“An ounce of prevention is worth a pound of cure.”
~ Benjamin Franklin
Life is filled with lessons learned the hard way. Sometimes we genuinely don’t understand the risks in advance, but often we do and take our chances anyway. “It won’t happen to me.” “I’ll get around to it soon, I promise.” “I’ll just deal with it if it happens.” And, then, the unexpected strikes. Our company goes belly up. I get laid off after 30 years of service (or because I was the most recent hire). Or, in the case of 2020, we have a brutal pandemic that causes societal chaos in our lives and livelihoods. Lessons learned again, the hard way.
When I wrote What I Wish I Knew at 18: Life Lessons for the Road Ahead, my goal was to provide students advance wisdom for their upcoming transitions into adulthood. 109 Life Success Pointers—well beyond an ounce—and including a chapter on financial matters. Oh, how many of them have been put to good use this year!
Regardless of how well prepared you were for the economic risks in 2020, we thought it would be helpful to reiterate some key financial pointers to help you navigate today’s turbulence and prepare you for the next battle.
- Build an emergency fund for unforeseen circumstances. One of our first financial priorities is to create an accessible fund of liquid, short-term investments amounting to four to six months’ worth of your expenses. When times are hard, as 2020 has proven to be, this fund can help soften the financial blow and provide a source of cash for critical needs. Generally speaking, the greater the uncertainty, the greater the number of months reflected in your emergency fund.
- Keep your fixed expenses under control. Hard times are made harder when over 40% of our income is devoted to paying our fixed expenses (housing, utilities, debt payments, etc.). These expenses must be paid regardless of our circumstances, unlike discretionary expenses (travel, leisure, dining) that can be curtailed. Generally speaking, the lower the percentage of our fixed expenses, the greater is our ability to navigate difficult economic circumstances and maintain peace of mind. Those who apply this practice live within their means and can still generate positive cash flow.
- Use credit sparingly and wisely. It goes without saying (but we still will!) that those who are conservative with respect to credit card usage are better able to withstand financial turbulence. Large credit card balances increase the cost of our purchases and represent significant fixed costs that must be paid to maintain a good credit rating. During tough times, a cash-only approach to spending helps us exercise prudent financial discipline.
- Diversify and periodically rebalance your investments. The pandemic has caused significant gyrations in the stock market this year, with the Dow Jones Industrial Average ranging from 18,592 to 29,551 in a short period of time! This volatility illustrates the importance of holding some fixed income securities to reduce risk, and of monitoring your allocations to stocks and bonds to ensure they’re within acceptable ranges. For example, at market highs, your allocations to stocks may have gone above your target range, in which case you could have trimmed your exposure, lowering your risk. At the same time, at market lows, your allocations to stocks may have fallen below your targets, indicating it’s time to increase your exposure and buy at lower prices.
- Don’t let your emotions interfere with your investing. There are two facts of life when it comes to investing that can get in the way of making sound decisions. First, the markets tend to decline more quickly than they rise, which is scary. Second, the market bottoms when the news is still bad. We want to wait until the news is better, but we will have lost our opportunity to buy at much lower prices. For these reasons, individual investors often display a “buy high, sell low” approach to investing when the reverse is the way to go. Over the long term, this tendency lowers our investment return. This is one reason why automatic investment programs are so helpful—they help take the emotions out of our investing.
- No matter the circumstances, remain a cheerful giver. Even during financial hardships, it pays to find ways to help support those in even greater need. Sure, we may not be able to write as large of a check to our favorite charities, but even a little is good for the soul and for others. We can also be searching for opportunities to donate our time to these causes—another great way of cheerfully giving to humanity. It helps keep things in perspective, too.
Whether you check all, a few, or none of the above six boxes, we hope this encourages you to explore how you can “up your financial game.” It will not only help your financial picture, but also increase your peace of mind.
Best wishes to you and yours,
The LifeSmart Team