Financial Planning When Everything Feels Risky
When the nation and world are facing a crisis that requires you to change how you conduct business, when and where you earn and spend money, how you relate to others, and how you live your day-to-day life, it’s natural to wonder if and how your financial plan should change.
In general, the rule of thumb for any crisis is that your financial plan should adapt to new circumstances in the short term but hold steady on long-term strategies. Remember, investing for things like retirement is a long game, and trying to “time the market” to take advantage of the current trends (at the risk of your long-term goal) is a losing game. Many investing experts will tell you to stay the course when it comes to retirement saving and investment.
With that in mind, here are concrete steps you can take to keep your financial plan on track and working for you during a time of crisis.
Keep your money in your credit union. News of an impending recession and closing businesses are not good reasons to withdraw large amounts of money out of your accounts. Unlike other national crises like the Great Depression or the Great Recession of the early aughts, the current crisis of a pandemic is not a systemic failure of the financial system. Nor is it a natural disaster where payment systems that allow you to use credit cards, e-payments, and debit cards are down.
In fact, withdrawing and converting your buying power to cash is a dangerous move in the current situation for several reasons:
- Cash is notorious for carrying bacteria and potentially viruses, so you should limit your exposure to it.
- Withdrawing cash and then using it both require person-to-person interactions, which are discouraged when trying to slow the spread of a virus.
- With many businesses' brick-and-mortar stores closed, you’re unlikely to be able to pay for goods and services in person, but you can probably still buy them online with a credit or debit card.
- You run the risk of not having enough money in your checking account for any automatic electronic withdrawals, like payment for utilities, car loans, student loans, and video streaming accounts.
- You won’t earn any interest on cash sitting at home.
And remember, the National Credit Union Administration (NCUA) insures deposits up to $250,000, per account holder for each qualified account type. Any remaining deposits beyond this amount may be insured through a private insurance fund.
Create a crisis budget. A budget provides a concrete, visual plan for how to use your money efficiently. And it’s probably the easiest way to quickly adjust your financial plan in a crisis. Re-evaluating your spending habits, needs, and cash flow will allow you to prioritize new needs and save more. This new, temporary budget should be flexible as your situation changes but should also take into account worst-case scenarios like potential loss of income. Knowing that you have some control of your immediate financial situation and that you can take steps to be more financially secure will also help prevent panic and lessen stress.
To create your crisis budget, you can use old fashioned pen and paper or any of the free or low-cost budgeting software available online.
As part of your crisis budget, speak with your employer about their current policies regarding paid sick time. Review your company benefits to know under what circumstances you could expect financial help. It’s not a bad idea to contact HR to ensure you’re taking advantage of any new policies regarding sick time, furlough, and unemployment. The same goes for checking with your state’s unemployment insurance benefits and policies.
If income loss is possible, shore up your emergency savings. Ideally, you would already have three to six months of living expenses in an easy-to-access savings account, but the thing with crises is that they’re hard to predict. Maybe you had only just started saving when the pandemic spread and you haven’t reached your goal yet. That’s OK. Work hard now to trim expenses and add that money to your savings fund. This might even be easier to do now that you’re not spending as much (or any) money on gas, auto maintenance, eating out, expensive entertainment, impulse buys at the store, etc.
Evaluate your risk tolerance and rebalance investment portfolios if needed. You can find risk tolerance questionnaires online that can help show you if you need to change your investment plan. Primarily, these will tell you if you have the right amount of your portfolio in stocks, bonds, and cash based on your time frame and comfort with risk. For those with a target date fund or other asset allocation fund, this will already be done for you!
Stay focused on the long term. Despite a crisis like the COVID-19 pandemic, the basic principles of investing haven’t changed: focus on the long term and stay diversified. This is no different during an economic downturn, either. Just like any gains you’ve enjoyed the last several years, any losses now are just “paper losses” until you sell or make withdrawals.
If anything—and if you can afford to—you may look into buying investments at a lower price for your next 401(k) contribution. The point is that you should only be growing your retirement investment, not withdrawing from it.