Congratulations for surviving the year-long month of May! Let’s do it again in June. Hopefully, our nation will find a way to come together.
Before the coronavirus, 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 and softball 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.
Once the coronavirus hit, everything changed. Not only were we robbed of our freedom due to the shelter-in-place rules, at one point, we were down over $600,000 in our equity investments alone. The sudden downturn was so swift, that I even thought about trying to find a job again to bolster our finances.
Thankfully, the stock market rebounded from its lows in March and I’m no longer thinking of going back to work. Although our family is ineligible for stimulus checks and enhanced unemployment benefits that are doing a great job to support our nation, we are at least thankful that our investments have recovered, for now.
Here are three things our family is doing to ensure that this latest crisis doesn’t destroy us. I recommend you do these three things too so that we may all potentially prosper in the end.
Three Things Every Household Should Do Now
1) Conduct 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.
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%. So long as the economy looks dire, we will stay conservative with our spending.
We decided to list out the most expensive budget items and come up with a game plan to cut. For example:
- Night time childcare ($5,000+/month savings). Given our 3-year-old son was still waking up 2X a night on average, we hired a night doula to help with night time feeding, general support, and sleep training for our daughter. A night doula was instrumental in helping both of us sleep more and help lower the risk of Sudden Infant Death Syndrome (SIDS). Because our daughter had acid reflux, just like our son, she wasn’t a good sleeper. However, once the stock market started crashing in March, we decided to eliminate this huge expense and suck it up. Although it is rare for both kids to sleep through the night, getting rid of this expense feels fantastic.
- 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 tempted by food delivery, 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.
- Reduced non-essential spending by 90% ($1,000+/month). Besides buying baby necessities, we have not bought anything for ourselves in over three months. The only non-essential item I bought over $25 was a small slide, a small basketball hoop, and a push car for my son. Given the playgrounds were closed, I felt it was a good idea to build our own so he wouldn’t feel too deprived of fun and normalcy.
- 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 as long as the school remains closed. 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. I hope they got some PPP money, but we haven’t been able to get an answer yet.
Conducting a spending audit will make you feel much better about your finances because it feels good to take action. You’re not just some helpless person who can’t do anything to ameliorate a bad situation. To make things more fun, try a no-spending challenge game together.
2) Conduct An Income Strength Audit
An income audit consists of identifying income sources that are most at risk. Assign each income source a letter grade for defensibility, an estimated probability of seeing a decline, and an estimate of the actual income decline.
We reviewed and updated our existing retirement income streams recently. Here are some income audit example:
- Dividend stocks: B grade. 30% chance of income decline. 20% decline in dividend payments for six months.
- CA Municipal bonds: B+ grade. 15% chance of income decline. 30% decline in coupon payments for one year.
- SF Rental property: A- grade. 20% chance of income decline. 20% decline in rental income with an 80% chance of eventually being made whole.
- Severance Negotiation Book: A grade. 30% chance of an income decline, but a 70% chance of an income increase given the mass layoffs and people looking to be more strategic if they are at risk. 20% decline in income for three months if there is an income decline.
After conducting an income audit, we calculated that our retirement income has the potential of declining by 20% – 30% for 3-12 months. This estimation gave us the motivation to immediately cut our expenses by ~30%. If our income doesn’t decline over the next 3-12 months, then we will have stretched our savings. If our income does decline, then we were prepared.
After analyzing all your income sources, figure out which sources can use more help. Also look for investment opportunities.
3) Focus On New Ways To Boost Income
It’s important to always figure out ways to boost income and wealth. Many great businesses were created during the 2008-2009 financial crisis. I’m sure many great businesses will be created today.
To boost wealth, first start with the easiest opportunities and work your way up. If you have a day job, the easiest opportunity is to do more work and be more visible. Employers are looking to cut further and many of those jobs that have been eliminated are never coming back.
During the pandemic, I 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. Why not write more and be more entrepreneurial? I made an announcement in my newsletter that I would “run through the finish line.” As a result, I’ve decided to publish four articles a week until the lockdowns are lifted. Not only is there an endless amount of things to talk about, there’s a strong correlation with effort and reward.
- 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 and $5,000 in my son’s 529 plan. Although I’ve sold all the stock I bought in March to de-risk, the stock I bought in my two 529 plans remain.
- 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 2,400. 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.
- Create another digital product. My severance negotiation book is one of my best investments that has also provided the most amount of value to buyers. Every time I get feedback about how someone got a severance up to 1,000X greater than the cost of the book, I get pumped! I should create another product given I have the platform. It’s just not easy to get the motivation to start. Here is a recent book testimonial that reminded me I should create more.
Hi Sam, I was just laid off today and start my new gig (with a raise) on Monday. Hard to believe I was just paid a $80K severance for a job I was planning on leaving! AND I got it during a pandemic.
I follow many of your philosophies (got my first house through a love letter, haven’t paid a broker in three real estate transactions and am a big believer in the side gig) though I am not nearly as disciplined as you. Also too nervous to leave day jobs for the side gig, even though the side gig made more money for us last year than me and my husbands day jobs combined.
Anyways, the engineered layoff was a first for me. I had bought the book for my sister a few years ago. I was excited to dust it off last month. The book was perfect. Just wanted to say thank you.
- Start another website. I have a couple other websites that bring in around $1,000/month semi-passively for the past 10 years. These websites are updated about once a quarter on average. As a result, the income is not included in my passive income reports. I should not only put more muscle behind these websites, I should also start a new one. For those who’ve been waiting to finally start their own website, now is the time. Not a day goes by where I’m not thankful I didn’t start Financial Samurai during the last crisis.
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, analyze your existing income sources, and aggressively look for new financial opportunities.
You will feel great taking action.
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!
Stay On Top Of Your finances
During times of uncertainty, it is more important than every to stay on top of your finances. To do so, the best free tool to use is by Personal Capital. In addition to better money oversight, you can run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees and whether you are properly allocated based on your risk tolerance.
After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. There’s no rewind button in life. Make sure you have your finances in order.
Readers, what are some things you are doing during this latest crisis to improve your life? Have you tightened up spending? What are some specific ways in which you’re boosting your income and your income sources?