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Leaner Financial Times Ahead

It was tough to pick a topic for this week.  I don’t want this site to turn into the Covid-19 blog.  But at the same time, our planned upcoming pieces on career advancement and investing seem to be a bit tone deaf in the short run.  As such this week I’m going to do something a bit different and tell you what we are doing to prepare financially for leaner times ahead.

Covid-19, Leaner Times Ahead

The ramification of the virus, for anyone living under a rock, has been a massive increase in unemployment across the country.  Coupled with that many industries are struggling.  The stock market has even had a sizable pull-back.  So what am I doing about these events?

Safer Job Than Most

Well, I will start by acknowledging my privilege.  My job is relatively secure.  I work in a healthcare adjacent industry for a company with a huge amount of cash on its balance sheet.  I am in a bit of a short term non-business critical role, but at the same time, I am one of the people in the company that is considered business-critical long term.  I.E. in terms of job loss, if it occurs it’s probably because the ship is about to sink.  That seems unlikely given the company’s industry and balance sheet.

But all is not roses.   My company has a long history of cutting salaries when things get tight.  Add to that it is possible they could temporarily furlough non-business essential employees like myself.    Added together I do have enough risk that I need to keep my wits about me.

The Importance of an Emergency Fund in Leaner Times

Which brings me to the first important point.  I see many of my fellow bloggers taking advantage of the decline in the stock market as a buying opportunity.  Some are investing large sums of money now.  I conversely have deposited my normal amount, perhaps slightly higher due to fortuitous timing related to self-employment income.  Why?

Where Do You Get Money to Invest

Well the question becomes where do you get the extra money to buy the opportunity?  I have already made it clear I don’t believe in, nor keep, dry powder.  That really just leaves our emergency fund, rebalancing, or loans as potential sources of additional investment in this down environment.

Raiding the Emergency Funds to Invest?

Well, any one of these is feasible for us.  To begin with we have 1.5x expenses in emergency funds.   Reinvesting this could make a sizable increase in our stock holdings.  But let’s be honest, selling out of your emergency fund at this time would be a stupid thing to do.    So I believe my company is unlikely to go bust or do mass layoffs.  I could be wrong.  It’s not like I know the timing of every one of their current debts or a day to day picture of all revenue collection.      

The existence of that 1.5x expenses is no less justified today than yesterday, and perhaps more so since we are in the middle of a national emergency. Note our emergency fund is part of the safer investment category and is heavily tilted towards direct CDs and Series I savings bonds.   Our emergency fund is essentially just the portion of the safer investment category not locked behind a tax-advantaged account.   The return is also somewhat higher for most of this fund than typical due to the age of some of these bonds.  This is part of why we feel comfortable holding 1.5x expenses rather than the more typical 6 months.  Your mileage may vary.

Loaning Money to Invest

Similarly to not wiping out your emergency fund, one would have to be completely nuts to loan money on margin now to buy stocks.  There is no way to guarantee things won’t continue to decline, thus whipping you out.  Remember a decline with leverage can magnify your losses.  No loan here.

Rebalancing in Leaner Times

So what about rebalancing?  Well our asset allocation is shifting.  We were at 80 percent stocks 20 percent safer investments.   After accounting for our new money contributions that number is closer to 26 percent safer investments 74 percent stocks.  The thing is, constant rebalancing can be a drain on your returns.  Too frequent rebalancing can cause high trading costs, drive you to attempt to market time, and in general are less efficient.

Our Investment plan calls for new money to be used to rebalance so long as we stay within 10 percent of our target asset allocation.    This is to avoid the above costs of rebalancing too frequently.    Since we have yet to trip that circuit breaker, it’s not time to rebalance any significant amount of funds into stocks.  So in essence, we sit and wait. 

Will we hit the rebalance point?  Maybe.  But for now I’ll settle for continuing to pump all of our new investing funds into stocks.  A reminder, you should have an investment plan in place that outlines what you do during major stock declines.  You should follow that rather than give in to negative stock market news.

Non-Investing Actions: Travel

Beyond investing I am taking a few other actions.  We recently booked a flight and home for a vacation in mid-April.    This was a significant out of pocket expense to prepay.  It is highly unlikely we will be able to take the flight or even get to the home.    In light of Covid-19 both the airline and the home are offering us the ability to cancel with voucher for future travel.  And yet, I have yet to take either offer.

Why?  Frankly, I am engaged in a bit of chicken here.  If either the airline or home has to cancel on us, we will receive our money back directly to our account.  If we cancel we get a voucher.   Honestly, I suspect both are likely to cancel on us.  Moreover, I fear if things get bad enough those vouchers will be rendered worthless by the counter-party risk of airline and homeowner bankruptcy.  So I’d rather not take the chance.  Worst case we will cancel and take the voucher, but for now we wait.

Frequent Flyer Miles and Leaner Times

In addition to the above steps we are also sitting on a sizable number of frequent flyer points.  I was saving these up to book a set of first-class tickets for myself and my wife for our ten year anniversary.   Given the potential for this industry to go bankrupt given the current situation, I made a decision to cash out these points in other forms to ensure they are not devalued or even bankrupt to 0 value.   If the industry recovers I believe flights will be cheaper for some time.  Also given work travel I can build this number up again fairly easy should things change.

Spending and Donating Locally To Support the Community

I want to ensure you don’t just think I am a heartless person who is taking advantage of the travel industry when they are down.    While I am taking steps to get this money back for services we will never use, we are actively taking action to pump some money into our local community.   We’ve brought forward a few small business expenditures we had planned for the summer in hopes of keeping those businesses afloat.  We also continue our normal donation and foster care activity.   These organizations and people need your help in this time of need.   Don’t forget them!

Take-Out and Covid-19

We wanted to do the whole take out thing to support local restaurants as well.  Unfortunately, the risk of catching the virus through this was just too great.  We have some contact still with individuals with high risk for the virus.  As such for now we are regrettably not able to do this.  

Otherwise, life goes on.  I work from home as usual.  Any time I’m not working I’m with my family exploring the outside and inside. 

How are you preparing for the forthcoming financial leaner times? 

10 Comments

  1. Joe
    Joe March 23, 2020

    I’m rebalancing into stock more. I think it’s fine because we have 10+ years until we need the money.
    We’re not touching our emergency fund, though. Cash is king right now.
    We canceled our travel plan and we’re staying home mostly.
    Our budget is already pretty lean so we’re not tightening up yet. We’ll have to turn down heat and eat cheaper food to make any difference at this point. And it won’t be a big difference either.
    Best wishes and stay healthy.

    • FullTimeFinance
      FullTimeFinance March 28, 2020

      There is not a huge amount of fat in our budget either. What little there was got cut simply by closing all the non essential businesses.

  2. steveark
    steveark March 23, 2020

    We rebalanced too, I think that’s something everyone should do periodically or when their desired allocations move by more than five percent. But we also had a big cash bucket, with maybe ten years of normal expenses or fifteen years of minimum expenses. We decided that was too much so we moved half of that into stocks and bonds too. That still leaves us with a five to seven year cash bucket as well as a 1.5X emergency fund intact. None of that is a significant part of our portfolio so it really doesn’t matter if it is invested or not but it seemed like a good time to make the change.

    • FullTimeFinance
      FullTimeFinance March 28, 2020

      Sounds like you have a sound position going forward. Our cash bucket is almost entirely part of the emergency fund. That being said 1.5x is excluding severance, Rsu payout, unemployment, and any emergency spending reductions we could make. Ie I’m not too worried about cash flow.

  3. R
    R March 25, 2020

    Hey there — I formerly wrote as “Rich” for pennyandrich … started a new blog now that I’m home all the time. I remember we had a sort of debate about dry powder and market timing. I was bearish for a long time on stocks … going back to 2016/2017 … finally starting to get back into stocks now on the way down.

    Anyway, we are in the lucky category in that our jobs are secure during this crisis. Financially we should be ok as our spending is way down — no travel, restaurants, etc. The most difficult part for us will be psychological / mental. Staying sane with 2 kids who are now out of school. Also, we live in an apartment and basically have no outdoor space. Staying sane will be the hardest part but if we all stay healthy it will be worth it.

    • FullTimeFinance
      FullTimeFinance March 28, 2020

      Welcome back Rich. I hear you on the child sanity part. We have the three running around. I can only wonder what my teleconference coworkers think when they come by sounding like they are coming through the ceiling (my office is in the basement).

  4. Mr. 39 Months
    Mr. 39 Months March 27, 2020

    Like you, we’ve got a significant emergency fund, but Mrs. 39 Months really likes that. We rebalanced in January (selling stocks after 2019, buying bonds) which appears smart now.

    We invest in our 401Ks, and we put away abut $3K a month in post-tax investments. My plan is to continue to invest that in the stock market, since everything is “on sale” right now.

    As far as the other items go, we aren’t planning travel (sticking with our June & July plans) but we are ordering more take-out than normal (supporting our local restaurants) and doing what we can to support our neighbors.

    • FullTimeFinance
      FullTimeFinance March 28, 2020

      Too early to tell on June and July. I still have work travel scheduled then. We shall see. I hope it works out for you.

  5. Katie Camel
    Katie Camel March 27, 2020

    Initially, I bought more stocks, but I found out I’m getting hit with a huge Condo fee increase and an assessment. Since I hadn’t planned on budgeted for these additional expenses and don’t want to dip into my emergency fund, the extra investments will be reduced for the next 2-3 months. My job is stable and I don’t fear a lay-off, but you never know.

    Don’t worry about not getting takeout. Like you said, there are other ways to support your community.

    • FullTimeFinance
      FullTimeFinance March 28, 2020

      Ouch, bad timing on the condo fee. Any chance the community could petition the HOA board to delay?

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