(Below is a reprint of the letter I sent to clients earlier today. I hope it’s helpful to you.)
Hi there,
What a crazy time this is! As I juggle work and childcare and homeschool and toilet paper shortages and convincing my parents to take this all seriously, I know that you’re juggling it all, too. We’re in this together. ;)
I want to reach out with some perspective and guidance for your personal finances. We’ve already connected 1:1 this week via email or phone, but I thought it would be helpful to send this summary along as well. Feel free to share it if you’d like.
Don’t Let Stress Short Circuit Your Decisions.
Stress often leads us to feeling very action-oriented. We skip over the thinking and feeling, and get right to doing. I encourage you, as I am doing myself, to slow down before making any decisions and acknowledge how you’re thinking and feeling before you take action. Don’t hesitate to reach out to me so that we can talk things through before you make any big moves.
Will your income change in the short-term or mid-term?
Consider whether your income may change in the coming weeks or months. If there’s a decent chance that your income could drop, begin adjusting your budget right away and estimate whether your reduced income will be sufficient to cover your expenses. If income won’t be enough, make a list of your next-best places to access cash to cover expenses – emergency fund, home equity line, low-interest personal loan, credit cards, etc.
You may also want to look into employer and governmental benefits like sick leave, unemployment and paid family leave.
Reduce expenses for the next few months.
Whether you anticipate your income will drop or not, it’s a good idea to review your budget and make some adjustments to reduce expenses for the next 3-6 months. Make sure to capture any money saved in your Emergency Fund if you can. These changes aren’t forever, so figure out what you can reasonably do in the short-term.
Stock up on cash.
If we’ve worked together for some time, you likely already have a well-stocked Emergency Fund. This is what it’s for! I hope it’s giving you comfort to have cash stashed away if you need it. If your Emergency Fund isn’t quite full, do what you can to reduce expenses short-term and put a little extra cash in the bank. For example, if you have to cancel travel plans, you should be able to get full refunds, and you can put that cash in your Emergency Fund. Every little bit helps.
Use tax refunds to pad your Emergency Fund. And keep in mind that although IRS payments have been extended until mid-July, your state may still require that you file and pay income taxes by April 15th. Plan to file federal and state taxes by April 15th, but know that you have a little extra time to pay if you owe the IRS.
And although there’s no need to worry, it’s a good idea to make sure your cash is FDIC insured.
Stay invested.
I have to admit this market has literally taken my breath away several times over the last few weeks. I managed client money through the Great Recession when the market dropped 57%, but the last few weeks have been something else! If you’re freaked out and want to stop the bleeding in your portfolio, I get it. I have those same feelings. Our brains are wired to want to take action and protect us from loss.
I do still, however, continue to believe that markets will continue to act like markets... more volatility, more drops, intermittent recovery days, maybe a false recovery in there (just to mess with our heads), and ultimate recovery. Volatility and recessions are the price we pay for the potential long-term gains that the market has historically provided.
If you’re thinking about getting out of the market, I encourage you to pause and think about how that will play out and when you’ll get back in. If you get out when the Dow is at 19,000, are you going to buy back in when it hits 15,000? What if it then goes to 12,000? Are you going to get back out to stem losses or buy more? And then maybe the market eventually recovers and gets back to 30,000. Were you in on the recovery? Or did it feel too late to get back in once it was climbing? Or did it feel like a "false recovery" so you stayed out? Our emotions are notoriously terrible at driving the right investment decisions, but they're so strong!
If you don't need to use your portfolio for 10+ years, so as long as it's substantially higher 10+ years from now, you're in good shape. What we’re aiming for is that your portfolio doubles about every ten years. Even if you invested every dollar right before the Great Recession hit and the market dropped 57%, your money still would have come close to doubling over that ten year time period.
So instead of watching your portfolio drop and feeling like a sitting duck, remind yourself that you are strategically staying invested for the long term based on historical data that has shown the likelihood of an eventual market recovery to be very strong.
Optimize your debt.
With interest rates dropping, there have been some excellent mortgage rates available recently. Especially if your interest rate is 4% or higher, it could be an excellent time to refinance. (And if it is, you and I have already talked about refinancing.) But with such low rates recently, demand for refinancing has been exceptionally high and rates have popped up a bit because of it. I’ll make sure to stay on top of rates and let you know when there’s an opportunity to lower your rate.
If you have a HELOC or adjustable rate mortgage, your interest rate could adjust downward which would save you some interest.
It’s also a good idea to have a clear picture of what debt you have available to you, just in case you need it.
I hope this is helpful. I’m here when you need me.
Best,
Natalie