6 financial tips for Surviving COVID-19
As of May 1, 2020, nearly 30 million Americans have already lost their jobs due to the pandemic. Despite this economic crisis, Dr. Anthony Fauci stressed that it is far too early to let up on social distancing. For many Americans, this means a broken budget.
To prevent this short-term crisis from turning into long-term financial hardship, Americans must carefully adjust their financial plans to the new reality. Here are six tips for helping your household or small business weather this storm and come out stronger on the other side.
Avoid Panic Selling
The longest bull market in history ended with the fastest descent into a bear market ever. The rapidity of the decline sent millions of investors into panic, but for many, exiting the market was exactly the wrong move.
Much of the selling resulted from forced sales due to margin calls, which has been especially prevalent among highly leveraged hedge funds. Now that the forced and indiscriminate selling phase has passed, the market is likely poised to bounce back when evidence of COVID-19 containment makes a reopening of the economy possible.
In fact, the market has already erased much of the losses as investors gain confidence the pandemic is nearing the peak. More buyers will want to take advantage of depressed equity prices as signs of the pandemic’s end comes into view.
Over time, equities historically return far more than options like bonds, cash and real estate. However, drastic declines have a psychological consequence that tempts investors to throw in the towel.
According to the Nobel-Prize winning psychologist Daniel Kahneman, people have a natural risk aversion that causes them to react more strongly to investment losses than to gains. This creates a negative bias that often results in investors buying high and selling low.
Staying fully invested in the market through a diversified portfolio allows the opportunity for large long-term gains. By allocating your portfolio to weather the bear market, you remain in position to potentially benefit from the next bull run.
Maintain A Cash Reserve
When equities sell at a discount, cash is king. It’s wise to keep a reservoir of cash that can be deployed into the markets after equities fall, fulfilling the rule to buy low and sell high. In fact, just a week after the WHO declared COVID-19 a pandemic, U.S. money market funds saw inflows of a whopping $87.6 billion.
The rapid descent into the bear market illustrates why cash reserves are so important. Because of the need for liquidity, many investors and fund managers were forced to sell excellent long-term investments in order to raise needed cash. A sufficient cash reserve makes it possible to ride out market declines without the need to convert stocks into dollars.
Separate Wants from Needs
With millions of Americans suddenly becoming unemployed, households should reevaluate spending. The key is to eliminate non-essential spending.
By reviewing credit card bills and checking account statements, you can identify subscriptions and other expenses that can be cut to free up cash. Then, you can calculate how much you are saving due to the shutdown. For example, spending for eating out, ridesharing and gym memberships can be cut (or significantly reduced) due to social distancing protocols. You can then place that cash in your emergency fund.
Take Advantage of a Line of Credit
A line of credit provides a fall back should your emergency cash deplete. Due to the economic devastation wrought by the pandemic, banks and other lenders are taking steps to make lines of credit more widely available. Some lenders have slashed rates on business lines of credit on new secured, unsecured and on-demand lines of credit.
Reduce 401k Deferral
Investment advisors usually disapprove of this method, but in an extreme emergency, it may become necessary. If possible, reduce contributions to the employer-match level rather than taking out a loan or emergency withdrawal.
The passage of the CARES Act lifted many of the restrictions on 401(k) withdrawals in another effort to support Americans’ financial well-being.
Utilize 0% Credit Cards
With paychecks interrupted and stimulus payments still in process, some Americans have been forced to carry credit card balances. If possible, obtain a 0% initial APR card that offers cash back or other rewards. By minimizing the amount charged, you have a better chance of paying off the balance completely while still in the 0% period.
Getting America back to work is important, but returning back to normal too soon would likely cause a spike in COVID-19 cases and necessitate another shutdown. A second shutdown would result in an even more painful economic crisis and force the government to borrow even more money, digging the financial hole that much deeper.
Though we are in a financially painful time, America will open again and recover, eventually resulting in a more robust economy. By avoiding panic, investing for the long term and spending carefully, Americans can set themselves up for success on the other side of this crisis.