all is not lost.
Everyone has heard about the legendary investor Warren Buffett. What many don’t know is that he made more than 99 percent of his $86 billion-plus fortune after he turned 50. How? By diligently spending less than he earned, and systematically investing his savings in stocks. So now that you know it’s possible, the next step is budgeting.
3. Review your saving and spending.
If there ever were a silver lining, it was that “shelter in place” and social distancing rules gave us an opportunity to reevaluate the way that we allocate our income. For example, you might have been spending $200+ per month on a gym membership, but have since found that $10-15 monthly streaming services are just as heart-pumping, and more convenient. One simple approach, made popular by Elizabeth Warren, is that 50 percent of your income should go to needs, 30 percent to non-essentials, and 20 percent to savings and debt payments. Take a look at your own spending over the past few months. How does it compare? Where can you make a change? One of my favorite quotes from Morgan Housels’s, “The Psychology of Money” states that, “One of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.” In other words, spend less on what’s Instagram-worthy, and more on what will set you up for long-term financial independence. But you can’t just save your way to success.
4. Invest in the stock market.
Once you have a solid cash savings fund to cover short-term and unexpected needs (this number looks different for everyone), it’s time to become an investor. You have to put your savings to work, in a diversified portfolio, to capitalize on compound growth. Think of it this way. If you save $6,000 per year over 30 years and keep it in the bank, at the end of 30 years, you have $180,000. Simple math. If you invest $6,000 per year over 30 years, assuming the stock market continues to return somewhere near 10 percent per year on average over the long-term, you’ll wind up with around $980,000. And you did the same amount of work! It is less overwhelming than it seems. If you’re contributing to a 401K plan at work, you’re already doing it. In fact, since retirement should really be called 30 years of unemployment, that’s one goal you should definitely be working towards, so if you don’t have a 401K, consider opening an individual retirement account, or IRA, which gives you the same benefit of allowing your retirement savings to grow tax-deferred (more on the types and benefits of IRAs here).
5. Don’t let up.
When times get tough, like, for example, on March 23, 2020 when the S&P 500 was down 34 percent from its previous high, avoid, at all costs, the big mistake. That is, don’t let up on your strategy of systematically investing your savings, and definitely, definitely, don’t sell your investments if you can avoid it. The only way to “lock in” stock market losses is to sell while the market is down. In fact, as our late-life billionaire friend Warren Buffet said, it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” What he means is, think of market downturns as “stocks on sale.” Invest cash that you don’t need, or at least just stay put, because what history shows us is that while markets are volatile in the short term, over the long run, they will reward you for your patience.
For those who are still struggling to pay day-to-day bills, steps four and five will likely have to wait. If you’ve depleted emergency funds, and the assistance you’re entitled to from the state or federal government isn’t enough, you may, in fact, have to use a credit card to pay for everyday essentials. But remember to do so wisely: pay as much as you can off the card every month, and call your issuer to ask about temporary interest relief—then pay off the debt you’ve built as soon as you are able to do so. Remember that small, positive decisions over time will allow you to build the wealth that will provide you with freedom and flexibility, no matter your income (remember the Vermont janitor Ronald Read, who made headlines a few years ago for saving $8 million?).
For those looking for more personalized advice, you might consider interviewing a few financial advisors. When I began my career in wealth management, I put together answers to several common questions you might have about working with a partner on your financial future—you can read them here.
All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index. This is for educational and discussion purposes only and is not a recommendation to buy or sell any security or pursue any investment strategy. More
