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Frugally and Financially Preparing for the Unexpected
Over the last week, I’ve heard tons of questions and participated in lots of conversations about COVID-19. The topic of COVID-19 itself is pretty far outside the realm of what is covered on The Simple Dollar, as it digs deep into health care and public policy issues and The Simple Dollar sticks to personal finance and frugality issues. However, whenever there is a major societal challenge, there are financial and frugal impacts for all of us.
So, let’s discuss them.
In general, I tend to stick to the same basic principles in life through thick and thin. Rather than altering what I’m doing radically because of a crisis or a disaster, I try to live my life so that a crisis won’t upend things — or will alter things as little as possible. Thus, almost everything I describe below are things that I normally do during normal times and during moments of crisis. These principles and strategies are ones that I repeated during the financial crisis of 2008, during the severe flooding that rocked the area around where I live in 2010, and I’m using right now, too. They’ve helped during a lot of personal crises, too. I expect that these principles and strategies will be suited for almost every major crisis that comes along in my life.
Who should I trust for accurate information? In any situation, I tend to trust the people who have spent their lives working with and studying situations like these. In the case of an illness or pandemic, I trust doctors, medical scientists and virologists, not politicians or talking heads. In a natural disaster, I tend to trust engineers, building contractors and the like. Those people have been working with situations like this or studying situations like this for the entirety of their professional lives, and if anyone knows the situation, it’s them.
As an aside, it is never a bad idea to wash your hands often, minimize touching your face and stay at home when possible if you’re feeling sick as a way to avoid contracting and spreading many kinds of illnesses. Those are things we should all be doing all the time.
Now, let’s talk about finances and frugality.
When the unexpected happens, don’t rock the boat with your finances.
If a major unexpected event in life happens, whether it’s a widespread illness, flood, stock market crash or a personal loss, it’s almost always a mistake to make a major financial move in the heat of the moment. You should not sell your stocks because of what the stock market is doing today or what it has done over the last week or the last month. That’s a giant mistake that usually just locks in your losses.
So, if you have money in stocks right now, my advice is to sit tight. Ride the roller coaster. Pulling out money right now is nothing more than an extremely risky gamble. What about buying investments right now when the price is lower? That’s risky, too, but I view it as a lower risk than selling.
What if you need that money to live on? Many people are already in retirement but still have significant amounts of their retirement savings in the stock market. If that is your situation, then you need to speak to a fee-based financial advisor who can look at your exact situation and give you some guidance.
What if you’re not in any immediate danger, but the stock market is leaving a sick feeling in your stomach? Don’t look at it. Don’t sweat the day-to-day action. You are in the stock market for decades, not days and weeks. The only people that should worry too much about the daily action on the stock market are day traders and people in the financial industry — and I’m not talking to those folks. For everyone else, looking at the daily stock market returns is basically useless.
My investment strategy is simple: if I am not going to need the money for 10 or more years, it’s invested in something aggressive, like stocks or real estate. Because I don’t need the money for that long, the volatility of a day, week or month isn’t a big deal. I have lots of time to recover and have the power of compound interest work for me.
If I’m going to likely need that money within 10 years, it’s in something relatively safe and not volatile. Things like highly rated bonds and money markets are good choices for those time horizons.
What if you need to change things? The best approach is to change your contributions. If you’re getting close to the point where you’ll need the money in ten years, shift your contributions from aggressive investments to safer things. That’s the money you’ll tap in ten years. If you need to, you can start slowly rebalancing by gradually moving money out of riskier things and into safer things, but try to do it with additional contributions at first. In general, don’t rebalance during periods of high volatility. If the stock market has gone up or down more than a few percentage points in a day within the last week or so, wait to rebalance.
If your retirement savings are in a Target Retirement fund, you’re fine. Those types of investments self-balance over time as you approach retirement, so you don’t really have to worry about these things.
What I’m describing here is exactly what Sarah and I are doing with our retirement accounts right now. We’re not touching a thing. In fact, we’re barely looking at the stock market right now. That’s what you should be doing, too. Looking at daily stock market swings adds stress when there doesn’t need to be any.
Smart frugal principles help right now, too.
We’ve all seen pictures and videos and read stories about people stocking up on things like toilet paper. To some, it seems crazy. To others, it’s worrying and a nudge to also stock up.
Here’s how we approach this.
We tend to buy our nonperishable foods and household supplies in bulk and/or when there’s a sale (ideally both), regardless of what’s going on in the world. That means at any given time, we have a month or so worth of food items and household supplies for our ordinary life around our house.
Our bulk buys are only things we know we’re going to use. For example, the household supplies we buy in bulk are things like soap, toothpaste, floss, dishwashing detergent, laundry soap, toilet paper, and so on. If I see a good deal on those things, I buy them because I know we’ll eventually use them. If I see that we’re running even close to low on any of those things, I buy a bulk bundle of them at the lowest price I can find (usually the biggest version of the store brand at a warehouse club, but not always).
We do the same thing with a lot of food items — we buy nonperishable foods that we know we will eat in bulk. We always have lots of dry beans, dry rice, peanut butter, canned tomatoes (and, to a lesser extent, other vegetables, though we usually buy them flash frozen), dry pasta, flour, sugar and yeast (we bake a lot of our own bread products by hand or in a bread machine). When we see a really good sale on one of those items, we buy it. When we notice we’re getting even close to low on something, we’ll stock up on it.
Aside from the cost savings of this strategy (buying in bulk, buying store brands, targeting sales and doing it only with stuff we know we’ll use), if something were to disrupt our ability to buy groceries or household supplies, we’d be fine for at least a while.
What do you do if your cupboards are relatively bare? I basically encourage everyone who isn’t pushed up against the wall financially to gradually move to a bulk buying system like this one, where you buy nonperishable things in bulk that you know you will use before their expiration date. If you have an opportunity to do so now without crushing your finances, do it, but do it in a realistic way. There’s no reason to buy six months’ worth of toilet paper. Buy one large package of it (in store brand form), enough for a month or two, at the best price you can get. Do the same for other nonperishable items that you know you will use up anyway in the next few months.
Another valuable frugal principle to have is to make a lot of things for yourself, particularly food. The more adept you are in the kitchen, the less you have to rely on others to make food for you and the more money you save along the way. This also makes you less reliant on restaurants (and the health of restaurant workers and delivery people).
I don’t claim to be an expert home chef, but I can make a lot of things with complete ease. I did this mostly by making dishes (with variations) that I liked and my family liked over and over, until all of the skills involved became second nature. My family likes spaghetti with sauce, for example, and I’ve made that so many times that I can practically do it blindfolded. Along the way, I got very fast at it, figured out how to make it with lots of variations, and also figured out how to make it delicious, none of which were true early on. I also got very fast at cleanup.
That same thing is true for lots of family favorites, things like homemade pizza, homemade bread, tons of different soups and stews, tons of variations on eggs and omelets, and so on. Simply knowing how to do all of these things well and do them quickly means that I’m naturally more interested in cooking from home, since that’s more convenient and also far less expensive. It has the additional benefit of always being an option (as long as there’s electricity, of course, but then we’re beginning to talk about situations that there’s no real way to prepare for).
Another principle we follow is having a lot of finished meals on hand, stored away in the freezer for easy preparation. If I’m sick or otherwise incapacitated, I’m not going to want to cook. I’m going to want something as easy as possible to get calories in my stomach. We keep some prepackaged meals in the cupboard, but we really lean into preparing meals in advance and keeping them in the freezer.
If we make a big pot of soup, we make it even bigger and fill up some quart-sized containers of soup for the freezer. If we make a casserole, we make four of them and freeze the other three such that they can be pulled from the freezer and popped in the oven.
This not only has the advantage of giving us really convenient food that we made ourselves, but the cost of that meal is usually really cheap because it was made from bulk ingredients. We could buy the 10-pound bag of potatoes at the store, for example, when making a big batch of potato soup. We could buy the jumbo box of lasagna if we’re making four pans of it at once.
What if the unexpected is coming quickly? These strategies help if you have some lead time, of course, but what if you have very little lead time? Getting some prepackaged foods is fine, but just make sure that you’re not buying more than you’ll ever use before they expire.
There are a multitude of other smart moves you can make, both to prepare for the unexpected and to help your financial future at the same time.
Here are some additional specific things you should be doing in your ordinary life that really show their value in unexpected times.
Have an emergency fund. This isn’t something that most people can produce in a jiffy, but moments of crisis should be a powerful reminder of how useful it is to have an emergency fund. Simply put, an emergency fund is cash stowed away somewhere (usually a savings account) that you can put to use during any kind of emergency. I have a small emergency fund in cash in my home and a larger one in a savings account in a nearby bank.
Obviously, building one very quickly isn’t realistic for many Americans, but it should be a good goal to have, simply because of the protection it offers against the unknown and unexpected. Things like a job loss or a period of illness are much easier to handle with an emergency fund.
My strategy for building one is to set up an automatic transfer from your checking account to your emergency fund savings account, for a small amount each week. Make it $10 or $20. If you do $10 a week, you have $520 set aside after a year. If it’s $20, that’s more than $1,000. Then, never turn it off. Let it keep building, essentially forever. That way, after a while, you never have to worry about it being there.
What if you don’t have an emergency fund and are facing a crisis that requires cash? Unfortunately, in those situations, debt is usually the answer. If you have to put some expenses on a credit card or a personal loan to get through a very bad situation, that’s an unfortunate situation. However, you should aim to get that debt eliminated as soon as you can and, even more important, keep that experience in mind as you aim to build an emergency fund.
Constantly build new skills and relationships at work. Your goal at your job, beyond doing the tasks assigned to you and collecting a paycheck, should also be to build some strong positive relationships with people there as well as building skills you can use to get a better job someday. That should be part of your motivation every day at work – you do the tasks to make money now, you build skills and relationships to make more money later.
This helps in unexpected times because the more skills you have and the more relationships you have, the easier it will be to find work in an uncertain economy if you find yourself without work.
Yes, sometimes it will be hard to build good relationships in some workplaces. Don’t expect perfection – just remember that the perfect is the enemy of the good. Stick with being positive where you can and aim to lift people up rather than cutting them down, even when they’re not around. Help people out, especially when the effort you have to put out is much smaller than the benefit that the other person gets. (If you can do something in five minutes that will take someone else hours, just do it.)
Most people should not be in immediate danger of losing their job due to current uncertainty, but this is still a great strategy to have for any job you hold.
Minimize your recurring expenses. Take a look at every single weekly, monthly, quarterly, and annual bill you have and ask yourself whether it’s actually necessary. If it’s not, is it providing you any real value for the money you spent? If you’re not getting enough value, cancel it. If it’s a necessary bill, is there anything you can do to make that bill smaller? Call up the company that’s issuing that bill and see what you can do to trim it down or consolidate it.
The smaller you can make your recurring expenses, the easier it is to make ends meet on your current pay and the easier it is to survive if you have to take a lesser-paying position unexpectedly.
Eliminate expenses that aren’t memorable. My rule of thumb when it comes to expenses that aren’t strictly needs is that if they’re not memorable, then they shouldn’t recur. If I look at my bank statement and see a bunch of stops at the coffee shop and they all blur together and aren’t memorable, then I know I need to cut back seriously on those stops. If I see a meal eaten out and I can’t even really remember it, then I know I should eat out less often and save such events for special occasions. If I see an entertainment expense or a hobby expense and I have to struggle to recall anything about it, a real change is needed.
Again, the reason this prepares you for the unexpected is that it frees up some of your spending to put yourself in a more financially stable position so that you can survive getting sick, you can survive a job loss, you can survive whatever life throws at you. You are much more likely to survive the unexpected if you cut out the unmemorable expenses in your life and apply that saved money to building an emergency fund or getting rid of debt.
There’s nothing wrong with using money to do something you enjoy in a genuinely memorable and impactful way, but when you’re spending money on stuff that just fades away pretty quickly, there are better things to be doing with it.
You can start doing this immediately and it will have an impact very quickly. Look over your expenses for the last month. Which ones from two or three or four weeks ago do you barely remember or not remember at all? You should really cut down on those particular expenses going forward because they have no real positive impact on your life. They’re just dollars vanishing from your pocket, dollars that can do a ton of good when they’re used in other ways.
Unexpected events, big and small, are a part of life. While you can’t predict exactly what they are, you can expect that they will happen.
When times are good, you have an opportunity to get ready for the times when things aren’t quite so good. This way, when things take a tumble, you’re not caught in a panic with life changes that you can’t easily handle.
My thoughts, hopes, and prayers are with everyone working to combat the coronavirus outbreak. The best thing I can do to help is to be prepared myself, take simple steps to keep myself and others safe, and share sensible advice. That’s all most of us can do in most unexpected situations.