As of today all 50 states within the United States have eased restrictions on the rules limiting individual and business activities used to slow the spread of COVID-19. Some things will have to change but it looks like we are beginning to approach a time where we can move about more freely and do many of the things we were doing before the pandemic started. This article is not about whether the easing of restrictions is the right thing to do, whether red or blue states are doing a better job of managing the health and economic aspects of this pandemic, or whether these restrictions should have been initiated in the first place. Instead, I wanted to write a brief article on the questions we should be asking ourselves as the economy begins to re-open. These questions have a personal finance slant to them (this is a blog focused on personal finance and financial independence) but you should probably think about other questions of self-reflection as we begin to move away from these stay-at-home mandates.
Here we go:
Were you financially ready to weather this economic downturn?
When I ask this question I think about the analysis I perform on companies right now before I decide to invest in them and purchase their stock. As I have discussed before I look at a company’s quality of earnings and cash flow and the strength of its balance sheet before determining whether to invest. This is also how we should be evaluating ourselves when answering this question. Specifically:
- Your Income Source – Do you have a job, investments, or other sources of income that withstood this pandemic and will it withstand the economic downturn we are likely to experience for another few quarters?
- Your Emergency Fund – If you lost your job did you have enough funds set aside to bridge the gap between your lost income from your job and paying the bills? If your dividend stocks suspended their dividends do you have enough of a cushion to bridge the gap to paying the bills until the dividend payouts return? Are you sweating it out hoping you do not lose your job because if you do you are screwed or can you rely on that emergency fund you put in place to cover six months of expenses? Do you need the extra relief from the government or was that just extra money you could add to your investments or emergency fund?
- Your Savings/Investments – How did your investments perform, if you have any, and just as important, how did you react if you had a portfolio that dropped 30+% back in March?
- Your debt levels/fixed expenses – Were you so saddled with debt that you had minimal flexibility to lower your monthly expenses during this downturn? If you had some of your monthly debt payments deferred will you be ready to start paying them again later this year when the bills come due?
If you can’t feel good about your answers to these questions then you need to think about what you can do differently to be ready for next time. And, yes, there will be a next time. It may not be COVID-19 but there will be something that stress tests your personal financial situation again. And possibly sooner than you think.
How did your monthly expenses change during the stay-at-home orders?
I do not know about you but I spent a lot less money over the past few months. My grocery bill went through the roof but every other expense went down. To me, being forced to stay at home was an exercise in showing someone that he/she could spend less money if he/she lived a bit more conservatively. I recommend comparing your year-to-date spending for this year and last year and see what changed. Do not just look at the categories that changed but look at the magnitude. Here’s my list:
- Groceries: My grocery bill went way, way, way up. I have never spent $400 at the grocery store but it happened a lot over the last few months. However, if we look at this expense combined with Food, Drink, and Entertainment then combined these expenses we were significantly down.
- Food, Drink and Entertainment: Gone were the $100 trips to the movies, the $50 casual dining expenses after soccer practice, and the occasional fancy dinner that costed a few hundred dollars. We saved a lot of money here.
- Kids Sports: This expense was way down as we had no soccer or golf tournaments during this time and golf courses were closed. We are a bit excessive in this area so we probably saved $500 per month in this category alone.
- Utilities: You would think the costs would have gone up since we have been home so much but we installed solar panels last year which kept our electricity costs down. We were up a bit but not more than $100.
- Auto/Gas: Down significantly as we barely used our car. We barely had to fill up our car with gas and when we did it was not costing us $50 per time. We probably saved $500 a month during this time.
- Insurance: Down a bit as we got a discount on our auto insurance and we stopped our insurance on one of our cars (the one we still are not driving). We probably saved $50 per month.
- Personal: My hair looks subpar for sure but we did all haircuts at home during this time. I got a haircut every two weeks last year while I was still working and my son got one every month so we have saved $40-$50 per month during this time. I wrote about how it was costing me a pretty amount of cash every year.
- Other Home Costs: Pretty much stayed the same, and they are not insignificant here in California, except we did our own cleaning and got rid of the cleaning person. This saved us $200 per month. We did some more work in the yard and planted some succulents, etc. so we spend a little more at Home Depot but it was well worth it and my son has found another hobby he enjoys!
Bottom line, there are probably some areas where you spent a lot less money since you were forced to do more things at home and consume less in terms of services and goods while out and about. Some of these costs will go up as we get back to normal but perhaps not all of them. This gets to the next two questions.
What costs were saved that should still be saved going forward?
If you categorized your savings then answering this question just takes a little bit of time and introspection. Basically, ask yourself which of these cost savings resulted from curbing an activity that was not that important to you in the first place. Then ask yourself if you can continue to change your behavior moving forward to keep these cost savings intact in the future. Again, here is my list:
- Food, Drink and Entertainment: The $100 movie outings are done for now. We are not afraid of going to the movies, at all, but we found that picking a fairly recent release on TV, buying candy at CVS, and enjoying the movie at home was just as enjoyable. We will also try to eat out less but my wife and I agree that we are not sure how that is going to work out in the long run.
- Auto/Gas: This really got me thinking that I need to get a car that is going to be cheaper with gas and maintenance. With good car deals likely available to us in the near future we may decide to swap my car for something more basic and less gas consuming.
- Personal: Haircuts from home are going to continue but my wife will have to help me just a bit more to make sure I do not screw up the back of my head like I did last time.
- Other Home Costs: We are going to clean the house ourselves going forward. We really liked our cleaning people but it is an easy way to save $2,400 per year and we found that it was not that tough to do if we all did the cleaning together.
What costs were saved that are worth incurring going forward?
There are some things you probably realized you missed once they were taken away from you. That’s a good thing to recognize and to understand that having a gratifying life while still making headway with your finances requires understanding the true utility or joy that you get from something. That is Economics 101 but the time at home really crystallized what I want to focus my efforts (and my wallet) on. For my family, I think we all acknowledged the gratification we receive from spending money on our kids’ sports and having memorable experiences during our travels. Therefore, we do not expect to really save money with our sports or our travels once we can begin to do them again.
Do you have the financial sophistication and resources to take advantage of the buying opportunities that present themselves during tough economic times?
Fortunes are made during tough economic times because things go on sale. In March stocks were on sale. We have historically low interest rates to benefit from right now if you are a good credit risk for the banks. Real estate may go on sale later this year if the economy has a sluggish recovery. Good commercial real estate deals are offering attractive investing terms to entice investors to invest.
How many of these opportunities did you take advantage of? How many do you plan to take advantage of during this economic recovery? If you are not taking advantage of any of these opportunities is it the financial sophistication or resources that are holding you back, or both?
I have found that when things go on sale I make the most money over the next few years. I bought different things on sale at different times in my life and it was one of the things I felt put me ahead of my timeline in terms of financial independence. In hindsight, I was too conservative during times where things went on sale and I wish I would have bought more assets at cheap prices. My financial sophistication and resources were not really there to do more but they have gone up over time and I am ready to take advantage when things go on sale again. You need to ask yourself if you are missing out on these opportunities and, if so, why.