The recession caused by the COVID-19 health crisis taught us that proactive measures are the best financial plan.
Historically, every 8 to 10 years, the economy experiences a recessionary environment. For many investors, 2020 was the first recession they have experienced. Nobody loves a recession, but there is a silver lining; they provide a unique opportunity to pay closer attention to your personal finances, learn from experience and create a proactive financial plan for the future.
At Emerj360, we always say “control what you can control.” Aspects of your personal finances that are within the realm of your control are your budget, emergency funds and asset allocation. Financial lessons emerged in each of these areas during the pandemic.
Lesson 1: Build an Emergency Fund
The pandemic taught us to expect the unexpected. Emergency funds were top of mind for most people during the pandemic, due to the fact that several jobs were lost or furloughed. Having a savings cushion allowed people to pivot comfortably when the pandemic became an income-affecting emergency. It may seem like Personal Finance 101, but emergency funds are a necessity, and many people didn’t have one. Depending on each individual situation, it is crucial to have three to six months of expenses saved for the unexpected in a checking, savings, or money market account.
Lesson 2: Use a Budget
During the lockdown, discretionary spending plummeted, which helped people to more clearly define the difference between a want and a need. Everybody knows that keeping a budget to monitor spending is important. However, like we saw with emergency funds, many people didn’t actually have one. Our clients wanted advice on cash flow management, and how to decide if they should save surplus funds or use them to aggressively pay down debt. Using a budget to manage income and expenses is the most effective way to make your finances work for your needs, because it puts you in total control of your cash flow.
Lesson 3: Stay the Course
Investors learned they need to keep a long-term mindset and the importance of maintaining focus during market volatility. The market naturally experiences periods of recessions and pull-backs. Sometimes, individuals get emotional and want to pull money out because they worry they’re going to lose everything.
Stocks generally go up over a long period of time. A younger investor can tolerate more risk in the market because they have a longer investment horizon. Younger investors should never make the decision to pull money out, especially when they are contributing to their employer-sponsored 401(k). As a person gets closer to retirement, their asset allocation should shift towards a more conservative approach, as the investment time horizon gets shorter. Working with a financial professional can assist in these types of changes the closer you get to retirement
Overall: Positive Outlook
Being systematic and process-oriented by building an emergency fund, following a budget, and staying the course will help you live comfortably when the next recession happens. We see time and time again clients who budget, save, and invest throughout market volatility and recessionary periods come out better than ever.
Schedule a meeting with the Emerj360 team if you’re ready to be proactive for the future and create a financial plan.
