Protect Yourself From Yourself

Patrick Cote |

By: Kate Hennessy

As schools closed, people around the world began adjusting to a new norm of “social distancing.”  These measures were adopted to stem the spread of the Coronavirus and guard against its economic impact.

We need to remember that the US economy is resilient, even with these external shocks and challenges.  The S&P 500 Index, which is an index of the 500 largest US publicly traded companies, went from a record high on February 19th to a bear market depleting a quarter of the index’s value.  A bear market occurs when stock prices fall 20% or more from their recent highs. This drop in the S&P 500 Index occurred in less than a month’s time. This rapid deterioration of the stock market is mostly due to the uncertainty about when the epidemic will be under control. In these times of uncertainty, how do you protect yourself from making a rash decision with regards to your finances?

Check Your Emergency Fund

An emergency fund is a “sleep at night fund,” it’s a certain amount of savings that stays in an interest-bearing account.  An emergency fund is just that – a fund you draw in the event of an emergency.  How much you hold in your savings account depends on your situation and your monthly expenses. If you are the sole breadwinner in a new job, we suggest holding 12 months of expenses in cash in your savings account.  If both spouses are employed and secure in their job, we typically suggest 3 to 6 months of expenses in your savings account.  The coronavirus pandemic is an extreme situation, so it may make sense to have a higher level of emergency fund, especially if a large part of your household income is at risk until things get back to “normal.”

Get A Handle on Your Expenses

Many people struggle with calculating their monthly expenses.  The first step is to calculate your “burn rate,” the amount you require on a monthly basis to pay your bills. Look at your net pay that is deposited into your bank account each month, then look at how much is left over at the end of the month.  The difference between the two is your “burn rate” or your average monthly expenses. If your emergency fund is light, determine ways to reduce your “burn rate” and save more.

Stay the Course

Most people are saving for a long-term goal like retirement or college, which may be many years in the future.  If that time horizon hasn’t changed and you are all set with your emergency fund, there is no need to adjust your plan.  If you are retiring next year or in a few years, remember that your account needs to last another 20-30 years. If your diversified portfolio that you held at the height of the bull market on February 19th was in line with your goals, then stay the course.  Don’t try and “time” the market or pick the bottom.  Protect yourself from making a rash decision. Keep dollar cost averaging into the market.  Dollar cost averaging allows you to invest throughout the year by investing a set amount each month or specified period. This exercise allows you to buy mutual funds at both highs and lows, and on average receive a favorable market price.

In sum, although the markets may be causing you to feel uneasy financially, remember that the US economy has survived multiple wars, flu epidemics, the Great Depression and previous recessions and has still proven to grow over time.  So, stay the course, check your liquidity (cash), get a handle on your expenses… and take a breath.  We will get through this time!