Before corona (BC), our family of four had everything planned out. We were going to lead a simple, early-retirement lifestyle in the San Francisco Bay Area.
Our three-year-old son would attend preschool during the day while my wife and I would take care of our baby daughter. During my free-time, I would write on Financial Samurai, as I have been doing since 2009, and play some tennis to stay in shape.
Once our daughter turned six months old, we planned to go up to Lake Tahoe and escape for a month or two during the summer. We have the capability to escape for long periods of time because both my wife and I left our day jobs; me in 2012 and she in 2015.
Once the coronavirus hit, everything changed. Not only were we robbed of our freedom due to the shelter-in-place rules, we also at one point lost a lot of money in our investments. The sudden downturn was so swift, that I thought about trying to find a job again to bolster our finances.
Thankfully, the stock market rebounded from its lows in March. Although our family is ineligible for stimulus checks and enhanced unemployment benefits that are doing a great job to support our nation, we are thankful that our investments have recovered, for now.
Here are some ways our family is tightening up the budget and preparing for another potential leg down in the economy. I'll also discuss how we plan to take advantage of a bad situation and potentially prosper.
Financial Advice For Families During A Coronavirus Pandemic
1) We conducted a spending audit. My wife and I did a spending audit for the entire year and identified things to cut from largest to smallest. Before the coronavirus, we had never done an extensive spending audit because we had always saved between 20% – 50% of our retirement income before spending any money. That's right. Even in retirement, we still couldn't quit the habit of saving. But after the coronavirus hit, our retirement portfolios declined and the income it generated were also at risk of declining.
Given the S&P 500 had corrected by 32% at one point, we decided that we would also cut our spending by 32%. We decided to list out the most expensive items and come up with a game plan to cut. For example:
- Night doula ($8,000/month savings). Our 3-year-old son was still waking up 2X a night on average, disrupting our sleep. As a result, one of our regrets was not doing more sleep training. Therefore, we decided to hire a night doula for our daughter to provide more support for my wife, conduct some sleep training on our daughter, minimize the risk of Sudden Infant Death Syndrome, and allow us all to sleep more soundly. Because our daughter also had severe GERD, we wanted to keep the night doula on past the fourth month. However, once the stock market started crashing in March, we decided to eliminate this expense and suck it up.
- Food ($500/month savings). When you live in one of the greatest food cities in America that also pioneered food delivery, it's hard not to get hooked on ordering food, especially during a global pandemic. Once the shelter-in-place rules were enacted, our food expense went up by over $1,000/month. We figured, it was better to pay up for good food and tip a delivery person than one of us risk going out and getting the virus with two young kids at home. After gaining several pounds, we switched more to grocery delivery to make more food at home. By switching more to grocery delivery, eating less, and eating leftovers three times a week instead of hardly ever, we were able to reduce our food budget by ~30%. Further, I'm back down to my fighting weight of 167 pounds at 5'10”.
- Reduced non-essential spending by 90% ($1,000+/month). Besides buying baby necessities, we have not bought anything for ourselves in over two months. The only non-essential item I bought was a small slide and a push car for my son's third year birthday. Given the playgrounds were closed, I felt it was a good idea to build our own.
- Automatic savings ($1,950/month). Although our preschool charged us for a full month's tuition in April, even though school was closed, it agreed not to charge us for May. We could have not paid for April tuition, but we didn't have the heart given the owners sent us an impassioned letter asking for help. Perhaps they will refund parents the tuition given they have received Paycheck Protection Program money.
2) We conducted an income audit. When neither parent has a regular day job, going through a financial downturn can get a little nerve-wracking. We were already paying $2,380/month for unsubsidized health care. Thankfully, the preschool expense was temporarily eliminated.
An income audit consisted of identifying areas most at risk. We assigned each source of income a grade, an estimated probability of seeing an income decline, and an estimate of the actual income decline. For example:
- Dividend stocks: B+ grade. 30% chance of income decline. 20% decline in dividend payments for six months. We invest in the S&P 500 index along with large-cap, high quality, dividend paying stocks.
- Municipal bonds: A- grade. 15% chance of income decline if the government doesn't aggressively buy city and state debt. 30% decline in coupon payments for one year. We invest in California municipal bonds that earn income state and federal tax-free.
- SF rental property: A grade. 20% chance of income decline. 20% decline in rental income with an 80% chance of eventually being made whole. We have two SF rental properties rented to long-term tenants who either work in tech or have an essential job.
- Commercial Real Estate: C grade. 70% chance of income decline. 30% decline in rental income with a 50% chance of eventually being made whole in two years. We have 15 commercial real estate crowdfunding investments in one portfolio. Most investments are multi-family housing, followed by office buildings. Two of the 15 investments are in hospitality, which have taken a massive hit due to shelter-in-place rules. Lucky for those who have not yet invested in commercial real estate yet, I see plenty of opportunity.
After conducting an income audit, we calculated that our retirement income had the potential of declining by 20% – 30% for 3-12 months. This estimation gave us the motivation to immediately cut our expenses by 30% to live off our income and not touch principal.
Below is our estimated passive monthly income for the year before COVID-19. Post COVID-19, we estimate losing potentially $50,000 – $80,000 a year.
3) We focused on ways to generate more income. One of the greatest reasons why America is so great is due to endless opportunities. The internet has democratized access to information, education, and money-making opportunities. So long as you have internet access, all of us have the ability to learn new things and make money.
Money stopped being a motivating factor for us after retiring early. However, maintaining our wealth is very important since we have two young kids to support and we're stuck living in expensive San Francisco for now. Therefore, during the pandemic, we identified the following income opportunities and took action:
- Financial Samurai. I've been publishing three personal finance articles a week on Financial Samurai since July 2009. I decided to increase my output to four articles a week during the pandemic. All the articles are written based on firsthand experience, predominantly by me, a 20+-year-finance veteran. As a result, the site has grown into a trusted brand in the personal finance space that consistently attracts advertisement opportunities.
- Bought more dividend stocks. After writing my stock market bottom prediction post in March, I decided to buy more stocks during the sell-off. I couldn't properly time the bottom with all my capital, but I did manage to buy over $100,000 worth of the S&P 500 in March in my taxable retirement account and $30,000 in my daughter's 529 plan.
- Hunt for more rental properties. Real estate prices move much slower than stock prices due to transaction costs, inspections, and financing needs. Regardless, I'm currently aggressively searching for real estate deals from property sellers who are the equivalent of stock sellers when the S&P 500 was below 2,300. These “Doomers” are hard to find, but they are out there. I got preapproved for a mortgage in order to amass as much capital as possible to make a no-financing contingency offer. I believe the easy recovery money has been made in the stock market. The biggest opportunity is now in real estate.
Taking Action Until The Recovery
When chaos strikes, it's easy to feel paralyzed and do nothing. The general advice is to sit tight and hang on until an eventual recovery.
Instead of doing nothing, I encourage everyone to figure out where you can cut excess spending, estimate how much of your income will get hit, and aggressively look for financial opportunities.
Many fortunes are made during times of uncertainty. As the saying goes, “never let a crisis go to waste.” Use this opportunity to change your future for the better!
About the Author: Sam worked in finance for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.
Sam started Financial Samurai in 2009 and has grown it to be one of the largest independently owned personal finance sites in the world. You can sign up for his free private newsletter here.