How Financial Planning is Helping Us Get Through the Coronavirus
We are still deeply in the midst of the fight against the coronavirus. Even so, I believe now is a good time to reflect on the financial planning decisions we made long before the pandemic began. Those plans and decisions helped many of us weather this time with lower stress, greater confidence, and a calmness that is reserved for those who plan ahead.
The coronavirus has been a difficult time for most of us and utterly tragic for some of us. However, as with so many things in life, nothing is one-sided and there are always positives to be found.
Personally, I became a de facto grade school teacher. And while I found the work to be overwhelming, somewhere along the way those feelings gave way to gratitude that I was given an opportunity to help my sons learn and grow in a way I otherwise would not have played a part in.
Professionally, I believe that proper financial planning is another silver lining in all of this. Financial planning is an immensely powerful tool for those who have implemented its central tenets before crisis strikes. As I've quoted before and probably too often: "The time to repair the roof is when the sun is shining." Thank you for that one John F. Kennedy - it has paid a lifetime's worth of dividends.
Financial planning is a broad discipline and its applications vary from client to client. For the purposes of this article I am focusing on the elements of the process that I believe were the most valuable to the greatest number of individuals and families who committed to the financial planning process.
Have Ample Cash in Reserves
In times of financial crises, cash is king. This is why a good financial plan should include ample emergency funds if you are still working, and much more in reserves if you are in retirement. With enough cash in reserves, nearly any storm can be ridden out without needing to sell investments or other assets to raise cash.
Establish the Ability to Borrow
In times of financial crisis cash is often difficult to borrow. Banks tend to get restrictive during times like this. This is why we want to establish lending facilities as forms of standby liquidity well before the economic downturn starts. In this, I am referring to things like home equity lines of credit, reverse mortgages, or investment-based lines of credit. The time to establish these types of liquidity vehicles is well before you need them, not after.
Maintain a Healthy Investment Allocation
During a 10-year bull market, it's easy to neglect your investment allocation. This can result in your investments being allocated in a manner that over-exposes you to equity/market risk based on your risk tolerance, goals, and time horizon. The financial planning process applied consistently and over time should help to mitigate this risk.
Know Your Monthly Budget
I've been amazed to see how many individuals and families were able to quickly and sharply reduce spending during the economic shutdown. I'm also happy to see that the drop in spending was not directly correlated with a drop in overall happiness. This is an interesting topic for another day.
The first step to reduce spending is to know what you are spending in the first place. Gaining this knowledge is a critical first step in the financial planning process. Ongoing tracking and monitoring is also critical. Because while much of our financial plans are based on assumptions, our spending is knowable. Once we know what our spending is, we can plan on it and we will know what we can or cannot cut during economic upheaval.
Establish Personal Insurance Policies
The age of the coronavirus is unique in that not only is this an economic crisis, but it is an economic crisis coupled with a national health crisis. These factors together with a months long quarantine made it unusually difficult to attain or increase basic personal insurances like life, disability, or long-term care. The protections afforded by these types of insurance policies are often a critical line of defense against life's what if's. Again here, financial planning applied regularly and consistently should address your possible need for these coverages as your life develops. If you'd like to learn more about disability specifically please read by blog posts on the topic here.
Plan for the Next Generation
This period of time has, unfortunately and to varying degrees, led many people to consider their own mortality. This is where the financial planning element of estate planning comes in. A good financial plan should help you consider, plan, and address (with the help of a qualified estate planning attorney of course) things like: beneficiary designation, wills, trusts, powers of attorney, healthcare proxies and, hopefully to help you consider the broader and deeper question of: what do you want your legacy to be?
Protect Yourself Against Fraud
It's unfortunate but true that during this time of global strife, criminals have viewed it as an opportunity to take advantage of some of us. Most recently this has come in the form of cyber criminals using Social Security numbers stolen during past data breaches to file fraudulent unemployment claims. Today the risks of cyber crime is as much a risk to your money and well-being as any other risk. Through the financial planning process and ongoing vigilance this risk can be reduced. If you'd like to learn more, please see my articles on Freezing Your Credit, and Using Two-Factor Authentication.
We cannot avoid times like the one we're all going through. Economic crises come regularly and they always have a new, unique and unnerving reason for starting. Knowing this ahead of time, leveraging the principals of financial planning, and doing the necessary work, will help us to get through our current crisis and any others that may follow it.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment, legal or tax advice. If you have any questions regarding this Blog Post, please contact us.