How to manage your finances during a crisis

by Joe Hearn | Sep 28, 2021 | Investing, Risk

The world is an uncertain place.  Bad things happen.  No argument there after the last few years, right!?  Sometimes those disasters affect a wide swath of people.  For example, a global pandemic, a housing crisis, terrorism or a stock market collapse.  Sometimes you have the disaster all to yourself.  A job loss, divorce, illness or the unexpected loss of a loved one.  

Regardless of what form they take, most disasters or times of crisis have one thing in common: They tend to do a number on your finances. The stock market dropped more than 50% during the housing crisis of 2008.  Covid job losses in 2020 were in the tens of millions.  Two-thirds of U.S. bankruptcies in a typical year site medical issues as the key contributor.  How can you keep a crisis from ruining you financially?  Here are 22 practical ways to manage your finances before, during and after a crisis.

Before

Not surprisingly, the best time to prepare for difficulty or disaster is before it happens.  Here are a number of things you can start doing now to prepare for (or help prevent) a financial shock.

• Review your asset allocation and risk tolerance.  You want your money to grow and keep pace with inflation, but you don’t want to take more risk than is appropriate for your situation.  Regularly review your investments to make sure that your risk and allocation are dialed in.  
• Have a written retirement plan.  One important side effect of having a written retirement plan is that it gives you perspective in a crisis.  That perspective can help calm your nerves and keep you from making reactionary mistakes.  A good plan has a certain amount of unpredictability and volatility built in.  Knowing that your plan will work in spite of the current crisis can be a powerful calming agent.    
• Build a cash reserve.  Cash is critical in a crisis.  Many experts suggest that you set aside 6 months of expenses in a cash emergency fund, but that’s always seemed like a daunting place to start since surveys show almost half of America couldn’t cover a $400 unexpected expense.  So start with a few thousand dollars.  That’s enough to cover a major car repair or other unpleasant surprise without going into debt.  Once you have that set aside, add to it until you have enough to cover a month or two of expenses.  That would give you a cushion if you lost your job or had some other big disruption.  Then, if you’re able, keep building your cash reserve until you get 4-6 months of expenses set aside so you have enough to ride out a major crisis.  
• Tighten up your budget.  The fewer obligations you have, the more financially resilient you’ll be.  Most people have a lot of waste in their budget.  Trim the fat. Look for ways to delete, downsize, simplify and optimize.  This will free up some extra cash to add to your cash reserve and will make any remaining spending more sustainable even if your income takes a hit.
• Fixed vs. Discretionary expenses.  There’s nothing wrong with splurging now and then, but if you’re going to do it, make your splurges discretionary (e.g. travel) instead of fixed (e.g. an expensive mortgage).  In tough times, you can quickly turn off discretionary expenses, but you can’t quit making your house or car payment.  
• Get your legal affairs in order.  Don’t leave a mess for your family.  Make sure you have a will and powers of attorney and make sure they’re up to date and reflect your current wishes.  
• Review your insurance coverages.  What if you died or became disabled?  What if you had a major illness or needed long-term care.  Protect your family.  Make sure you have adequate life insurance, disability insurance, health insurance and long-term care insurance.
• Pay off debt.  Debt adds risk and reduces cash flow.  The less debt you have, the more financially resilient you’ll be.  Make a plan to gradually eliminate your debt and you will greatly increase your odds of weathering a financial storm.
• Get healthy.  A health crisis often leads to a financial crisis, because getting sick is expensive and can result in the loss of income.  Be proactive with your health.  It’s one of the 8 Habits of Successful Retirees.
• Do a pre-mortem review.  Think about the types of crises you might face and ask yourself “Could my finances withstand this?”  Look for weak points and vulnerabilities.  Try to anticipate what could go wrong and look for ways to strengthen your defenses.
• Hire an adviser.  You’ll be more likely to do everything listed so far if you have the help (and accountability) of a trusted, competent adviser.  

During

• Don’t panic.  The Navy Seals have a saying: “Under pressure, you don’t rise to the occasion, you sink to your level of training.”  That’s why I spent so much time on the “Before” portion of this article.  When bad things happen (and they absolutely will happen), take a deep breath and think about everything you’ve done to prepare.  Don’t make rash decisions.  Seek advice from your trusted advisers.  Handle your emotions.  Respond well.  Do what needs to be done.  Lead.  Take care of those close to you.  Have empathy for others in need and look for ways to help.
• Study the type of crisis you’re in and respond accordingly.  History doesn’t repeat, but it rhymes.  For example, the market crash in 2008 had similarities with previous ones.  How did those work out?  How long did they last?  What were common mistakes that people made?  How can you avoid the same mistakes?  Knowing history helps you to keep things in perspective and chart a logical course through the crisis.  
• Communicate effectively with your family.  Be honest and transparent about the situation so you can all be on the same page.  It can be as simple as “Hey, we’re going through a tough time.  We need to make some changes.  We’re going to get through this, but we need to take action.  Let’s have grace and patience with each other and come out stronger on the other side.”  
• Be data driven.  Review your plan.  What is it telling you based on the new circumstances?  Do you need to cut back spending?  Delay retirement?  Reallocate investments?  Change your Social Security claiming strategy?  Let the data be your guide.  Don’t make rash decisions, but when the data is clear, be proactive and don’t be afraid to stop, pause, shift, delay or change as necessary.
• Be optimistic, but realistic.  You will likely get through this if you do the right things and take the right actions.  But avoid false optimism that keeps you from doing what needs to be done.  Don’t be afraid to take bold action when needed.
• Use dynamic spending.  If you’re already retired when the crisis hits, dynamic spending can be a good way to preserve your nest egg in the face of investment volatility.  Read more about it here.
• Continue investing if you’re able.  This is especially true if the markets are dropping and you’re able to buy shares on sale.  But if you need that extra money to weather the storm, you can stop your automatic investments in things like your 401(K).  Just be ready to start them back up as soon as you’re able.
• Look for help.  With a major crisis, the government often passes emergency assistance measures.  For example, with COVID we saw special unemployment benefits, PPP, tax relief, stimulus checks and student loan relief.  Local organizations like food banks are also there to help.  Don’t be afraid (or embarrassed) to get help if you need it.  That’s why those things are there. 

After

• Review.  Do a post-mortem review of the crisis.  What did you do well?  What did you do poorly?  What did you learn?  What can you improve?  Enduring one crisis doesn’t make you immune to the next one, so take what you learned and use it to be better prepared going forward.
• Recover, rebuild and restart.  What do you need to do to recover?  What needs to change because of your new reality?  For example, if your credit report was impacted by the crisis, what can you do to start repairing it?  If you panicked and moved your investments to cash, how can you get invested again?  If you depleted your cash reserve, how can you start building it back up?  If you stopped things like 401(k) contributions during the crisis, start them up again as soon as you’re able.   
• Reevaluate your priorities.  Pa Ingalls of Little House fame once said “It’s an ill wind that doesn’t blow some good.”  One of the benefits of enduring a crisis is that it often gives you a better understanding of yourself and what’s important to you.  It forces you out of ruts and gives you a new perspective.  Use those insights to recalibrate and reorient your life around things that bring you meaning, purpose, happiness and fulfillment.  

Be intentional,

Joe