Aside from the death and illness, it has caused, Covid-19 has done a number on the financial system and the economy.
I’m writing this on May 19th, and up to this point, over 30 million people have filed for unemployment benefits.
In my previous post, which can be found here, I detailed how you can plan in the event of job loss.
Even if you haven’t lost your job, more than likely, your finances have changed. In this article, I want to pull back the curtain on how my finances have changed during this environment.
My Job
Thankfully, I’m still working. I work for my family’s business. Technically speaking, we have four family businesses and I work three out of the four in various capacities.
Two out of those three businesses are very resilient during recessions, so I’m not terribly worried about my income from those two sources.
The last, however, will be influenced by movements in the market. If I do my job well, it shouldn’t vary a ton, but if I don’t, my clients will feel the pain, as will I.
The reason being is I, typically, charge a percentage of the assets under management (AUM). If account values go down, so does the fee I receive. The two go hand in hand, as they should. If I do a poor job, I should make less. It just makes sense.
With that said, my income hasn’t moved too much from the financial advising gig. It dropped a little bit last month, but I imagine it’ll come back up by the end of May, as the market has recovered.
Opinion: The Economy
I don’t know if I’ve mentioned it yet here, but my opinion of the economy is darker than some. I think there will be a cascade of bankruptcies in the public and private sectors.
With regard to the public sector, the companies that are rated BBB are already at record highs. When revenues stop coming in or significantly reduce, it’s hard for companies to make interest payments to lenders (holders of debt).
Companies will start defaulting on their debts, and the ability to pay, as well as other factors, help determine the credit rating. This will cause a slew of BBB rated companies to get downgraded.
Funds
With regard to fixed income mutual funds and ETFs, the vast majority of them have rules they need to abide by. One of those rules could be only investing in investment-grade companies.
Investment grade is anything from AAA to BBB. My fear is that when companies get downgraded from BBB to BB, it’ll cause funds to dump those companies; exasperating the sell-off.
My Finances
With that said, here’s how I’ve adapted.
My finances really haven’t changed much. I’m spending more on groceries, especially right now as I am stocking up on certain goods. The added benefit of that is I’m spending less on food from restaurants, which saves me money and I’m eating healthier too.
So you’re spending more on groceries and less on take-out…what else? Well, given the nature of Covid and the uncertainty that surrounds it, my priorities have shifted a little.
More Cash
I’ve planned my clients’ portfolios with the above scenario in mind. The majority of clients aged 60 and up are positioned more conservatively than normal. With that in mind, all of the portfolios I manage will take a little hit, and my income will drop as a result.
I’ve suspended my retirement contributions, via payroll deduction, until I feel comfortable again. This may seem counterintuitive because of the stress I put on leaving things alone and dollar-cost-averaging as prices go lower.
Due to the fact that my income has some variability, not to mention my rental property and the uncertainty of my renters’ making rent payments (because of talks about forgiving rent payments for those affected by Covid), I have to keep more cash available than normal.
Retirement Contributions
As I mentioned, I stopped my automatic retirement contributions, but I am making voluntary contributions to my Roth IRA when I feel my cash available is adequate.
Other than that, nothing else has changed. Debt payments will continue as planned and saving for a down payment on a house will also continue.
Be advised: Any opinion expressed about the market/economy is strictly an opinion and should not be viewed as a certainty. Additionally, my preparations for said opinions are specific to me. Consult your financial professional about your particular situation.