If I can find a silver lining in COVID-19, it’s that it has compelled us to press pause in our lives, allowing us to reflect on matters that our pre-COVID lives didn’t afford us because we were too busy.
I hope for many of you, you’ve had a chance to reflect on what truly matters most to you. I’ve found in my own life that this reflection happened naturally. The pandemic and the anxieties it has brought up, both in terms of our family’s health and our finances, has brought into sharper focus my priorities: providing a secure and comfortable lifestyle for my family. And by extension, it has made me reflect on my goals both in the short and long term, and whether I’m generating sufficient revenue sources to fund them.
We all need an easily accessible, liquid ‘rainy-day’ fund
Covid-19 has taught us that our short-term planning is critical. By short-term I mean the planning that relates not to our retirement funds, but rather, to a contingency or rainy-day fund, which is typically described as ‘3-6 months of fixed expenses.’ However, this amount can be different for others and it may be equal to 3-6 months of your income or more. It depends on multiple factors, such as job security, the nature of your employment and business, or preparing for maternity or parental leave. Many savers are discouraged by the notion of having six months of their income sitting in cash because of the opportunity cost or because it is simply unrealistic to have six months of income saved while living in one of the most expensive cities in the world. But we also see now more than ever why this is a necessity.
And it’s vital to the continued growth of your other goals as it provides liquidity in times of emergencies and opportunities. The last thing you want to do is be forced to tap into your long-term investments in a down market like we are experiencing. Having liquid cash on hand also provides you with the freedom and confidence to make financial decisions that can alter your future, like choosing a new career path, going back to school or starting a business. While a fund of six months of expenses might be difficult to attain, like other goals that you intend to realize over a longer time horizon, it takes time to build your rainy day fund, but it is worth the effort.
But this crisis holds another lesson that we would be wise to take note of. That is the importance of our long-term goals. One of the concerns I often hear from clients, particularly clients at the beginning of their career, is how can I plan for a future when I have no idea what that future might look like? What if my life is upended and my needs change? What if everything I thought I wanted changes? How can I possibly know how much I need to save for retirement when I don’t know what retirement may look like for my generation or for me as an individual? These are valid questions, particularly if you are young. It often prevents young people from taking action.
Why chasing a moving target is actually okay
Planning for the distant future is challenging because we are chasing a moving target. What we perceive as a long-term goal may change vastly even a year from now. Why? Because life happens. Pandemics happen too it seems. We may meet someone who changes the way we think about our future or we may change careers, perhaps not by choice. Planning for the future is not a linear process because life is not static. But that’s okay as long you have a financial plan that is built upon your values because those are unlikely to change. We can always shift, rebalance or reassess your plan or portfolio as life changes - in fact that is the very idea. The financial plan that you create with your advisor is a living document that evolves with you and your family. It provides a measuring stick by which you can gauge your decisions.
Understanding your cash flow is key
What I consistently recommend to my clients who voice these concerns is to focus on the areas of your financial plan that you can control, such as cash flow and savings, and complimenting your investments with products that provide cash flow for the unexpected. Understand how much of your savings you can allocate towards your goals at the present moment- even though this will inevitably change. The only way to do this is by truly understanding your cash flow.
If you find that you are spending as much as you bring in, work with your advisor to develop a plan that focuses on your behaviour towards spending, and whether you can unify some of your debt obligations to lower interest payments and free up cash flow. You might be surprised by how much money you are leaving on the table. This exercise holds true regardless of your income; it’s simply human nature to spend more as we earn more. Building in practices that instead allow us to save more, is key in reaching our goals.
Once you’ve determined this with your advisor, shift your focus to maximizing your investment returns within the investment framework and within the bounds of your risk tolerance and the time horizon for each goal. Diversify your investments with complimentary and alternative financial and insurance instruments that can provide cash flow independent of each other. In essence, create as many income sources as makes sense for your future self, by your present self. Pandemic or not, this will help mitigate the risk of depending on one or two sources of income to fund your goals.
All of this is within your power and control right now.
A financial advisor can help you build this framework with the benefit of the best knowledge, products and insight available in the industry. On top of this, a financial advisor can ensure you execute upon it. As we navigate these truly unusual times, I hope you take the time to assess and reflect on your approach to planning for the future. We’d love to help you.