“Where focus goes, energy flows.”
They say the grass is greenest where it is watered. Not unsurprisingly, the same adage is true when it comes to your finances. Where you devote your time and attention are where things tend to improve. But, there are some aspects of our financial lives that we can control with our actions, and others we cannot.
Unfortunately, no matter how diligently we watch the headlines, none of us can control what will happen with the stock market. We can, however, review (and possibly improve) the other areas of our financial lives such as budgeting, spending, saving, and insurance coverage.
What actions can you take in a volatile market to improve your financial situation?
1) Track Your Spending
The sudden economic downturn has financially impacted each of us in different ways, but what it has encouraged on a large scale is a re-evaluation of current spending habits. The majority of us know we need to spend less than we earn, but sometimes we don’t win against the limbic system in our brain—the part responsible for emotional behavior—and overspend anyway. Other times, our hurried and busy lives distract us from how much we are actually spending and saving, which is why now is a great time to take a closer look.
As a result of the COVID-19 pandemic, business closures and social isolation have forced many of us to go without certain luxuries we used to spend our money on such as eating out, making unnecessary retail therapy pit-stops, and even getting our hair and nails done. Has this experience revealed any excess spending habits you may have slipped into before the quarantine?
If nothing comes to mind right away, perhaps a look at your bank and credit card statements can help you identify any areas where you’re overspending. Maybe you’re still subscribed to the Harvard Business Review, but never read it. Perhaps one of your children is old enough to take over certain responsibilities, such as walking the dog, that you previously paid a service provider to handle. Take note of transactions that no longer serve you or don’t align with your current needs. Can you cut them out, if even temporarily?
If all of this sounds overwhelming, look into downloading a money-tracking tool like the one available on your personal wealth management site to help you get an idea of the bigger picture. Once you have identified and eliminated the areas of excess you can, don’t stop there. Keep tracking over the next few months (at a minimum) to make sure nothing falls through the cracks.
2) Check Your Savings Rate
One of the main reasons you’ll want to eliminate excess spending is to be able to continue saving and investing while assets are able to be purchased at a depreciated price. A more concentrated position will allow you to capture additional gains when the market turns around.
The first step here is to identify your current savings rate. How much of your gross annual income are you allocating for retirement and other financial life goals? Second, check with your financial advisor and ask them if you will still be on target to reach your financial life goals at your current savings rate? If not, you may choose to make some adjustments.
The reality is that the downturn is causing certain individuals—specifically those with compromised or truncated timelines—to rethink certain elements of their financial plan. For example, individuals who were planning to retire in the next few years may decide to continue working until the market turns around. Others may choose to retire anyway, but try and live on less income (that is, withdraw a lower percentage from their portfolio each year) while the market is low. Those with longer timelines may try and accelerate their savings to purchase more securities while they are being sold at a temporarily lower price.
The point in checking your savings rate now is three-fold: (1) to make sure your contributions are enough, (2) to check and make sure you are still on track to reach your planning goals, and (3) to decide if you should try and invest more while the market is down.
3) Review Your Insurance Policies
So often investors are overpaying for policies that don’t meet their needs. Or they believe they are covered for certain liabilities that they are not. These gaps in coverage or understanding can expose you to grave risks that could potentially threaten your financial security. When was the last time you reviewed your policies?
Are you driving significantly less working from home during this pandemic? Some auto insurance providers are currently offering discounts as a result. Additionally, keep in mind that auto insurance providers change rates all the time. Shopping around for a cheaper premium while you have some extra time on your hands could save you money over the next six or twelve months until the policy renews.
Homeowners coverage is a policy we don’t typically think of adjusting. However, as the value of your home increases due to repairs, upgrades, improvements, or simply just inflation and the cost of living, you may need to consider increasing coverage on your home.
You will also want to review your deductible. Having a low deductible on your home policy generally means higher monthly payments. And since insurance companies generally increase rates after you file a claim, you may be hesitant to file a claim under a certain dollar amount anyway. Consider increasing your deductible to save on your premium.
Personal Umbrella Policies
Personal umbrella policies are supplemental to auto and homeowner’s insurance policies and seek to protect your other assets should you be sued for damages or injuries. These are popular amongst high net-worth individuals, families with teenage drivers who are insured under the parent’s auto insurance policy, and individuals in professions at a high-risk of legal actions such as physicians worried about medical malpractice suits.
Keep in mind, though, that umbrella policies are not the catch-all policies many individuals believe them to be. In some states, they do not protect the equity in your home or assets kept outside of retirement plans. Check your policy to ensure you are getting the coverage you need at a price that aligns with that coverage. If too many of your assets are exposed to liability risk, you may consider structuring them differently for protective purposes.
In your finances, as in life, wherever you devote your energy is where you can anticipate seeing the most change. If you try and focus on elements outside of your control—such as the stock market—you will likely be neglecting the areas that could use improvement.
Even if none of us anticipated how different our lives would be as a result of this global pandemic, we can still take action today to protect our health, wealth, and the businesses we have worked so hard to build.
As always, the team at RiversEdge Advisors is here to support you through these challenging times. Should you have any mounting concerns as a result of these circumstances, or simply wish to reach out to extend a friendly “hello,” we’d love to hear from you.