“Pressure is what you feel when you are not prepared”
Financial planning is all about planning for the future. Like most planning, you model best-case and worst-case scenarios. It’s the planning in financial planning that helps you be prepared when a crisis like we’re experiencing now takes hold.
The stock market will eventually recover. How long that will take is too much of an unknown currently. What’s important to focus on now is what you’re able to control, and that is your spending.
Cash Flow - Cash Flow - Cash-Flow
Now is the time to know exactly, or as close to exactly as possible, how much of your monthly/annual spending is for fixed expenses like mortgage, rent, food, insurance, health insurance, etc. Use 2019 as a guide.
Go through your bank statements, credit card statements, brokerage accounts, or hopefully, if you’ve been using a software or web-based program for money management, run a report for 12 months of actual spending using last year’s numbers.
Next step, determine how much of your monthly/annual spending goes toward discretionary spending, such as entertainment, travel, gifts, etc.
Once you have these numbers, first step is to pat yourself on the back for taking this action. Emotionally, with so much concern all around us, asking you to dive into your spending when you’re already at high anxiety levels is not easy.
Here’s the beautiful thing about taking this proactive step. It really works to calm your nerves and helps you feel in control. And when so much during this crisis feels out of our control, having control over this crucial aspect of our lives is very empowering.
Once you have accurate fixed and discretionary expenses, step two is all about trimming your discretionary expenses. Since most of us are home sheltering in place and with restaurants, bars, movie theaters all pretty much temporarily closed or take-out only, that lowers your dining/entertainment spending already.
If you are currently in retirement, you should reduce your discretionary spending by at least 50%, and most likely 100% for the next 3-4 months at a minimum. If the economy seems to be in recovery mode 3-4 months from now with stores are opening back up, people going back to work, the stock market improving, you can start to reintroduce discretionary spending to your budget, little by little. Take it quarter by quarter.
If you’re near retirement, a couple/few years away, reduce discretionary spending by 50%.
If retirement is a long way off, reduce discretionary spending by 25%-50%. Once we get to the other side of this pandemic, business after business, corporation upon corporation, start-up upon start-up, once the dust settles, it will be time to take measure of how bad the impact of the crisis took to the bottom line.
Once business owners, corporations, non-profits, etc. assess the damage, they will confront very difficult decisions. Although you may feel your job is at no risk, and it very well be at no risk, play devils advocate and assume you or your spouse/partner are laid off.
Be Proactive, Not Reactive
Being proactive is the way to go at this stage of the crisis. Assume the loss of one income in your family. Now that you know your fixed and discretionary expenses, map out a cash flow plan in a worst-case scenario.
See how low you can get your total monthly spending. Be creative like never before. If you own your home and do not have an equity line of credit, now would be a good time to apply and have that in place. Also find out if your 401k or 403b plan offers a loan option.
Also, look at your non-retirement accounts and discover or rediscover how much of your investments are in bonds and how liquid they are.
For Spiritus Financial Planning Clients
Now is the time when your comprehensive financial plan we developed together takes center stage.
All that time consuming work you did in terms of gathering all your financial data, making sure you had an accurate picture of your total annual spending, knowing how much goes toward fixed vs. discretionary spending, having a precise total of your net-worth and your projected net-worth, now comes the payoff.
What we’ll be doing at the end of this quarter and for the next few quarters to come is updating your net-worth outlook report with your most recent Schwab investment balances as well as your other assets.
Your net-worth outlook report, as so many of you have heard me say many times, is your financial roadmap to your future. It’s your key performance indicator. When we update your net-worth projections, we’ll know immediately if a course correction is needed.
Your financial plan was designed purposely to be a dynamic tool, not a static document. It will be our guide, our financial road map, that shines the light on the path forward.
The work we have done together as we designed various what-if scenarios, well, we’ll be doing that again. What’s most important now is discovering what if any changes need to be made to reach the goals in your plan. The numbers will tell us how to move forward and what changes need to be made to your cash flow.
The payoff I mentioned above is that you, my treasured clients, are not going to be flying blind into the future. We know how much your total net-worth needs to be in order to reach the goal of retirement or early financial independence and if we need to adjust your plan in order to stay on track so you reach those goals, we will.
Your Money and Your Life
I know from talking with many of you over the past few weeks that this crisis is triggering a lot of fear. Fear of the COVID19 virus as well as fear of losing money which is understandable given the unknowns we’re all facing. Money is a powerful energy and left to its own devices, it can wreak havoc on our emotions. Your thoughts soon turn to doom and gloom and before you know it, fear of getting infected and fear of losing money, the double whammy if you will, has taken your emotions hostage and won’t let go.
I’ll speak directly to the fear around money. The way we overcome this fear is to a) acknowledge it, b) name it, and c) shine a light on it. Be aware that rational thoughts get tossed aside when fear takes over and you get emotionally hijacked. This experience happens regardless of how much money you have. That’s why when I’ve sensed fear clouding a clients decision making process, I’ve asked them to literally write down their worst fears. So much good comes from getting these fears out of our head and onto a piece of paper. Please try that yourself.
Because I’ve had long-term relationships with so many of you, your willingness to trust me, to be vulnerable, and share not only your highest aspirations but also your deepest and darkest fears, this allows me the opportunity to help you let go of the darkness of fear and come back to the light. Now is the time to turn crisis into opportunity.
This is a time to play observer. Use this time out we’re all having as an opportunity to observe your relationship with money. You do this by consciously observing your thoughts around money. Your thoughts directly affect your emotional state. Are your thoughts full of scarcity, or are your thoughts full of gratitude? Be mindful of what type of news around money you take in. Fear sells and creates good ratings.
When the stock market drops 1000 + points in one day, and then again and again the next day, it’s normal to feel scared. At this point, do your best to tune out the noise as much as you possibly can. Then, make a conscious decision to move from feeling scared to feeling empowered. How do you do this? By going from scary thoughts to taking action and being proactive. By updating your financial plan, calling me for reassurance, and by knowing you’re prepared because you have a plan. You’re not winging it, and this will move you from fear to feeling in control. And as we go through this crisis together, I promise you, if you feel in control, fear doesn’t stand a chance.
Moving forward, allow your financial plan to be your touch stone. In your plan are all your hopes and dreams. Those hopes and dreams are still there and as exciting and inspiring as ever. Will we most likely need to make some adjustments to your plans, but that’s OK. That’s what planning and course correcting is all about.
But right now, right this minute, I love the facts and truth to power that Dr. Fauci shares with us to keep us abreast of the latest news and by watching Governor Cuomo and Governor Newsom hold press conferences with honest and truthful info and guidance. They provide much needed comfort by letting us know the latest and of course adjusting their plans as needed. Just what’s needed in times of crisis and just what we’ll do in terms of your financial planning.
I suggest letting your financial plan be your guiding light, your touch stone, your source of comfort, that provides the facts and guidance we need to feel not only in control of our lives but also secure about our financial futures.
Stay well, stay safe and keep the faith.