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Financial Planning Amidst a Crisis

If you lose a job, or if a family member gets sick, how will you prioritize? There are countless things that could happen in someone’s life that would cause a cash crisis in the short term or potentially a longer term financial burden. You did not plan for this, and now that you are directly impacted and forced to make decisions. You MUST do something. So, what will you do first?

Tactical Retreat (Not a run away and hide)

In the military, I’ve heard the term “tactical retreat” used when a unit approaches a situation or circumstances drastically different than anticipated. This isn’t a turn and run away type of retreat … it is a purposeful step back, look at it, and then assess both the situation and the risk.

Ask: (1) what just happened? (2) What is in front of us? (3) How can we systematically address this? (4) How do we re-engage and move forward?

Assessing Wants and Needs in a Financial Crisis

You might be thinking: “We’re getting hit from all angles.”  Similarly, with financial planning, it is about assessing wants, needs and the cost of those wants and needs. Priority One, though, is meeting basic biological needs: food, clothing, shelter and protecting your family.

Wants are not priorities while in immediate crisis mode. For example, many households have more than one TV in their house. In a financial crisis, do we need cable television? Granted, you want to know what is going on, but generally speaking, you can do without it. We have four cars and two drivers … do we really need four cars? So, this is where you start categorizing and prioritizing your wants vs. needs. When you do this in crisis planning, you begin to see that the budget you previously operated under can run more efficiently under a new and different set of needs only – even if it’s temporary. 

If you were previously accelerating your debt payments – paying your car off earlier by doubling up on your payments or adding to your monthly mortgage payment – I may advise a client to pay only the required debt payment. With so much uncertainty, having extra cash on hand will allow you to better navigate the choppy waters for a few months. My best advice at this time is to only spend money on what you really need.

I’m also a big proponent of having an emergency fund, a cash reserve for an emergency. This way, you don’t have to go to credit or to high interest debt.  The main reason for having emergency money is so you can use it in a real emergency. This goes back to what our needs are. If you don’t have income and cannot make a mortgage payment, you’ll risk losing your home. But if you have, for example, a $20,000 reserve in your emergency fund, you can make your payment from there. 

Nobody Likes Uncertainty – The Case of the Covid-19 Pandemic

A fundamental trait of human beings is the dislike and discomfort surrounding uncertainty and the unknown. When we get out of our routine or comfort zone, things seem out of whack. We like knowing what we do, how we do it, and how it works for us. For example, the COVID-19 pandemic completely changed everyone’s routine, from my eight-year-old son to my retirees. As more and more people were hearing and reading sometimes-contradictory information, many felt there wasn’t clear guidance. People were seeking the truth and at times it seemed nobody knew what the truth was.    

Feeling like you can’t find the answer is scary, frustrating, and causes us to become emotional.  Remember that tactical retreat? It helps you figure out where you are and what is happening. Then at that point you can attack the problem rationally. Poor decisions are often times based on emotion and looking at things rationally is critical. When you take a step back, you minimize the initial emotional urge and will be able to more clearly see exactly where you are and where you need to go.

Understand Market Volatility

Early on in 2020, market volatility was frightening, mainly because the drop was sudden and very different from what we experienced in 2008/2009. In March, the stock market indices around the world seemed to plummet double digit percentage points on an almost daily basis. The yields on US Treasuries dropped to levels that seemed to rival the very best money market funds. Thankfully, the volatility and uncertainty today is better than it was earlier in 2020 – but still here and will remain present, as it always has.

Because volatility in the short term is inevitable, if you are either heading into retirement or are already retired, have 12 to 24 months of income in cash or a money market. Not only do you NOT want to sell when the market is down, you don’t want to be forced to sell either. There are tremendous opportunities for those with proper planning. Unfortunately, those without proper planning are prone to making decisions based on their emotions. Not having the right planner and the right team around them might make the road ahead more difficult to navigate.

Having a Plan Makes it Easier

I tell people all the time, “We do financial planning and investments, but always in that order.” As a firm focused on Financial Planning (very different than only providing investment recommendations), we address these types of risks with our MASTERPLAN®. No one could have ever really seen something like the COVID-19 Pandemic coming in the manner it hit the world.  

Granted, Bill Gates did a TED Talk in 2015 about how the next global crisis was going to be a pandemic and not a nuclear war, but even he couldn’t predict COVID-19 or its impact on the world economy. Though we don’t know when a crisis will happen, we do know something like this COULD happen so we need to be prepared for it. 

So, to sum it up, here are three things to remember if presented with a financial crisis: 

1. Take a Tactical Retreat – step back and assess the situation before moving forward, plan your attack from there…

2. Look for Opportunities – tax planning, harvesting tax losses or buying investments at a reduced cost are just a few examples…

3. Learn from this Crisis – if you have not done a plan, now is the time so you can address these issues with clarity and with guidance from a professional you trust and you know understands your goals, family dynamics, estate plan, income needs, etc.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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