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Your Economic Crisis Survival Guide

Your Economic Crisis Survival Guide

March 21, 2020

Your Economic Crisis Management Guide

We face a future more uncertain than at any time since the dark days of 2008.  Now, as then, we have little visibility as to what the future holds.  I have been poring over economists forecast – and all of them now predict a recession – but there can be little agreement how long, how deep, and how bad it will get.  The lack of clarity is due to the very nature of the crisis.  We don’t know what the virus will do, we don’t know what the government will do, and it is highly unclear how effective government response will be.

The one thing that is very obvious is that many, many people will lose their jobs in the short term.  I see estimates of 5 million lost jobs.  The knock on effects are significant.  Restaurant closes its doors, employees lose income.  Suppliers lose business.  Credit card processers lose fee revenues.  Landlord loses rent income, on and on. 

What makes this situation so very different is that we know that the very core of the economic problem could be (and ultimately will be) eliminated overnight with a vaccine or even an effective treatment.  In the meantime, government’s job is to keep employers viable (so they can reopen their doors when this crisis is over) and employees solvent.  These are two simple goals on which our leaders should be laser focused.  

Meanwhile, you and I need to take care of our own financial situations.  Here are a few of my crisis management tips. 

Cash is King.  Hopefully you come into this emergency with a well-funded emergency fund.  Financial management experts almost universally recommend that individuals hold 3-6 months worth of personal expenses in savings for “emergencies”.  Well, that emergency is here for many people! 

 But what if you don’t have emergency funds in place?  What about those living paycheck to paycheck – and the paycheck stops?  It is a bit too late to start accumulating an emergency fund now!   Instead, you need to start conserving what cash and income there is today for your most critical expenses.  That means food, heat, critical transport and shelter.  Credit card payments?  Pay the minimums if you can – but ultimately this is about survival.  Not making payments will hurt your credit score – but you can repair that later.  Right now you need to conserve cash for the essentials of life.  Big car payment?  Well, if you are a two car family with no jobs and no income – you might have to let one car go for now.  Having a nice new car in the driveway feels good – until you have no money to put food on the table.  

Cut Expenses to the Bone.   The government seems to be helping us in this task, as it seems there is quite simply nothing we can spend money on.  In fact, if we learn anything from going through this experience, it is that we REALLY DON’T NEED ALL THAT STUFF we though was so important a few weeks ago.  I thought gardening would be a good pastime during the crisis – and it is a great time to start gardening – but the garden centers are closed!   If your income is (or might soon be) interrupted, now is the time to cut all non-essential spending.  Remember – cash is king.  If your income has been interrupted, you need your emergency fund to last as long as possible.  If you don’t have an emergency fund and are already in debt – you need to minimize the amount of additional debt you may incur. 

Investments – Patience Pays Dividends (and a strong stomach helps)  In every financial crisis of the modern era, the same advice has always proven to be true.  Stick with your investment plan.  And in every crisis, that proves extremely hard to do.  “This time is surely different” your brain will scream.  And there is truth to that.  There was truth to that in 2008 too.  But the tried and proven tactic proved to be the best strategy in the long term.  Even when stocks had lost ½ of their value, those investing for the  long term were best advised to hold on, wait for the crisis to play out – no matter how long it took.  Those who followed that advice were rewarded.  But it took guts, discipline, and faith to get through.  Knowing things may possibly get worse before they get better, NOW is the time to make that firm commitment – I can survive this.  I won’t panic.

If you are young and saving this is an opportunity!  Keep piling in the 401k contributions (if you are employed).  Stocks are on sale when you are a buyer.  The money you invest today will have a much better chance to grow than money you invested a month ago, because it is starting from such a low point. 

What if you are older and taking money from your funds?  This is a difficult question.  The answer is it depends.  If you have a suitably conservative asset allocation, or if you have plenty of resources and a sound financial plan, then no worries.  You will weather this just fine.  If you have just barely enough to get by, and your plan is on thin ice as it is, then you may want to sell just enough investments to make sure you have cash to cover your spending needs for the next 12-24 months.  Then let the balance ride out the storm. 

We often talk about “what if” scenarios (we call them “stress tests”) like this when we do financial planning with clients, but it is so easy to consider it simply an academic exercise when times are good.  It is easy to forget that actually living through times like this is challenging.  Hang in there     

Hands Off the Retirement Assets!   When the going gets tough, many people will resort to withdrawing money from their retirement accounts to survive.  In fact, I will often counsel people not to put money into their retirement funds until they have an adequate emergency fund – just so that in a crisis like this, the retirement savings will be protected.   Remember if you are under 59.5, you will have to pay both state and local income taxes PLUS a 10% penalty to take money out of a pre-tax 401.  And since all fund withdrawn are added to your other income, you may be paying at a high tax rate too!   Assume you will owe the government 40% of what you take out, and pay it out IMMEDIATELY to the IRS and the state as an estimate tax payment.   (if the provider withheld 20%, then send in the balance).   A loan is preferable (as a last resort), but has its own risks – if you lose your job (a likely possibility right now) the loan may need to be repaid, or reclassified as a distribution anyway.   Tapping retirement accounts in a crisis is truly LAST RESORT – I would rather you stiff the credit card companies, destroy your credit, eat rice and beans for a month – rather than go down this road.  

Keep a positive attitude.  Look for the silver linings and enjoy them.  More time to exercise.  More time with your spouse.  Cleaner air (go look at the NY skyline without smog – I bet the view from Washington Rock is magnificent today.  Talk (really) to old friends on the phone.   Do that jigsaw puzzle you got for Christmas 3 years ago.  Learn a new language – spoken or programming!   Pick up a skill.  Don’t squander the time you have been given – put it to good use!