It can be difficult to make decisions when the future is uncertain. Shelter-in-place orders and business shutdowns halted economic activity here and overseas. Some Americans are unsure about investing their 401(k)s or have considered tapping their reserves. However, we’re in the process of re-emerging, learning to live with COVID-19 and adapting to a new normal. It’s time to get back on track with your financial plan and I’ll share four areas to consider and discuss with your family and advisors.
Increase Cash Reserves
Hold cash for two reasons: planned expenses and emergencies. The rest is invested for its purpose such as a house down payment, education funding or retirement. Have at least three months’ living expenses parked in an interest-bearing Federal Deposit Insurance Corporation (FDIC) insured account. Consider holding more if you’ve got a seasonal or sales job or retired. Life’s less stressful when you have cash available for the unexpected medical bill or car repair versus charging it.
When Should I Start Investing?
We recently had two historical events – the fastest stock market decline followed by one of the quickest rebounds. Both of these make some investors hesitant to invest. Some investors question an apparent disconnect of a rising stock market compared to a struggling economy and high unemployment. However, they’re comparing a lagging indicator (economy) to a leading indicator (stock market). And others identify other uncertainties including the 2020 U.S. elections, trade wars and more. These are reasons given why some investors are sitting on a bunch of cash. If fear has paralyzed you, consider two things. First, if you wait for all uncertainty to go away, then often so goes the opportunity. Second, use a page from many retirees’ playbook. Retirees gradually sell investments to fund their retirement paychecks – they don’t typically need all their money at once. Consider investing your cash over time such as a third over each of the next three months or a quarter over the next four – and if the market sells off then accelerate the investing. This strategy is called dollar cost averaging.
Reduce the Number of Accounts
Would your life be simpler if you had less accounts to track or debts to repay? Debt reduction is a high priority for most households. But instead of focusing on the total amount of debt, concentrate on eliminating one at a time (smallest balance first). This is called the “debt snowball” strategy. Some couples have an excess number of bank accounts. There may be my, your and our accounts with multiple checking and savings accounts. What can be consolidated? Look at your budget – can line items for electricity, water and phone be consolidated to “utilities” or groceries and dining out be labeled as “food?” Sometimes, less is more.
Roll with the Punches
Who could have predicted this pandemic? Household earnings may have declined, the budget shifted and the kids moved back home. Perhaps the debt reduction and retirement funding goals are temporarily delayed. You make adjustments and move on.
What differentiates the financially successful and those that aren’t? Did some plan to fail or fail to plan? Warren Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” Don’t put things off too long. Secure your future wisely.