Managing your personal finances during the COVID-19 Crisis

The COVID-19 pandemic and the societal and economic implications have overwhelmed us literally in every part of the world. After securing the health and safety of our families, we will need to look at the financial consequences we will have to manage. Losing jobs or reduced business will probably be the most dramatic impact on individuals and their financial situation. But also significant losses in the capital markets as well as ongoing volatility will impact those with investments. This article therefore gives practical tips on how to manage your personal finances and thus effectively navigate the COVID-19 storm.

COVID-19 – where we stand right now

The COVID-19 pandemic has created a situation of unprecedented social and economic misery* which typically only wars would trigger. The crisis unfolded very fast – in most of the world, two months ago, life was running as usual. Nobody would have believed that a complete shutdown of entire countries was even possible in the western world. The economic consequences will certainly be massive but were not yet intensively discussed as politicians, public health officials and virologists shaped the agenda. In addition, the economic implications of COVID-19 are just beginning to unfold.

Massive increases in job losses all around the world give a first glimpse of what is to come. A substantial recession with a massive contraction of the economy in the second quarter (and beyond) will likely follow. The speed and magnitude of the subsequent recovery are to be seen.

At the same time, the crisis has had a dramatic impact on the capital markets. The S&P 500 for example was down by a whopping 32% in the month between mid-February and mid-March. Since then, it has recovered a bit but remains down by almost 20%. Oil prices have collapsed dramatically as oil demand worldwide has evaporated. The implications on (corporate) bonds and real estate prices are to be observed in the longer run. All along these developments, there has been massive uncertainty and volatility in the market.

All of these factors, obviously, have a dramatic impact on the personal finances of individuals and families. Here are a number of practical tips on how to weather the COVID-19 storm.

#1 – Impact on income

The European answer to unemployment* is state sponsored unemployment benefits or reduced working hour schemes (“Kurzarbeit”). This may work for many but still brings financial hardship as unemployment benefits are lower than the previous income from proper jobs. Unemployment benefits also have shortcomings, as e.g., the self-employed will not be covered appropriately. In many other parts of the world, including the US, such generous government sponsored benefits are unknown.

The only universal and reliable personal finance answer to the problem of no or intermittent income as experienced due to COVID-19 continues to be an emergency fund about which I had written already a while ago. My recommendation is to hold three to six times your monthly expenses in cash for unforeseen crises. The reliability of your current income streams should determine whether you hold three, four, five or six times your monthly expenses in the emergency fund. E.g., if you are a civil servant, 3x should do while a self-employed software developer with volatile earnings should aim for 6x of monthly expenses.

If you had previously doubted whether an emergency fund was really necessary, the COVID-19 crisis gives a simple answer: Yes! Everyone should hold an emergency fund. It gives you the peace of mind to navigate the unforeseeable crises which hit every now and then.

#2 – Impact on spending behavior

In the previous section, I spoke of monthly cost. Well, as a matter of fact, your monthly cost will go down due to the COVID-19 crisis automatically. Due to the lock-down in effect in many countries around the world, our spending behavior forcibly has to change. And the change will be quite radical! Many discretionary and big-ticket items magically disappear (travel, shopping for luxury goods, eating out) such as travel or shopping trips to the mall. At the same time, some items remain (rent & utilities) and even increase (grocery shopping).

The Boston Consulting Group has identified the biggest changes in our spending behavior in its recent COVID-19 consumer sentiment survey The biggest changes for the next six of months are:

• Top spend categories which are likely to win
  
  • Savings – in the wake of an upcoming recession a quite reasonable priority…
  • Food
  • Health care
  • Travel – consumers still hoping for deferred travel after a quick end to travel restrictions (?)
  • Education
• Top spend categories which are likely to loose
  • Tobacco
  • Fashion & luxury goods
  • Gambling
  • Travel
  • Toys & games

I find this quite revealing and also containing positive (!!) news for your personal finances. First, this survey shows a reasonable and quick re-prioritization of our spending. If you look for opportunities to trim your budget, it includes great ideas. Second, all non-essential expenditures are eliminated, some because it’s physically impossible to spend (e.g., closed stores or travel restrictions) or because it’s smart to do so (e.g., tobacco). Third, this change in spending behavior will also mean lower monthly costs which will allow you to stretch out the emergency fund a bit longer.

While I consider this positive news for your personal finances, I certainly do not want to downplay the impact on the economy at large. This radical shift in spending behavior will bring massive problems to entire sectors, e.g., airlines, hotels, fashion retailers, etc. This will obviously have further detrimental knock-on effects on the overall economy.

#3 – Impact on your investments

As mentioned above, we have experienced a massive crash in equity capital markets due to COVID-19. Volatility as increased dramatically. And bond as well as real estate markets will likely face more challenging times ahead too. So what to do with your investments? The very simple answer is: Nothing! Already in August 2017 I wrote an article (in German) about what to do in a crash situation on the capital market. My recommendation remains pretty much unchanged.

For your investments, I would strongly advise to stay true to your previously defined investment strategy! Taking erratic (sell) decisions on the mere basis of volatile markets will not lead to success. If you are aiming for very long term investments with 10 years + in investment horizon, the immediate movements in the market should not be the decisive factor for a fire sale. An important, additional argument in favor of not doing anything is that we all don’t know what will happen. While a further decrease in capital markets is possible, a rebound or a partial recovery is also an option.

Some investment strategies involve holding cash to be able to invest if the market collapses. First, I didn’t follow such a strategy and never hold significant amounts cash in my portfolio. Second, I would not know what the right moment for taking this investment would be, should it be when the market is -10%, at -20% or at -30%? In other words, should I invest now or wait a little longer? How much longer? Third and finally, the cash portion might have missed yield over many years which is lost altogether.

If you have a regular savings plan which invests monthly, e.g., into an ETF, I would encourage you to stick with it even in the current crisis. Of course, the automatic monthly investments help to maintain continuity in a time of uncertainty. More important though, you will be able to benefit from the cost average effect. In essence, you are able to buy more ETF shares at a lower price given your fixed monthly investment amount.

Based on the experience of the last couple of weeks, I would add one recommendation which has served me well and helped me stay calm: Don’t look at your portfolio every day! It has saved me a lot of nervousness and worry as I did not see red numbers as the portfolio value decreased. At the same time, I mentally familiarized myself with the idea of substantial (>20%) losses. When eventually checking the portfolio, the shock was not that bad.

In closing, let me acknowledge that pretty tough times for the personal finances of many people across the world lie ahead of us. Particularly as millions of people will lose their jobs in a recessions, personal finances will be substantially impacted. Even more so, personal finance and the required know-how will be essential. I therefore hope that the tips above help managing the crisis a bit better! I am looking forward to hearing from you with a comment or an e-mail myfinancialfreedom.blog@gmail.com