This article is part of a series on personal finance during the coronavirus pandemic. Please check out the Coronavirus and Your Finances Series (link will open in a new window).
Don’t set yourself on fire trying to keep others warm.
I recently had a reader, “Lyra,” contact me after she read my article on what to do with your CARES Act coronavirus government stimulus check.
I’ve been trying to think about what buckets need to be taken care of before I can help others, without worry that we didn’t take care of our own needs first. It would be great to have a post that walks people through what to earmark before spending. For example, a large co-pay for a hospital stay isn’t in most emergency fund totals, but probably should be included now. Are there other things you can think of?
This is a great question. Just as you do not want to raid your own retirement accounts to pay for your kids’ college, you also do not want to give to others if it is going to jeopardize your own financial security. It does you no good to help someone else only to then create a situation where you are dependent on someone else to help you out. That only creates a vicious cycle.
How to Think of Potential Unaccounted for Expenses During the COVID-19 Pandemic
The way I think about how to shield yourself from unexpected expenses is to think about worst case and work your way down the OSM (“oh **** moment”) scale:
- Losing your job. If you haven’t reached retirement (or retired and are rethinking the retirement decision due to the performance of the stock market during the coronavirus pandemic), then your income is what is going to keep you afloat. Yes, the S&P 500 has dropped 20% since the beginning of 2020 as of 10:30 AM EDT on March 30, 2020 (which makes the article I wrote in 2014, “Do You REALLY Know How You Would React if the Stock Market Dropped by 20%?” pretty prescient), but, if you’re working, then, unless you’re having to rethink your FIRE (financial independence, retire early) plans due to the COVID-19 pandemic, you will have time for the stock market to recover. I don’t know when or how quickly it will recover, but it is my personal opinion that, given that the driver of the drop was a (I hope) one-time event, the market should recover. So, you need to have enough money in liquid assets – an emergency fund to weather the storm if you lose your job. Yes, the CARES Act provides more unemployment relief than you would normally receive, but it is limited. It maxes out at $600 per week for 39 weeks. Given that the average income in the United States in 2019 was $48,672, that’s still a 36% income shortfall (on average). The government stimulus check will help a little with that shortfall, but not completely. Personally, I’d want to have at least 12 (and preferably 18) months of expenses set aside. My article “Cracking the Whip on Your Money” can help you determine your necessary expenses that you will need to cover.
- A massive health issue. You don’t want to get socked with a bill for a COVID-19 worst case scenario – a long-term ICU stay followed by recovery – that you cannot afford to pay. The Kaiser Family Foundation estimates that the average cost for a person who needs COVID-19 treatment and has health insurance provided by an employer will be about $9,763. While some health insurance providers are waiving the copays for tests, they are silent about copays for subsequent treatments. The safest play right now is to check your health insurance. Look for your maximum out of pocket costs in your health insurance. For example, the company I founded and still serve on boards for, provides us with the United Healthcare Choice Plus plan. It’s a high deductible healthcare plan with a health savings account, meaning that we have a higher health insurance deductible, and are able to utilize a health savings account to either pay for our health care or to use as a backdoor tax-advantaged retirement account. While we have a $3,000 family deductible, we also have a 20% copayment, and our family out-of-pocket limit is $7,150. After that, the insurer pays our bills. This resets annually. The way that we planned for that maximum is to set aside enough money each month in our side accounts so that, at the end of the year, we’d set aside enough to max out our health savings account plus the maximum out-of-pocket expenses. We do that a year in advance, so this year’s expenses ($7,100 for our health savings account plus the $7,150 for our maximum out of pocket expenses) were taken care of: $1,187.50 per month.
- If you are REFIREd, a loss of tenant income. This one is our biggest financial risk. We achieved PIRE through having a portfolio of rental properties. While I still think that, due to the socioeconomics of our tenants, we’re reasonably protected, I’d be naive to think that we’re not going to have tenants who are impacted by the coronavirus pandemic. We are debt free, so we will not have to worry about making mortgage payments, but we still have other real estate investment expenses to account for, such as insurance and property taxes. Since all of our tenants are also now in a shelter in place order, they’re discovering all of the “idiosyncracies” of our properties and hitting our property manager up for repairs, so I expect our repair costs to go up now that our tenants are spending a lot of time at home. The HUD moratorium on foreclosures and evictions puts banks and property owners on the front line of bearing the brunt of the economic impacts of the COVID-19 outbreak, and 50% of landlords are “mom and pop” owners like my wife and I, who are not corporate owners. Fortunately, we have a amazing property manager, so I expect our impacts will be lower than do-it-yourself landlords, but we’ll get hit, too.
- Reduced dividends. Many retirees and early retirees (see here, here, and here) leverage dividends as an important part of their retirement income streams. That stream is already starting to dry up, and probably will continue to do so in the future. Just like advice for personal finance, businesses are starting to hoard cash, which means that, in my opinion, dividend payouts will continue to decline. If you’re a retiree, this is going to be the equivalent to a job loss. Furthermore, if you have to sell stocks to cover expenses because your dividends have been cut, you’re hitting your savings doubly, as you’re reducing the basis on which future dividends will be based. The average S&P 500 index annual return without dividends from 1970 through the end of 2019 is 7.37%, while the total return, with dividends reinvested is 10.6%. That means the average annual dividend yield for the S&P 500 is about 2.3%, or about 57.5% of a standard 4% safe withdrawal rate. Having to withdraw during a downturn is one of the biggest drivers of sequence of returns risk for retirees.
- Moving somewhere cheaper to make your money last longer. If you are a renter, and you’re coming up towards the end of your lease, you may want to think about moving somewhere cheaper to make your money last longer. This could be a cheaper housing situation or a completely different city if your job allows you to work remotely. Don’t forget to add up moving costs if you are going to pull this lever.
- Needing to take in a loved one. Where I live, in Dallas County, Texas, clusters of outbreaks of COVID-19 have appeared in nursing homes, causing the county commissioner, Clay Jenkins, to advise on March 29, 2020, that it may be wise to take nursing and long-term care patients home rather than have them stay in affected facilities. Clusters of outbreaks in nursing homes and long-term care facilities are happening nationwide, which may force you, if you have a loved one in such a community, to decide that you need to bring that loved one home before the coronavirus spreads. If that happens, then you will need to add their care costs to your budget, including skilled nursing care, food, and other supplies that you may need to make your loved one’s stay at your home comfortable.
- Needing to upgrade your home equipment to work from home. You may need to upgrade your computer and your Internet service in order to efficiently work from home. Our teams use Zoom meetings to keep in touch with their employees and their investors. Because it’s a video conferencing tool, it is very bandwidth intensive, and you may need to upgrade to make sure you can keep up. Plus, let’s be honest, if you’re sheltering in place like we are, you’re probably going to be streaming a lot more entertainment.
- Increased utilities costs because you’re at home all of the time.
I'm always running our dishwasher.
— Grant Wahl (@GrantWahl) March 30, 2020
This is probably a common scenario in households across the United States now, as people are staying at home much more. Restaurants are closed, so people are cooking at home much more. They’re probably washing clothes and washing hands as a santiary precaution much more than they did before the coronavirus outbreak. If you worked in an office, that office was paying for air conditioning, lighting, water, power for your computer, and the like while you were at the office. Now, you’re paying for that at home, so you need to budget for higher utility bills.
- Homeschooling supplies. Most school districts in the United States are on an indefinite “Spring Break” because of the coronavirus pandemic. If you’re one of those families whose kids are now learning from home, you may need some school supplies to help them with learning. I’m not a parent, so I’ll rely on this homeschooling supply list as a reference for what you may need to keep your kids’ learning up to snuff.
- Purchasing a used car if public transportation is shut down. Where we live, in Dallas, Texas, our local transit system, DART, just announced a reduction in service hours. This may not be the end of the reductions. In Wuhan, where the COVID-19 outbreak initiated, public transportation services were suspended on January 22, 2020, and not restarted until March 28, 2020. On March 31, 2020, DART announced that a driver and a security officer had contracted COVID-19, which, in my opinion, increases the chances that, eventually, even public transportation will be shut down or significantly curtailed. If you rely on public transportation to get to work or other places where you need to go, if that public transportation is shut down and you do not have a car, you will need transportation. I’d recommend buying a beater to get you through the shutdown, as I suspect that, if public transportation shuts down, so will Uber, Lyft, and other ride sharing services.
- Food home delivery costs in the event that goverments shut down public access to stores and restaurants. In the county where we live, Dallas County, Texas, our county commissioner chastised people who are hanging out in big box stores like Home Depot and grocery stores, and floated the threat that, in the interest of public health, he may shut them down. We have been using curbside delivery for our groceries, but stores may turn to grocery delivery, which offers contactless experiences for buyers and providers. If that is the case, you may need to budget more for those deliveries.
- Home gym equipment purchases. This is definitely a want, not a need. However, if you’re a fitness freak, bodyweight exercises may not be enough. Practitioners of regimens like Leangains (#aff) may find bodyweight exercises insufficient for their own fitness programs. If that’s the case, you may need to stump up for some home equipment.
So, to calculate how much you need to have earmarked before you can feel comfortable giving to others, I’d advise:
- The sum of items 1 through 4, as appropriate, plus
- Any of the other items in the list that you feel are necessary for your own personal situation, minus
- What you would receive in unemployment, as appropriate, as a result of the CARES Act.
Here are a couple more action items for you, regardless of your distance to the personal finance cliff’s edge:
- Use up gift cards to restaurants while you can. I’ve seen estimates that 11% of restaurants will close for good as a result of the coronavirus pandemic. I think that’s very low. Most restaurants run on thin margins in the best of times. If you have a gift card for a restaurant that is still open, use it sooner rather than later. You may find your options for using a gift card purchased for a restaurant that goes out of business are limited. Better to spend now before they become as worthless as a confederate dollar.
- Team up with your neighbors to pick a winner. This sounds Machiavellian. It is. In the apartment complex where we live, we have a group of people who all communicate with each other. We live in a neighborhood where there are several restaurants. Not all of them will survive. We figure it’s better to support 2 or 3 to give them a puncher’s chance rather than diffuse our spending power amongst many restaurants, increasing the chances that more of them will go under.
The Bottom Line
There’s no one right answer to the question of how much you need to have set aside before you can feel comfortable giving to others during the novel coronavirus pandemic. It can only be informed through thoughtful analysis and budgeting.
However, if you go through this list and go through a detailed budgeting exercise, then you should get to a point where you can trust your gut. If your emotions are informed by data, then you’ll know when you feel comfortable enough to give to others.
Until you’ve gone through the exercises and made a thorough and detailed budget and analysis of how the COVID-19 pandemic could affect your finances, do not trust your gut. Once you have, then you’ll know if you are at the point where you feel comfortable giving.
Are there other personal finance topics that you’d like to see me cover as we all work through the coronavirus pandemic together? Let’s talk about it in the comments below, or contact me, and give me some ideas like “Lyra” did.