Near term financial strategies in a Covid-19 World

To say that COVID-19 has affected our lives and our economy materially would be a massive understatement. It will take the world a few years to recover from the damage and it is imperative that we plan our own finances accordingly.

In the world of money and finance, there are two sides that need to be balanced (and every Wall street executive’s dream is to find this balance) – Risk and Return. The higher the risk, the higher the expected return. This is pretty much why the bank pulls your credit score when you try to borrow money. Your credit score tells the bank how much of a risk they are taking by loaning you the money and that risk factor is what determines how much interest they will charge you. Lower your credit score, higher the risk in lending you money, meaning, the more interest they will charge you for the loan.

When it comes to financial planning and investing in a volatile world like now, the old adage ‘A bird in hand is worth two in the bush’ hits home. When it comes to your money in COVID times, this ought to be your financial philosophy.

The chairman of the Federal Reserve announced today that interest rates are expected to stay at near zero for the next few years in order to help the economy recover from COVID-19 damages. In layman’s terms, low interest rates allow banks to borrow money from each other cheaply, allowing them to lend this money out to people cheaply (albeit at a slightly higher rate since they still have to make some profit). In other words, for the next few years, people borrowing money will benefit and the people saving money will be punished since the money they store in their savings accounts will yield very little returns. Now, savings accounts and US treasury bonds are pretty much benchmarks of RISK FREE investments. There is almost no chance of losing your money if you park it in one of these investments (unless the US defaults on its debts, which can happen but we’d have much bigger problems then). That means, If you park your money in any place other than these two places, you should demand higher returns than what the treasury is paying for its bonds.

The world of investments however has pretty much no guarantees. Anything apart from the above two investment means you could lose some or all of your investment. In an uncertain environment like this, people tend to panic and move their money from riskier investments like stocks to less risky investments like savings and bonds (as i mentioned above) which leads to a dip in the stock market. The government in turn, lowers interest rates (which they’ve now done), meaning people get no return from keeping money in savings. This encourages SOME people to take more risk if they want their money to grow over time and they go back to investing in riskier assets like stocks, in turn stabilizing the market.

However, it is important to remember that only you control your money. Nobody can force you to move your money from stocks to savings/bonds or vice versa. In uncertain times like we find ourselves in today, there are a few different things you may consider doing depending on your age, financial situation and/or retirement plans.

1. If you are 25, have a stable job and an emergency fund saved up
   • Time and luck are on your side. You have a long way to go and you can probably afford to take some risk. If your emergency fund is beefy enough, you may want to take on slightly more risk and invest in some assets that promise good returns long term. May be some stocks that have been impacted negatively due to the virus now, but the business shows promise to pull through the crisis and get to its past glory days. Make sure you do your due diligence however.
   • If you own a house, look at if refinancing can save you money long term. Once again, do not do a cash out refinance if you have equity in the house. Crunch the numbers, calculate the break even point (Number of months it will take for the lower payments to offset the added closing costs from the refinance) and total interest savings over the life of the new loan. If the numbers make sense, do it.
2. If you have lost your job and are surviving off of unemployment and emergency funds
   • Good on you to have saved up for a rainy day. You’ve probably already realized the value of having a piggy bank to dip into.
   • I recommend finding side hustles that will pay. While you work to find another job, find ways to keep bringing in some money. Anything that will help you stretch your emergency fund.
   • Do not think about investing because the market seems to have gone lower. Weather the storm best you can. Better days are coming and this time will only make you stronger, smarter and more disciplined with your money in the future. Trust me. I’ve been there.
3. If you are nearing retirement, you still have your job and are wondering how you should plan your near term future
   • If you are near retirement, I am hoping most of your nest egg is already in less risky assets like bonds.
   • You are unlikely to get much return from these assets over the next few years but if you have any debt, I recommend focusing on paying that off instead of contributing to your retirement.
   • For example, If you still have a mortgage at a 3.5% interest rate, do everything you can to pay it off. You know you will need a house to live in even after you retire and a risk free bond (especially in today’s interest rate environment) is not going to give you nearly enough interest on your investment to offset the 3.5% you are paying on your mortgage. That means having the guarantee of not having to pay 3.5% is far better than the impossibility of getting 3.5% return if you save that money for retirement. PAY OFF THE DEBT.
4. Finally, if you have no savings, have lost your job and are surviving on unemployment
   • Remember that times will change. Do what you need to, in order to come out on the other side. Take whatever job you can find while you look for a more permanent one.
   • Cut expenses. Eat at home. Have a garage sale to raise cash. Do anything you can to stay away from taking on debt.
   • Most importantly, self reflect. Figure out how you got here and make yourself a promise to never let yourself get in this situation again. When times change, make sure your financial habits do too.
   • Save all you can to create an emergency fund and then get out of debt.
   • Once those two goals are achieved, start investing. Remember, that one source of income is just not enough. Life is unpredictable and you are cutting your risk exposure to financial uncertainty significantly with each additional income source you build.