Writing this post is eerily familiar to one I wrote at the end of 2008, just a few months after I became the host of the Money Girl podcast. The Great Recession, which lasted from the end of 2007 to the summer of 2009, was getting real. The show was a response to many questions I received about how to invest and shore up finances successfully during the crisis.
We should be prepared for significant hardship in the economy every decade. It’s been about 12 years since the last one, so you could say we’re overdue. The coronavirus is a big but invisible challenge that’s causing a host of first-time problems for families, businesses, and the medical community.
Until we know more about what the specifics of pending legislation mean for your finances, consider what you can do on a micro level to make your financial health as resilient as possible.
In early March, Congress approved an $8.3 million round of funds for various government health agencies dealing with the virus, including Medicare. The response from the federal and state governments is still unfolding. It should be aggressive to preserve public health, help consumers manage living expenses, and help business owners cope with major disruptions.
Until we know more about what the specifics of pending legislation mean for your finances, consider what you can do on a micro level to make your financial health as resilient as possible. In this post, I’ll offer five strategies to manage money in uncertain times and address some questions that have come up from members of my Dominate Your Dollars Facebook group.
5 tips to manage money and investments during coronavirus uncertainty
Follow these tips to make the best decisions possible during a crisis.
1. Check your emotions
When the financial markets are down or extra volatile, the true nature of your risk tolerance gets revealed. Whether you’re a riverboat gambler or a stuff-the-cash-in-the-mattress kind of person, you’ve probably been wondering what changes, if any, you should make to your investments right now.
Before you do anything, remember that being a successful investor and money manager is mostly about managing your emotions. I know that’s easier said than done because there’s no separating money from emotions. However, in general, the fewer rash decisions you make, the better.
Instead of letting your emotions get the best of you, consider imposing a waiting period on yourself before making any large-scale money decisions.
We’ve seen how emotions affect the economy with panic-buying of basic supplies such as toilet paper, hand sanitizer, and bread, which continues to leave most store shelves bare. And investor emotions are on full display with the wild swings in the stock market. These get fueled by two powerful motivating forces: fear and greed.
The problem is when you panic and make quick, drastic decisions—such as selling your investments at the moment their value drops or taking a loan from your retirement account—they can set you back financially for decades. So, instead of letting your emotions get the best of you, consider imposing a waiting period on yourself before making any large-scale money decisions.
Allow a plan for making any changes soak in for a day or two. And consider discussing it with a financial advisor or a representative from your investment firm before you pull the trigger.
2. Maintain cash reserves
Those with emergency funds in the bank are going to feel a lot less financial stress than those who don’t. That’s why it’s essential to maintain a cash reserve of at least three to six months’ worth of living expenses in an FDIC-insured bank savings account.
If you don’t need to dip into your emergency fund, continue shoring it up when possible. If you don’t have a cash reserve, do what you can to accumulate some amount of savings by cutting non-essential expenses and even temporarily pausing contributions to retirement accounts. That’s a better option than succumbing to panic and tapping your retirement funds early or taking a loan from your 401(k).
Most workplace retirement accounts allow you to borrow half of your vested account balance up to $50,000, which you must repay over a five-year term. But they only allow regular withdrawals for a few specific needs, such as avoiding foreclosure, paying for a funeral, or education expenses.
Even if you do qualify for a retirement account hardship withdrawal, you’re subject to a 10% penalty. Typically, you’re also get locked out of making any new contributions for a minimum of six months.
Specific plans, such as 401(k)s and SEP-IRAs, are covered by the Employee Retirement Income Security Act of 1974 (ERISA) from claims by creditors.
Another reason to never break your qualified retirement account piggy bank is that it gets special federal legal protection. Specific plans, such as 401(k)s and SEP-IRAs, are covered by the Employee Retirement Income Security Act of 1974 (ERISA) from claims by creditors.
The bad news is that not all retirement accounts get this automatic protection. For example, traditional and Roth IRAs aren’t covered by ERISA. However, they may be protected in some states and under federal bankruptcy law.
If you find yourself in a cash crunch, contact your creditors before dipping into any retirement account. Many lenders will be willing to work with you to suspend payments or modify existing loan terms temporarily. They should have options to help you based on pending and new legislation.
The first round of consumer protections puts a 60-day halt to foreclosures and post-foreclosure evictions on mortgages backed by Fannie Mae or Freddie Mac. However, proposed bills would expand protections for homeowners. You can check your loan documents, mortgage statements, or visit knowyouroptions.org to learn more about relief for homeowners facing a crisis due to the coronavirus.
3. Keep up good savings habits
The most common question I’m hearing is, “Should I continue to make contributions to my 401(k)?” If you’ve got some cash in the bank, you can afford to make contributions, and your retirement is at least five to ten years away, the answer is an emphatic “yes.”
Most investors contribute the same dollar amount or percentage of their salary or wages every pay period. Not only is this a convenient way to invest, but it allows you to “dollar-cost average.” That means that you buy a fixed dollar amount of investments on a regular schedule.
For example, if you contribute $200 per month to a 401(K), you end up buying more shares when prices are low and fewer shares when prices rise. Dollar-cost averaging is a buy-and-hold strategy that allows you to accumulate shares and see your account balance go up when the prices of those shares rally.
If you’re fortunate enough to receive a percentage match from your employer on your 401(k) or 403(b) contributions, it can easily offset some losses in your account.
Also, don’t forget about the benefits you may be receiving from company matching. If you’re fortunate enough to receive a percentage match from your employer on your 401(k) or 403(b) contributions, it can easily offset some losses in your account.
However, if you’ve been laid off or work in an industry that’s going to be unstable during the expected economic downturn due to the coronavirus, you might be better off suspending retirement contributions and shoring up your emergency fund instead. It just depends on how much cash you already have and how stable your income should be.
4. Watch your investment choices
Another common question is, “Is there anything different that I should be doing with my money right now?”
While it’s wise to continue investing, you still need to be picky about what you buy. Loading up on shares of a fundamentally lousy stock or fund just because it’s cheap doesn’t make sense.
Depending on your retirement account, you likely have a nice menu of funds to choose from. Sticking with diversified index funds, mutual funds, or exchange-traded funds (ETFs) is wise. Unless you’re an experienced trader, I never recommend buying individual stocks, even when prices plummet.
Subtract your age from 100 (or 110 if you prefer more risk) and use the result as the percentage of stocks or stock funds that you should own.
If you’re not sure what funds you’re buying with your contributions, log on to your retirement account and take a look. You’ll see your balance for each fund, the percentage return over different periods, the amount of company matching you may have received, and a lot more.
Check out your investment allocation and use a shortcut to make sure you’re comfortable with it. Subtract your age from 100 (or 110 if you prefer more risk) and use the result as the percentage of stocks or stock funds that you should own.
For example, if you’re 40, you might consider holding 60% of your portfolio in stocks. If you tend to be more aggressive, subtracting your age from 110 would indicate 70% for stock funds. But this is just a rough guideline that you may decide to change.
You might allocate your stock percentage to a variety of stock funds or put it all into one. The remaining amount would be in other asset classes such as bonds and cash. This allocation should stay the same, even in an economic downturn.
Most investment accounts have the option to elect automatic rebalancing. Make sure you select this helpful feature, which will make sure that you maintain your preferred amount of stocks in your portfolio even as prices are moving up and down. If you’re not sure how to use a rebalancing feature, be sure to speak with a representative at your investing firm for guidance.
5. Focus on what’s in your control
Once you’ve done some deep-breathing and exhaled out the panic, focus on what you can control. Many economic factors that affect your investment portfolio are simply not under your control, so why worry about them? Your job is to stay informed, healthy, and as calm as possible.
Staying home while the pandemic passes won’t be fun. But you can use the time wisely by:
Look around and figure out how you can create more income or cut unecessary expenses. Working on tasks that you can control will give you more clarity and help you manage stress in these uncertain times.