What COVID-19 Has Taught Me...So FarManaging Your Finances
I'm not sure the COVID-19 "crisis" is unlike anything we've ever seen before. It certainly isn't the first pandemic. But, that doesn't mean it is a walk in the park. Here are a few things that I think I've learned or relearned from it.
Emergency Funds Really Are Important
It is really hard to put money into a bank account that pays "Zero Point Nada" when you could have it in the "market" making big returns (or so it seems). But when things go south in a hurry, having that money can help you sleep at night. While it isn't quite as critical for those of us with a military retirement or still serving on active duty, I think it is important. In the past I've recommended 6 -12 months of living expenses for an emergency fund. I'm thinking that more like 1 1/2 years may be a better idea. If you are retired, this would only be the amount that exceeds your monthly retired pay (after taxes) and VA Disability Compensation (if you receive it). If you're not retired military, then it would be the amount that exceeds your "guaranteed" income (like Social Security or other pensions). Once you're in your ultimate retirement, then I think you can cut it back to around 12 months (although you might also want to use a cash "bucket" in your portfolio to hedge against market risk).
Having a Plan Makes a Big Difference
This one is a "two parter". When markets go crazy, it is hard to know what to do. Having an investment plan allows you to take action based on decisions made at zero airspeed and 1 G. If the market throws significant changes at you, you move your investments to get back to plan. Without a plan, all you can do is guess (and worry) about what you should do.
Having a financial plan allows you to focus on the finish line versus the market "lurch" of the day. Being able to check things out and see how market fluctuations affect your ability to live your life the way you want to, is more beneficial than looking at those fluctuations.
You would never start a military training or combat operation without a plan. Why do it with your finances?
Sometimes Doing Nothing is Just Fine
While re-balancing a portfolio back to plan is a great thing to do, sometimes it isn't practical. Early in March the stock market was fluctuating so violently, it was virtually impossible to do the math to re-balance a portfolio. It is o.k. to let things sit for a bit, until you can actually see through the fog of volatility and make an informed decision
Roth Conversions Might Make Sense
If your income is down for any reason, this could be the year to look at Roth conversions. I would consider it if in the 22% bracket and if you're in the 12% or lower bracket, I would strongly recommend filling up those brackets with Roth conversions.
I'm Rethinking Food Security
For the least 15 years or so, I've kept about 3 days worth of canned food and water in the basement. Should get me through a hurricane aftermath. After seeing issues with the food supply chain, I might push that out a few more days or weeks. It hasn't been bad for us yet, but the shelves are a little bare. I'm not worrying too much though as there are plenty of squirrels around here and I have a pretty good recipe from my Dad for cooking them.
If you found this article useful, you mike like the following blog posts:
COVID-19: You Can Now Take $100,000 From TSP or Your IRA, but Should You?
Military Finances 201: Executing a Plan versus Reacting: Portfolio Rebalancing
Unwrapping the CARES Act