The COVID-19 crisis is creating financial uncertainty and testing emergency savings plans for many low-and moderate-income earners.
WCBU’s Dana Vollmer talked to Brad Davis of Investment Strategists at Better Banks about some of the personal finance lessons learned from the pandemic.
Dana Vollmer: A lot of people are pretty panicked on the economy and personal finance front. I'm curious, from your perspective, how warranted the panic is?
Brad Davis: I think the panic is certainly justified. Speaking of the markets, we've never seen anything go down this quickly. And speaking of the economy, we've never seen the economy come to an absolute standstill like this. Typically, whenever the economy is turning over on itself, it's a much more elongated process, where this was a matter of a couple of weeks and it was by proclamation. We decided we were going to do it for the benefit of human lives, which I don't think anyone would argue with.
To suggest we should be panicking, we never recommend panicking. In terms of personal finance, that's typically the type of thing that can get you in trouble. And the reason we say that in this particular circumstance is because we've seen the [Federal Reserve], as well as Congress, step in in pretty meaningful ways — with $2.2 billion bailout packages, as well as bringing interest rates back down to relatively zero, making borrowing much simpler for businesses and individuals. So we think that we have a backstop to where we're going to be able to let this process play itself out and get to the other end of it. You know, there's going to be some casualties along the way, in terms of the economy. And that's unfortunate, but I do think that as a whole, we're going to get out of this and get to the other side in a relatively quick time period.
DV: A lot of people thought they had built up a decent emergency savings reserve, but they're quickly learning that it wasn't sufficient. What are your recommendations for people trying to prepare themselves for the next time something like this might happen?
BD: Yeah, and I appreciate you saying that there will be a next time. It may not be a global pandemic but there, statistically speaking, is going to be another financial crisis in some fashion. If there is going to be a silver lining out of this, I think people can understand that you can't be caught flat-footed again. In the way that we advise people — before we get to the fun part, which is actually the wealth creation — we're teaching them that you have to keep debt loads down to very manageable if not zero. And you have to establish an emergency fund, which is going to be somewhere between, I would say, six months on the most liberal side to 12 months on the most conservative side of guaranteed expenses — meaning estimated utilities and other housing costs, your rent, your mortgage, property tax, food, and things of that nature.
That could be a pretty big number. I think a lot of people are of the mindset that “Hey, I have an emergency fund of somewhere between a couple hundred dollars and a couple of thousand dollars, and that's going to get me through to the other side.” Then we get to something like what we're seeing right now and that's nowhere near enough. Now, we have a couple of protections set up in terms of unemployment insurance as well as the stimulus. But we can see that when that mortgage is due — and it's going to be due — and when we have to purchase food, and if we have an auto loan or credit card debt or whatever that may be for that individual, a couple thousand dollars or a couple hundred dollars even it's not going to last that long.
When we're advising people, we're really helping them write out what their version of a budget looks like. What does their statement of cash flow look like? What are their expenditures? What are some ways that we can try to eliminate some of that consumer debt like credit card debt, student loan debt, auto loans, things of that nature, and get them to a point where they're able to keep much more of their monthly cash flow in their own pocket — potentially save some of that to create that emergency fund and then begin so those wealth creation steps.
DV: As you mentioned, six months of all of your expenses can be a pretty massive sum of money. And the path to saving that much is going to be different based on what your income level is. And certainly this is affecting people of all income levels, but it may be harder for those on the lower end to recoup those costs once we are back to work. Can you talk a little bit about differences in strategies based on income level?
BD: Yeah, absolutely. I think you're spot on with that. If you earn a handsome sum of money — or even just the average that we see in the American household — it's going to be a little bit easier for you, unless expenses are completely out of hand to recoup that a little bit quicker. We encourage people to try to get into a situation where you're keeping your expenses below whatever you're actually bringing home on a monthly basis. That can be difficult as we get down to the lower income levels, but one of the areas where we really see people potentially overspending is in the areas of food. That is something that can be controlled, just by reasonably taking a look at your budget and saying, “Are the things that I'm purchasing something that I need or is it more of a luxury item?” We've actually helped people cut hundreds of dollars a month out of just that very category, because you realize, “Hey, maybe I'm eating out a little bit too much, or maybe I'm purchasing pre-packaged foods that tend to be a little bit more expensive, or you can actually eat it a little bit better and prepare food that costs much less.” So that's one area. In terms of recouping that back, if you're at a lower income threshold, there really is no magic bullet, unfortunately.
DV: A lot of people are getting a little bonus from the federal government in the form of a stimulus check. What are you advising people to do with that windfall?
BD: Everyone's going to be different, but Congress enacted that stimulus to be spent. It's meant to cover the gap that a lot of people are feeling right now, just to make sure that they keep their head above water. So there's an order of operations that we typically recommend in all situations: Number one, of course, it needs to be food. We need to make sure that you're fed, your family's fed, you're protected in that matter. Then we need to make sure that your rent payment or your mortgage payment is paid, followed by household utilities and then any other consumer debts that you may have.
Long story short, we're advising people that if there is a clear gap just due to an unemployment difference, that needs to be [used] to survive. In other people's circumstances where perhaps you're still employed and collecting the same paycheck that they were accustomed to, we let them decide what they want to do at that point in time. Certainly, there is nothing wrong with stockpiling cash at this point. It's actually prudent, but in other circumstances where individuals are still well off, I think it's advisable to share that with people who may need it ... and that's a personal decision.
DV: Circling back to the stock market, one of the questions a lot of people are asking is whether or not now is a good time to invest, if they have the ability to do so.
BD: We're getting that question a lot, for sure. The answer always boils down to, “What is your timeframe?” If someone comes to us and they say, “My timeframe is three years or less,” I don’t if the market sold off what it did recently and I don’t care if the market’s at all time high, it's typically never advisable to invest any sum of money in stocks and during that time period — for reasons just like what we're seeing right now. If we go back not even two months ago, we were at near all time highs, and the economy, while slowing, was still in pretty reasonable shape. And then all of a sudden, we're at where we're at right now.
If you have a time period of over, I would say, five to 10 years, it's a great time to be buying, even if we do try to retest that bottom or even if we go lower than where we were at a month ago, it's still at a discount relative to where it was at a couple months ago. But to suggest that this is going to be a quick hitter and you're going to be able to get back — maybe in a couple of months — back up to those all time highs, I don't think we have any evidence to support that. Nor do I think it would be prudent for anyone to expect their money to rebound that quickly and make a profit that handly.
Investment Strategists at Better Banks Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities are offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. The investment products sold through LPL Financial are not insured Better Banks deposits and are not FDIC insured. These products are not obligations of Better Banks and are not endorsed, recommended or guaranteed by Better Banks or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
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