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by Megan Gorman
August 06, 2020
by Megan Gorman
August 06, 2020
Americans are exhausted after almost five months of the Covid-19 pandemic. Their lives have been turned upside down and this includes their finances as well. Even though this has been a long journey, there is still a long way to go until we return to a more normal world. A recent Bankrate survey found 76% of adults are worried about financial harm from another outbreak. These past few weeks may be the calm before the next financial storm resulting from the virus.
Taking a moment today to get your finances in order may help mitigate the impact of another downturn. While the first part of the crisis has been a V-shaped recovery, it is much more likely that we are in a W-shaped recovery, meaning we’ll likely have another significant pullback similar to the situation in March and April of 2020.
There are three key steps that can help you get organized in terms of managing the crisis. By establishing a cash reserve strategy, creating a dollar-cost average plan, and updating your health care directive, you can position yourself to better manage another downturn.
One thing most Americans have realized during the Covid-19 crisis is the importance of liquidity. While many Americans are not spending as much as they previously were on day-to-day expenses, they do require liquidity in order to cover some of the bigger items in their financial lives.
A key step to take is ensuring you have a significant cash cushion. The general rule of thumb is six to nine months of living expenses and having the cash easily accessible. Banks are not paying a high-interest rate on savings, but there are some high-yield savings accounts available. These accounts are subject to FDIC protection and allow you to generate additional yield on your savings. Most of the banks offering these accounts are online and an account can be set up with just a few simple steps.
The biggest surprise for most investors has been the rebound in the markets. While the S&P 500 was down 30% in March, by late July, the S&P 500 has effectively been flat for the year.
For investors focused on the long term, this provides perspective. If there are market pullbacks, you want to be buying into your portfolio. Since it is incredibly difficult to out-think the market, this may be a time for a more traditional financial planning approach.
One solution is a dollar-cost average plan, where you invest a specific amount on a regularly scheduled basis. This enables you to take the thinking and emotional aspects out of investing.
For many Americans, this could be as simple as dollar-cost averaging into a target retirement fund. People with larger portfolios may want to decide each month which funds to put money. Either way, you want to be sure you are sticking to your overall asset allocation and buying in on a regular basis.
The Covid-19 crisis is a health pandemic that will impact people differently. With more than 149,000 deaths in the United States as of July 27, we all need to face the possibility of sickness, incapacity and even death.
Now would be a good time to update your health care directive, a document that allows you to appoint an agent to make health care decisions on your behalf. These decisions can range from pain relief to life-sustaining decisions.
It is important that these decisions reflect your current state of mind. You can either go to an attorney to have this drafted or, in most states, download a form from your state attorney general’s website.
Make sure you pick an agent who will be best able to represent your medical wishes. You should be explicit with your agent about how you would want your treatment to proceed in the event you contract Covid-19 and are unable to advocate for yourself.
Ultimately, this calm in the Covid-19 crisis is an opportunity to prepare for the next potential downturn. The key to success is getting organized in terms of your cash reserve, investment strategy and estate planning. By taking this time to work on these three aspects of your financial life, you will be better positioned to manage the next phase of volatility due to the Covid-19 pandemic.
Are you looking to start saving for a car, house, or rainy day? Check out our savings accounts that can help you get there.