It’s anybody’s guess what the next few months will look like, but it’s abundantly clear that the uncertain times we’ve been experiencing are far from over.
Although it’s difficult to have to live in limbo, unsure of whether things will get better or worse in the coming months, it’s important to take a deep breath. Consider what you can personally do to create some form of stability in your own financial life right now.
Remember that what goes down, must come back up
I recently got off a call with a client of mine who asked me, “So this is what you meant by preparing yourself for the next downturn, huh?” Earlier in the year, she’d completed my online course about investing that went through the history of past market crashes and recessions. I warned my students that since we’d been experiencing the longest bull market in history, we were due for another downturn soon.
Now, I don’t have a crystal ball, because I certainly didn’t see 2020 unravelling like it has, but as any credible investing expert or financial resource will tell you, what goes up must come down. As proven by statistics from the past century, market downturns and periods of economic recession are cyclical. But so are periods of recovery.
The 1929 market crash and subsequent Great Depression were financially devastating for millions of people. Although it took years for the stock market and economy to recover, they did, which led to the 1950s economic boom. The same thing occurred after the recent 2008 market crash and Great Recession. Although many people suffered financially at the outset, not only was there recovery, but historic prosperity followed.
So, if what goes up must come down, what goes down must come back up. This too shall pass. Remember that.
Don’t make long-term decisions based on short-term emotions
What’s a key piece of advice you’d give a friend going through a breakup? “This isn’t the time to make any rash decisions.” When you’re in a heightened emotional state, making life-altering decisions is never a good idea. The same goes for making big financial decisions during uncertain times.
The only way to make smart choices with your money is by taking the emotion out of it. I know this is easier said than done, but it’s essential.
When the stock market started declining at the beginning of March, people started making all kinds of regrettable decisions with their money. They let their emotions take over, they panicked, and they started cashing out their investments for fear that if they didn’t, they would lose everything they had. Or, people started dumping their life savings into the stock market after hearing it was a good time to buy, without crafting a proper investment plan to guide them.
In effect, they made long-term decisions based on short-term emotions, whereas sometimes the best financial decision you can make is to do absolutely nothing. Doing nothing means taking the necessary time to reevaluate your financial situation and your goals, then waiting until you can make an unemotional and rational decision.
It could also mean literally doing nothing. If, before everything happened, you were focused on building up your emergency fund, and then all of a sudden you decided to dump your savings into stocks because you were afraid you would miss out on some big gains, you’ve made an emotional decision, not a rational one. Why not just stay on course and keep building up your emergency fund like you originally planned?
Ground yourself with tried-and-true financial advice
Lastly, one technique I’ve found incredibly helpful when weathering periods of financial instability is allowing tried-and-true financial advice to ground me. Here are some pieces of financial wisdom that have helped me stay calm during this storm:
1. Live below your means.
Don’t just live within your means, live below them. The only way to truly achieve your financial goals sooner and grow your wealth is to save more than you spend, cut non-essential expenses when necessary, and be more mindful with your money.
2. Build up an emergency fund.
Having experienced several bouts of unemployment, underemployment, career changes, and now a pandemic, I’ve never been more certain that a cornerstone of financial stability is having three to six months’ worth of your living expenses tucked away in a savings accounts for emergencies.
3. Don’t spend money you can’t afford to pay back.
Debt doesn’t have to be the enemy. Without it, most of us wouldn’t be able to afford to buy a new car or home. But by taking on debt, you’re promising to pay back what you borrowed. Don’t ever borrow more money than you know you can afford to pay back.