This article first appeared in Louisville Business First:
Let’s say you’re cruising down a curvy country road on a starry night, windows down, a slight chill in the air as you put some miles on a new car. You come around a corner, only to see a deer just feet from your bumper as it gallantly strides across the pavement. Luckily enough, you swerve in time to miss the animal, but you careen off the side of the road, blowing your tire out in the process. You are not at fault — there was no way to see the deer around the corner. But here you are, through no fault of your own, with a broken car and a soon-to-be lighter wallet, all because of something you couldn’t see coming.
Periods of volatility can have a way of helping us focus on our priorities and reestablish our guiding principles. The beauty of finance is that the principles never change. This has been a rocky start to the year, and there will be uncertainty throughout the summer as we fix the tire and get our car back on the road. What’s important now is making sure we’re all better prepared the next time a deer sends us into a ditch.
Know your budget
The most complicated financial plan always begins with a budget. The amount of money that comes in must be greater than what goes out. Start with your last three bank statements. Are there line items that don’t seem as important as they did a few months ago? How much of the outflows are going into savings? Don’t cut items from the budget completely. Instead, figure out how to reduce them. These do not have to be permanent cuts — just focus on getting to the other side of this crisis. That’s a much easier task than trying to reorient your budget in perpetuity.
Focus on income
Your lifestyle is ultimately derived from your income. If your income is in jeopardy, then building a moat around it, or finding a second source of it, needs to be a priority. Hone your skills, and rededicate yourself to your job. Make yourself essential. The best employees will be the last ones cut.
There are two ways to have more money: Save it or earn it. If you’re having a hard time finding ways to reduce what goes out, then find ways to increase what comes in. If you can’t protect your primary source of income, think about finding a second job. Or perhaps this might be a great time to think about starting a side hustle and creating your own secondary income.
Plan for emergencies
This year it’s a pandemic. In 2008 it was a real estate bubble. In the early 2000s, a tech bubble. There will be other economic events in the future that cause stress and volatility. If you’re stuck in an emergency, your options may be limited. That’s why preparing for one is so important. Take the lessons learned today, and apply them to your budget and lifestyle going forward. For most people, this starts with an emergency fund. Establish six to 12 months’ worth of expenses in a liquid account that’s easily accessible. Ideally, it should be invested with far less risk than the stock market. Having an emergency fund at your disposal allows you to make it through to the other side of any emergency with far less stress and the ability to avoid making any rash decisions with long-term consequences.
Continue to invest
If you’re lucky enough to be able to, do not stop investing. Market volatility provides an ideal time to “buy low,” as they say. Dollar-cost averaging is the idea of investing money at regular intervals to take advantage of price fluctuations in the market. When prices are high, your investment will buy fewer shares; when prices are low, your investment will buy more shares. This allows for greater growth potential and returns over time. It also helps avoid investing large pools of money, or “timing the market,” at inopportune times and participating to a greater degree in market losses.
During the month of March 2020, the performance of the S&P 500 was down 12.51%. During the month of April 2020, the S&P 500 was up 12.68%. If you panicked and decided to withdraw or stop investing after March, you would have missed a chance in April to recoup some of your investment losses. Investing is a long game. Those who participate the longest have the greatest opportunity to succeed.
Ultimately, when it comes to finances, focus on what you can control. Live within your means, and stick to a budget. Prepare for the future. Focusing on these guiding principles of finance will ultimately yield greater results — both personally and professionally.