Written by Dr. Richard Laudon
The financial impact of COVID-19 has been devastating for many people throughout the world. In articles and research focused on personal finance, it is often reported that most Americans would not have access to four hundred dollars in case of an emergency. Ironically, this situation existed when unemployment was at historic lows and the economy was booming according to the media. No one can image the extent of this current fiscal crisis on our society as we undergo a period of severe economic instability, which has not been experienced since the Great Depression. With tens of millions of people out of work and our health system overwhelmed with COVID-19 patients, our country is in a state of semi-paralysis. As life gradually settles into a new normal, financial uncertainty will remain a constant in our lives. The true reality is that financial insecurity is a persistent variable, which can trigger a primitive fight or flight response to any perceived threats to our own personal survival.
What can we learn from these unexpected devastating events? One insight is another pervasive epidemic which is often unrecognized by most Americans. From preschool to post graduate studies, money management skills are rarely part of the curriculum. The result has been financial illiteracy. Our wealth management industry has created a system that can be more beneficial to their bottom line than to their clientele’s net worth. From planners, brokers, insurance agents and others in the alphabet soup of advisors, there are often many undisclosed incentives that are contradictory to the goals of their clients. An example of this conflict is in the realm of our retirement programs. Legislation from the previous administration had focused on a fiduciary standard for professionals involved in the co-management of any individual’s retirement accounts, but current governmental action has been able to modify this mandate. Simply stated, the fiduciary standard means that your adviser puts your needs FIRST, while the newer proposal is more consistent with the more established suitability standard. In this latter concept, you, as well as your adviser, can benefit from their recommendations. Due to the lack of clarity, most retirees are unaware of this subtle but significant difference in these standards.
The combination of the pandemic, long-term economic inequality, and social unrest has created a nightmare for many families especially those with lower incomes. Today is not the day to find fault with your previous financial miscues or their potential consequences. The past is the past. Today is the day to reassess and reorient your thinking so that you can face any challenges ahead of you with renewed confidence. Without the appropriate knowledge and guidance, we are all vulnerable to making mistakes and missing opportunities for achieving financial independence. I learned my lessons from the School of Hard Knocks. My own journey began with a major setback, when my financial advisors, who were highly recommended by a colleague, proved to be incompetent. My investments and financial health suffered because of their poor guidance. Despite my losses in money and personal pride, this experience was a positive turning point in my life. My Eureka moment occurred when I realized that if I was going to lose money, I was going to do it myself. In taking responsibility for my financial decisions, I had achieved a defining moment in my successful journey to financial independence.
In retrospect, my first step should have been to have a plan, any plan. Without any goals or realistic expectations, I wasted valuable time and money by blindly turning control of my financial destiny over to my financial advisors. Ultimately, each of us will design our own plan, based on our life experiences and our acquired knowledge. Your plan will need certain fixed rules that you can rely on but must also allow you the flexibility to make appropriate changes over time. The earliest templates of my own unwritten plan evolved out of crisis situations rather than from a comprehensive, well-researched strategy. My initial mindset to any financial problem was negatively impacted by my overly impulsive and over-reactive responses. As Ben Franklin has often been quoted, “By failing to prepare, you are preparing to fail”.
Our first lesson will focus on a system from a book, “The Index Card” by Helaine Olen and Harold Pollack. This specific book is an excellent introduction to money management concepts for those individuals who are beginning or reassessing their plan to achieve their own financial dreams. Your task is to write a first draft of your own financial plan on a small index card. As we begin our own journey together I will also share my own list, which has been modified because of insights gained from these authors. The creation of a financial plan will be your own defining moment in understanding the art of money management since it will represent a specific starting point. The act of writing it down on paper gives your plan structure and benchmarks to judge your progress. Although there will be changes over your lifetime, this blueprint will help you to achieve your own personal and financial goals. The utilization of an index card is to make your plan as simple and concise as possible. My index card, with some pointed comments, which will to be explored in subsequent articles, includes the following:
Financial Insights — Index Card Format*
1) Design a budget, which creates a surplus (Actual income minus spending = savings)
2) Save a realistic percentage of your income (Any percentage which increases on a yearly basis is acceptable)
3) Pay yourself first by using an automatic withdrawal system (It is better than an end of the month transfer of money, which should be designated to a specific savings category ranging from an emergency fund to a retirement fund)
4) An investment strategy, using a dollar cost averaging approach, with money invested into low cost index mutual funds/ETFs. (Need to develop an understanding of investment concepts such as compounding, diversification, allocation, long versus short term investing, regression to the mean, rebalancing, other)
5) Understand your retirement options as an employee or as a self-employed individual and begin contributing ASAP (Be cognizant of institutional/fund policies, fund choices and overall expenses)
6) Use credit cards as cash and not a loan (Eliminate credit card debt ASAP because their interest rates are exorbitant and a major roadblock to your financial independence)
7) Buy a home when fiscally possible (A home has many advantages from forced savings to tax breaks but be aware of other expenses such as insurance, property tax, and maintenance)
8) Have the appropriate insurance at the appropriate time (Insurance options, which can range from disability to term life insurance are important safety nets in case of an unexpected personal disaster)
9) Co-manage your financial destiny with an advisor, who is committed to the fiduciary standard or manage your money yourself with some outside assistance (No one has expertise in all areas of money management but be a cautious consumer)
10) Focus on your health (Since a health crisis is often cited for a person’s financial demise, pro-active strategies regarding diet, exercise, sleep, and stress management should be part of your overall plan)
11) Be gratuitous with your money (One of the benefits of financial independence is the potential to help others and it also has a beneficial impact on our physical and mental health)
* Take responsibility for your actions. You and only you are responsible for your money management decisions. Learn from your mistakes because there will be many on the unpredictable road to financial freedom.
The guidelines from the book, “The Index Card” and my own personal perspective will hopefully motivate you to begin to collect your own thoughts and aspirations. In future communication, we will explore these areas and help you to become a better decision-maker in the wild world of finance. At this juncture, I want to emphasize that I have no ties to the financial industry. My goal is to simply eliminate or to at least minimize the negative impact that financial illiteracy has had on ourselves and our society.
In summary, the COVID-19 crisis has challenged everyone’s financial situation whether rich or poor. In times of uncertainty, we need to step back and reflect on our own situation. As stated by John Maynard Keynes, “try, fail, analyze, adjust and try again” is an insightful appraisal of the ups and downs that we can expect to encounter on our own journey to financial independence as well as life. Denial is not an option in dealing with your finances.