“What a month this week has been?!” COVID-19 has forced “non-essential” businesses have been ordered to shut down. People are confined to their homes and advised to stay home. The economy is in a free-fall. It’s a crazy time to be alive right now. Even crazier, it could get much worse before it gets better. So what steps can you take now to protect your personal finances? How can you protect your family not only from the COVID-19 pandemic but also from the coming recession that could result from all of this economic unrest? Let’s dive in and talk defense.
[EDITOR’S NOTE]: Listening back to this episode, I realize that the tone may sound alarmist or pessimistic. I want to clarify: while I do have global concerns and I laid out some realistic scenarios, the goal of this episode is not to invoke panic or anxiety, but to instill hope and confidence. Regardless of what’s going on in the world, I want you to feel empowered and in control. When things around you feel like they’re spinning out of control, there are steps you can take to focus on what you CAN control. You can’t change the cards you’re dealt, but you can change how you play your hand.
IN THIS WEEK’S EPISODE
- What’s going on with COVID-19?
- Surviving COVID-19
- How COVID-19 is leading to another recession
- How to protect yourself from a recession
Man, it has been too long of a break! It’s been a full 26 months since I checked in with you last. Or, for those of you just coming across this show, it might have been a full 30 seconds since you streamed the last episode.
I’ll tell you what: a lot has changed since then: getting laid off, landing a new job, adding a new baby to the mix, moving homes, and of course plodding along on our path toward modest millions, which comes with its own changes in our investment philosophies and strategies. It’s a longer episode (or episodes) for a different day, and I hope to bring that update show to you soon.
But for today, I wanted to address how current events might shape our futures, both in the short-term and the long-term.
I’m recording this from the friendly confines of our closet because with both myself and my wife working from home and our kids home from school and daycare due to the COVID-19 lockdown, this is the quietest place in the house right now.
Today is Thursday, March 26, 2020. I’ve stopped and started recording this episode several times over the past week, and even within that time, the world has shifted a ton in that time. Right now, Minnesota is gearing up for a “stay in place” directive from the governor, falling in line with many other states. Essentially, much of the economy is grinding to a halt in an effort to stave off the spread of the virus. By the time you listen to this episode, the situation will likely look different and might prove some of these thoughts right (or wrong).
Here’s the thing. No one knows what will happen. Not even the experts know what’s going to happen. Over the past few weeks, I’ve been doing a lot of reading up on the current situation, researching the past and thinking about what the future might hold. As always take these thoughts with a grain of salt, do your own research and make your own decisions for you and your family’s situation.
First, let’s address the virus. I’m not a doctor, but listening to the doctors out there, they’re worried about the spread of the virus. So, take the necessary precautions to keep you and your family safe. Wash your hands and stay at home. This, too, shall pass.
Surviving the Coming Recession
Now, let’s talk about the trillion-dollar elephant in the room: the economy.
Never in a million years would I think that a virus could topple the global economy, but alas, here we are. The US stock market has mostly been in a free-fall over the past month. Over the last 10 years, the economy has been on a tear. Heck, last year the S&P500 grew almost 29%. But, over the last month alone, the S&P500 has shed 1/3 of its value, dropping from its all-time high of 3,386 down to 2,237. That’s crazy.
What’s crazier is I think it’s going to get a lot worse before it gets better. I’ll tell you why.
Back in 2008, when we were launching into the 18-month period known as the Great Recession, my wife and I were fresh out of college and were taking a less traditional approach in launching our careers. We weren’t in the corporate world yet and we didn’t have any savings socked away So, we didn’t experience the full brunt of the last recession. So, the best I can do is read up on the past and try to learn from it.
It doesn’t matter how hard I try, but I couldn’t tell you what a credit default swap and what it meant for the housing crisis in 2008. All I know is, it threw the world into a tailspin. It led to a cratered stock market, dried up consumer spending, massive layoffs.
Compare 2008 to where we are today. Different cause. POTENTIALLY the same result.
While the Great Recession was caused by a much larger economic issue with the housing market and today we’re on the verge of another recession because of a highly contagious virus, we’re staring down a similar outcome.
Hear me out.
Right now, people are stuck at home and non-essential brick-and-mortar businesses are forced to close down or operate in a severely limited capacity. It’s not that people don’t WANT to get out there and spend money, they CAN’T. As a result, businesses are laying off hourly staff, many of whom were already barely getting by. A scary stat has been floating around that 40% of Americans would have trouble covering an unexpected $400 expense. Many of these layoffs are still one or two weeks old. Those affected haven’t had to scrounge together their rent or their mortgage yet, which is almost certainly more than $400. Some projections suggest that unemployment rates are going to spike much, much higher over the next couple weeks. Posted just this morning: 3.28 million Americans filed for unemployment in the past WEEK. That’s only the number who filed for claims and doesn’t take into account the hundreds of thousands or millions more who have been furloughed, meaning that they might get healthcare premiums paid, but they’re not earning a paycheck. An economist from Ball State calculates that 28 million jobs or one-sixth of the US workforce are at risk of layoffs. If Americans are concerned about the stability of the economy, or if they’re furloughed as a result of the COVID-19 shutdowns, there’s even less consumer spending. And when consumers aren’t spending, businesses have an even harder time keeping their doors open, leading to more layoffs. It becomes a self-propelling spiral.
Now, in fairness to the markets, they’ve now posted gains in three consecutive days, but I don’t think it will last. But wait for companies to start posting their first and second-quarter earnings showing massive losses, it should further drive down the market.
Will that happen? I hope not. Could it happen? I think it absolutely could. Can we do anything about it? Maybe.
How Can You Protect Yourself?
At the end of the day, we’re limited in what we can control. Can we impact if the stock market moves up or down? No. Can we change how the government reacts to COVID-19? No. Can we control how we react to the situations in front of us now and in the future? You bet.
Sun Tzu wrote in The Art of War, “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
If we can see what MIGHT be ahead of us, we can better prepare ourselves for a number of different scenarios. So, how can you protect yourself for what might be ahead?
- Don’t Sell Low – I don’t know about you, but our 401(k)s and IRAs have gotten HAMMERED over the past several weeks. However, I tend to be pretty optimistic about the long-term future of the economy. As was the case after the Great Recession, if you kept your money in the market, you would more than made up for any of your losses. I know it can be painful to look at your investment balances right now, but if you have a long time horizon before you need to access those funds, just sit tight.
- Be the Best at Work – Holding onto your job should be one of your top priorities. You should always strive to be great at work, but now more than ever, you should be hyper-focused on delivering maximum value at work. Be the employee that your employer can’t live without. Protecting your primary income is your single greatest weapon against an economic downturn.
- Hoard Cash – I’m not talking cash under the mattress (although having some cash reserves in or around your house might be a generally good idea). But, now’s the time to make sure that you have a sufficient emergency fund of 3-6 months of expenses sitting in an online savings accounts like over at Ally.com where you can still get a decent interest rate. Hopefully, you won’t need to tap into that emergency fund due to a job loss and you’ll be able to use that money for something else (more on that in a bit). But, do your best to not be part of the statistic. Don’t be one of the 40% that have less than $400 in the bank. Cut down on unnecessary expenses. Save anything extra from your paycheck that you can. If you have time to pick up an extra job, sock away that extra income.
- Prepare Your Lifeboat – You could be your best at work and still find yourself out of a job if a recession hits hard. Do some planning so that if something happens, you’ve got a fallback plan. You should both think about what you might do for work if you get furloughed and also think about your household budget and know what expenses you could cut in an instant if you needed to. If you need help creating a budget, check out Episode 2.
- Set Up Safety Nets – If you’ve got some equity in your house, you might think about reaching out to your bank and getting a home equity loan in place. Or, you might set up a personal line of credit. You could reach out to your credit card company and increase your credit limit. All of these are OPTIONS in case you need them. Putting emergency expenses on a credit card is a BAD IDEA. BUT, if it’s between that or defaulting on a debt, at least you have an option available to you. All of those things are easier to get now while you’re still employed than later when you’re scrambling after being out of work.
- Be Ready – I know a lot of this episode has been focused on defense and doom-and-gloom scenarios. But, I firmly believe that similar to the gangbusters recovery from the Great Recession, there will be huge opportunities on the backside of this situation. If you took proper defensive actions to prepare yourself financially, you could find yourself in a position to take advantage of great buying opportunities. Whether it’s a buying into the stock market at its bottom or finding great real estate investing opportunities, be ready and you could find yourself in great shape in a couple of years.
Look, I truly hope I’m wrong with these predictions. If this comes to pass, it means it’ll get messy for a lot of families out there. In a worst-case scenario, you’ll have taken steps to protect yourself and your family’s finances. If I’m wrong, and this all blows over with minimum impact, then you should be no worse for wear. ALL of the steps above are things you should be doing anyway. Don’t end up a statistic.
We’re in crazy uncertain times. But, we will all get through this. And, it will. get. better. Sit tight, fasten your seatbelt and be nice to each other.
I will mention, one of the ways I have been tracking the performance of our investments, along with monitoring our net worth through this tumultuous times is through Personal Capital. They also offer financial planners to help you navigate these tricky waters as well, so when those buying opportunities come up, they’ll be able to help you take advantage of it. Check them out at modestmillions.com/capital.