The current economic crisis was unexpected, but it hit quickly. Within a month, the stock market lost about a third of its value. Many investors were hit particularly hard. As states largely locked down, many workers saw their jobs evaporate without much warning. Some of these layoffs were temporary. Unfortunately, many people are still out of work. One thing is clear, the rapid decline in the ability of many Americans to pay their bills should teach some important lessons.
Emergency Funds Are Necessary
First, it's extremely important to have a fund for rainy days. It will eventually rain, and having the ability to weather the storm is a necessity. This means you need to save up an old-fashioned emergency fund that can pay your bills if there is little or no income rolling in from a job. Fortunately, many Americans were able to access enhanced unemployment benefits, but this is not a given for the next financial crisis. Most experts recommend having at least three months of your basic expenses stashed away, but having even more saved might help you sleep better at night. Having six or 12 months available when necessary can alleviate a great deal of financial stress.
Debt Adds Stress
Having debt is stressful. A mortgage can make sense because you'd have to rent otherwise, but other debts like student loan debt or credit card debt can cause stress when things are going great. If you're unable to pay those debts due to an unexpected job loss or a drop in income, your stress level will likely go up to 11 on a 10-point scale. Once things return to a sense of normalcy, you'll want to start working on your debt to provide more flexibility in your finances.
In order to pay off your debts quickly and build up an emergency fund, you'll need to have margin. The same is true if you're looking to invest for long-term wealth. You simply cannot spend everything you make every month and expect to get ahead. Building margin will likely require writing out a budget and cutting back enough to start putting some money away for long-term goals. The more margin you're able to build up, the greater your level of financial flexibility will be. Over time, many people have been able to become financially independent by building high levels of margin into their household finances.
Build Multiple Income Streams
If 100% of your income comes from a single job, you'll lose all of your income if you lose your job. This puts your financial stability largely at the whim of an employer, and an economic downturn can lead to a serious crisis in your household. Adding a side hustle or a second job can not only help you build margin, it can also help you weather an economic storm. If you can invest and start bringing in a stream of some dividend income, you'll be in better shape should you lose your job.
Keep A Long-Term Focus
Investing during a quick market downturn can kick your blood pressure up a few points. The recent volatility in the stock market caused some people to bail. You'll want to remember that investing in the market is a long-term game. You might lose some money on paper in the short run, but you're likely to see your nest egg grow over the long haul. Selling in a down market just means you'll lock in a loss.
The current financial crisis has led to worry. The fact that it's tied to a global pandemic makes it even more frightening. Despite the deep concern in the immediate term, coming up with a plan for the future.