Most recently, the world has been absolutely rattled by COVID 19.  People have felt the impact in many aspects of their lives and it has exposed numerous weaknesses in our current systems. One of the most notable weaknesses is that of personal finance.  Although this situation was unique in how globally encompassing it was, it still sheds light on areas where all of us can improve.

When times are good, people tend to over leverage, over spend and may take risks they wouldn’t have otherwise. When the stock market is at all time highs and unemployment is at all time lows, people feel invincible.  COVID 19, and any other life altering situations for that matter, demonstrate how quickly our world can be turned upside down in a matter of years, months, or even days.  

No one can predict exactly when these situations will occur. However, what we can control is how we prepare for them.  I have developed a list of 3 strategies that you can execute in your financial life to better prepare yourself for the probable next time:

1. Emergency Fund:  An emergency fund is a basic principle of personal finance. Although there is some variation, it can generally be considered 3-6 months of living expenses that is saved in the occasion of an unexpected event. More financially conservative individuals may prefer to have more months covered, while others may opt for less.  The key is to ensure that this money is sufficient, accessible, and only tapped in an emergency.  COVID 19 exposed a significant problem with Americans and their finances: According to Forbes, a new survey revealed that 49% of Americans live pay check to pay check and 53% don’t have an emergency fund.  An unanticipated payment or loss of income is a reality that can occur even in a thriving economy. Thus, an emergency fund offers one layer of defense against financial devastation. Tip: Set up automatic withdrawals from your paycheck directly into an appropriate savings vehicle.  Automating your savings allows you to prioritize saving without “missing that money”. As they say, out of sight, out of mind.
2. Multiple Streams of Income:  Most individuals have one source of income and that is their “day to day” job.  They show up and exchange their time for a paycheck.  This all works well until there is a disruption in that system.  If anything were to jeopardize this job (injury, reduced hours, job loss, etc.), they simply have no means to earn money.  Many people maintain an attitude that if job loss were to occur, they would simply just find another job.  However, in the case of COVID, it is obvious that it may not always be an option. Developing multiples sources of passive income is often discussed and this is a prime example of the value that it brings.  Real estate, stocks and bonds, side hustles/businesses (websites, YouTube channels), and interest-bearing accounts are all possible ways that allow you to generate income aside from a traditional job.  Some of these require upfront capital and incorporate some risk, but not relying on a single source of income allows over performance in some areas to compensate for under performance in others. COVID 19 dramatically reduced people’s ability to earn income through their traditional jobs and also eliminated the possibility for rehire in many industries. This exposed the complete reliance of people on their job as the only income source. A pandemic will clearly have widespread economic impacts but even in a more stable environment, job loss is always possible.  No position, industry, or role is bulletproof and having multiple streams of income provides a defensive strategy to an “all eggs in one basket” income approach. Tip: Regardless of your level of income and education,  developing alternate streams of income and passive income is possible.  Developing these while you still have steady, reliable income through your primary job is the best time to seek out these opportunities rather than in a time of desperation.  
3. Asset Allocation: When the stock market is soaring and people see their portfolios climb, they often exchange higher risk for higher reward.  They let greed supersede logic and position themselves in riskier positions than they are comfortable.  When the stock market takes a nosedive, those same people begin to panic and sell. Why? Because they took those risks based on being comfortable with the gains but not the losses.  The best way to ensure that your portfolio matches your risk tolerance is controlling your asset allocation. Generally, placing more of your portfolio in stocks instead of bonds creates a higher risk, higher reward scenario.  Stocks tend to have a bumpier ride with more volatility but often outperform bonds.  Those who place more weight in bonds compared to stocks generally aim for lower risk and more stability even if that means lower reward.  Often, the longer investing horizon you have, the more people prefer to have higher portions of their portfolio in stocks.  This is because they are able to recoup losses due to the fact that they have time on their side for the market to recover.  However, age should not be your only factor to consider.  These are all general trends and you must decide your risk tolerance for YOURSELF.  There are no cookie cutter instructions because each person’s financial situation and tolerance is unique.  Assigning an appropriate asset allocation that is comfortable for you, both in ups AND the downs, is an essential defense strategy in times of economic volatility. Tip: When considering your risk tolerance, you can evaluate factors such as the time horizon for the investment, other avenues you have that can generate income in the event of significant loss of your investment portfolio (rental real estate, income you’re your job, income from other assets), what the goal of your investment is, and finally your general understanding of the investment itself.

Although this list is concise, it provides focus on a few key concepts to better prepare your finances for times of economic volatility.  It is much easier to fortify your finances in a stable environment than in times of distress.  COVID 19 has provided us a unique opportunity to examine and evaluate our financial preparedness in the event of a devasting situation. As Ben Franklin once said “By failing to prepare, you are preparing to fail.”

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