I recently listened to a podcast where the guest was an American social and cultural scholar whose recent work covers the phenomenon of “Preppers.” Preppers are individuals who anticipate social, political, or possibly cataclysmic disruptions in our everyday lives, and they “prepare” for these events by stocking up on food, learning survival skills, and building bunkers under their homes.
While some of these preparations may be a bit extreme, we can all take a few lessons to be better “financial preppers” for the future.
Why Financial Prepping?
Being prepared financially (whether or not there is a crisis) is a life skill in its way. But unfortunately, the importance of being finance-ready is often ignored until one faces challenging times ahead. In fact, only 30% of Americans have a long-term financial plan to stick to.
With the Coronavirus still lingering in the shadows and the rising inflation causing financial crisis, there isn’t a better time to talk about the importance of financial preparedness. In this blog, we’ll look at some of the tried and tested methods that financial preppers have adapted over the years. And it could work for you too.
Tend to Your Emergency Fund
Most of us abide by the emergency fund rule of thumb: “put away at least three to six months’ worth of expenses.” But when was the last time you looked at either your emergency fund or what exactly your 3 to 6-month expenses are?
Additionally, many disability incomes and long-term care insurance policies have a 60- or 90-day period before benefits begin to pay. Consider property owners whose tenants were unable or unwilling to pay rent during an ever-extending eviction moratorium.
Tip: Take some time to consider if you may need to pad your emergency fund further. There is no need to keep large sums of cash stashed away, but an amount that appropriately reduces your risk of having a cash crunch and helps you have peace of mind, is best.
Related: The Ebbs And Flows Of Seasonal Budgeting
Determine What Spending is “Essential”
Speaking of expenses, when you are not allowed to go anywhere or do anything for a few months, you really begin to understand what you “need” compared to what you “want.” If you notice that you have a lot more money in your account lately, it’s possible you were spending a bit too freely on restaurants and other entertainment.
Tip: Now is the perfect time to evaluate and modify your spending habits. Try to avoid developing the ill-habit of impulse buying online while stuck at home. If you can modify your forced budgeting into an ongoing habit, you will benefit from this added financial preparedness.
Essential vs Non-essential Expenses
As you budget, it is important to maintain a logbook or some kind of record to determine your essential and non-essential expenses. For instance, an essential expense is one that you must pay no matter what.
Essential
Rent/mortgage
Groceries and Utilities
Car payment
Credit card monthly minimum payments
Health insurance
Phone
Tuition
Insurance
Non-essentialCable Non-business internet Dining out Entertainment expenses Fashionable trends Impulse purchases |
Manage Debt Aggressively
Did you know that in 2020, the average American’s debt payments made up 8.69% of their income? Mortgage, student loans, auto, credit cards and other debts are all monthly expenses that may eat at your emergency fund in a crisis. While this crisis was unique in that financial institutions and governments granted many the ability to defer some of these payments (though not interest), the next crisis may not have such a benefit.
Tip: Take the initiative to pay down higher interest and higher payment debts early. With these bills either off your monthly expense list or trimmed to a more manageable level, you will be better prepared to handle any crisis that may arise.
8 in 10 Americans have some form of consumer debt
The average debt in America is $38,000 not including mortgage debt
Invest In Alternative Assets
A great way to add diversification to your investment portfolio is by investing in alternative assets. Besides, it helps you hedge against market volatility during difficult times. Some of the most common alternative investments include commodities, precious metals, investment in startups, private equity, cryptocurrency, and hedge funds.
Alternative investments also tend to provide higher rewards than traditional investments. If you’re trying to get your foot in the door, then starting with mutual funds or ETFs is a sweet way to start building your wealth portfolio.
The Pros And Cons Of Alternative Assets
Pros
Counterweight to conventional assets
Portfolio diversification
Inflation hedge
High rewards
ConsDifficult to value Illiquid Fewer regulatory requirements High-risk |
Mentally Prepare Not to Panic
Staring into a void of virus-related uncertainty, the financial markets assumed the worst and sold into one of the fastest, steepest declines in recent history only to completely reverse that assumption and market trajectory. How do the markets go from panic to euphoria so quickly?
In wealth management, we evaluate risk tolerance and establish an investment policy statement (IPS) that clarifies goals along with risks as a way to mentally prepare for the bumps and stumbles (and sometimes severe falls) that the market may bring.
While the health crisis continues to be scary, investors who adhered to the long-term plan laid out in the IPS fared much better in terms of both stress and returns than those who panicked and ditched the long-term plan to go to cash in the short-term. Focus on the big picture and what you can personally control.
Focus On What You Can Control
One of the overlooked aspects of financial preparedness by clients is determining where their future income stream will come from. Many pull an income stream from a combination of social security, annuities, pensions, or retirement funds. You control many of the key decisions that determine when and how much money you take. These decisions may also be impacted by taxes.
Tip: Working with your financial advisor to better understand what you do control and how you can make smarter money decisions to keep you in control will only add to your financial preparedness.
BONUS : Download COVID-19 Relief Checklist
Be Finance-Ready, Always
While you don’t need to invest heavily in stocking up a 30-year supply of food, buying hunting and farming equipment, or building a bunker, there are many simple steps you can take to increase your own financial preparedness for the uncertainties of markets and life.
With the close guidance of your financial advisor, you will better understand the risk you face and take and navigate through these troubled times to improve the odds that you safely land at your planned financial destination.
Want to schedule a free consultation with Matthew? Visit his advisor page.
THE AUTHOR
Matthew Belardes
Matthew is a Wealth Management Specialist at Capital Growth. He specializes in Estate Planning. In his free time, Matthew is an avid reader of political theory and history. Learn More.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
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