Given the crazy virus related economic conditions, let’s use this time as an opportunity to reset priorities and get back to personal finance basics.
Before we begin with reviewing the basics and resetting ourselves, let’s review exactly what happened over the past 4+ weeks regarding market returns.
Market Update (Feb – Apr, 2020)
Based on the charts below, we can see the significant changes in pricing over a very short period of time – amazing gyrations in market pricing on a daily basis; not uncommon for 1000+ point gains and declines!
Based on the two charts below, we can see the net effect of the overall market volatility on market pricing levels (enhanced by the Dow Jones price weighted model) is a negative impact of approx. 6000 points. We started the market at 29,398 points on Feb 14 and completed the week of Apr 8 at 23,433 – a net loss of 5,965 points or a 20% drop. Moreover, at the worst point the Dow Jones was down to 18,591 points or 37% (Mar 23)!
See the daily point change and the waterfall charts below for more details.
Headline News 2020 (CAD)
Already living paycheque to paycheque, some Canadians are being pushed over the brink by coronavirushttps://www.toronto.com/news-story/9935299-already-living-paycheque-to-paycheque-some-canadians-are-being-pushed-over-the-brink-by-coronavirus/
Millions of Canadians are deferring mortgage and other debt payments — what happens when those bills come due?https://www.thestar.com/business/2020/04/08/millions-of-canadians-are-deferring-mortgage-and-other-debt-payments-what-happens-when-those-bills-come-due.html(
Similar ~ Headline News 2019 (CAD)
More than a third of Canadians have no retirement savings, half live paycheque to paycheque, poll findshttps://business.financialpost.com/personal-finance/more-than-a-third-of-canadians-have-no-retirement-savings-half-live-paycheque-to-paycheque-poll-finds
Now What? – As we mentioned on our last market update post, it’s best to focus on helping others instead of focusing on negativity of the markets.
However, if you just can’t help yourself and continue to look at the current market situation (myself included), its probably best to renew your focus or direct your attention in a positive manner.
Let’s present a recovery plan for this current financial situation:
“Crazy Market” Recovery Plan – The Golden Rule(s) of Personal Finance
Therefore, as discussed above, let’s reset our focus and start working on positive action plan with the Golden Rules of Personal Finance
- Rule #1 – “Spend Less Than You Make“
- Rule #2 – “Save, then Invest“
- NOTE: Part 2 of this series to follow with rules 3, 4.
- Rule #3 – “Focus on What You Can Control – Ignore the Noise“
- Rule #4 – “Stay Diligent, Be Conscious of Your Emotions“
Recovery Plan – Rule #1 – “Spend Less Than You Make”
If we rewind all the way back to the beginnings of personal finance, we see that the one of the key principles is “spending less than you make” this is at the heart of all personal finance foundations – let’s dive into this a little more. This rule may sound simple, but it has vast implications on our current way of living, see below:
However, our current economic marketplace is no longer based on agriculture or even manufacturing, rather consumption of goods and services or consumerism society.
Further, just prior to the viral pandemic, it appears that we as a society have gotten complacent and collectively fallen into a trap with the relentless pursuit of material possessions; let me be clear here, having possessions and enjoying your purchases is not the problem, but spending everything you have and borrowing more in pursuit of these possessions is what gets people into trouble; revealed in the current economic climate.
Remember, it took a major worldwide pandemic crisis which caused a significant global economic “hiccup” to reveal this truth. Now, both governments and banks have stepped into the middle of this pending disaster to help alleviate the suffering caused by this situation.
Implementation – Rule #1
Now maybe the information above is just adding new salt into a very fresh wound; that is not our intent – we understand that your circumstances may be not favorable right now and you are acting in crisis management mode.
If that is the case, let’s help you get back to a positive position regarding your personal finances – Here are some helpful ideas:
- Go through your house and collect unused things to sell online (phones, movies, tablets, video games are still in high demand),
- Cut back on impulse spending – Yes, we are looking at you Amazon!
- Make a grocery list of only the essentials and stick to it – Leave the cookies, chips and treats in the store (yes, this is hard)
- Cancel unused online subscriptions and magazines – Or a least scale back for a few months
- Leave the car at home – Walk / bike, spend time exploring your neighborhoods
- Call your utility companies and ask for some relief – They may offer a discount or deferral.
- Call your car and home insurance and ask for some relief – It never hurts to ask!
- Think back to your childhood and dig out your old hobbies for fun
- Make food from scratch instead of ordering delivery – Or cut back to delivery once a week to make it special.
AND remember, once you regain your financial footing again after this virus situation dissipates, ensure you save some or a large portion of your income for the next time something like this happens again – Let these times be a reminder to never go back to this level of crisis living again.
RECOVERY RULE # 2 – “Save, then Invest”
Now that we have tackled Rule 1, we should have some additional money that has come into our hands; either left over from cutting costs or additional funds available due to selling items. This money should be outside our normal living expenses and can be represented by a % amount of our income. No matter the amount, we can start the implementation process of Rule #2.
Implementation – Rule #2
DO THIS FIRST – These finds can then be set aside for emergencies – Figure out what it cost you to live at a basic level; your monthly bare-bones spending and then allocate 3x or 6x these costs and put this into a separate bank account (perhaps an online high interest savings account; separate from your traditional bank) – Then do not touch this money, let it sit and collect dust; in this case some interest. This is only for emergencies like we saw in Rule #1.
Then, after you have some money saved for emergencies, take a small break and pause for a moment to reflect on this fact; you have succeeded in preventing another personal financial crisis. This pause is represented by the comma in the title “Save, then Invest”. Feel free to celebrate this achievement 🎉.
Once your have some emergency savings committed and separated from your daily financials, the next piece of this solution is the investing component. When you have additional funds beyond saving for emergencies, then it’s a good opportunity to put this money to work for you and grow – This is especially relevant in an economic market that has stocks and bonds on sale (Minimum of 20%-37% on sale).
For further advice in investing and setting up a strong market allocation please see our earlier post for more details on asset allocation and market shock absorber. Additionally, we also provided a layout on how to meet your investing goals with 70% less effort.
Conclusion – Part 1
We know that these are difficult times and economic conditions are changing by the day and by the hour – Our hope for you is that you and your family are safe and healthy.
Additionally, we hope that the content of this post can help bring some stability and security on the financial aspects of your situation.
Focusing on improving our situation and thinking and hoping for a better future is a much better mindset than being negative and scared – We will touch on this in our next post (Part 2). Remember, we are all in this together, around the world.
We wish you and your family stay safe and healthy. We will meet again in the next post – Thank you for reading.
Sincerely, The Lab Manager.
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