Unlike my usual posts which deal with a specific topic (in theory at least!) this is a collection of my random thoughts on the current Coronavirus situation and what to do about it as well as how it will impact on FIRE and people’s finances in general.
Obviously all of this depends on how long this situation goes on for. It if turns around in a month or two, well some of what I write will turn out to be irrelevant and I may look silly. Given I’ve already written a couple of posts about things that didn’t end up happening (the proposed removal of cash refunds on excess franking credits) this won’t be my first time and I won’t lose any sleep over it.
Quick disclaimer: As is always the case you should not plan your finances around what some random person on the internet says. Everything which is written here is of a general nature at most and is certainly not specific professional advice for you and you should not be relying on it when making decisions. Whilst every endeavour is made to provide accurate information at the time of writing you should be talking to a licensed professional about any specific areas of your finances, taxes etc. Also, it’s going to be really embarrassing if it all goes pear shaped and you have to explain that it did so because you read about something from a random blogger. Moving on!
Duration is key
The extent of the impact is really going to depend on how long things go on for. If the current situation lasts for a month, although that is still going to have a huge impact for some people I think the economy as a whole will probably return to relative normality fairly quickly, albeit with some changes. But if this goes on for 6 months or longer, things are just going to get steadily worse. I have no idea what the duration is going to be, or if there are other options like on again off again restrictions.
Staying afloat is the most important thing
What you really need to do first and foremost is make sure you get through the current crisis. If you don’t have an emergency fund and you still have an income, now is the time to start building one up. If this means putting a pause on investing to do so, well you probably shouldn’t have been investing anyway. You need to make sure that you can get through however long it takes before things get back to normal, although normal may look a little different when we’re done with it all. Investing should be secondary to protecting your downside and keeping your head above water.
If you no longer have an income, then look at what support is available to you from the government as well as potentially family and friends if they’re in a position to help you. Please keep in mind that they may also be in a very precarious situation financially and be understanding of their situation. Unfortunately there are a lot of people who live paycheck to paycheck, and this isn’t necessarily through any fault of their own.
No you should not use your emergency fund to buy shares now that they’re “on sale”
I’ve seen a bunch of people asking on various social media platforms about whether they should be using their emergency fund to invest. With some exceptions the answer is almost always going to be no. Your emergency fund is there for emergencies, not for investment. Your job may not be as secure as you think it is, you may still have a boiler blow up, your car break down, or any number of different issues which mean you need that money now. If you’ve just put it in the share market and it’s dropped 30%, well you now have 30% less money available to throw at your problem(s).
And for most people it’s not going to make much difference whether they put in another $10,000 or $20,000 or whatever the amount is anyway. Oh sure it’ll presumably grow to a larger amount over time than it would have sitting in cash, but it’s very unlikely to make or break FIRE for you and probably won’t bring it more than a few months closer anyway.
Ben Carlson put out this great post with the graph above on how much your investment each month since 2007 would have grown to and it really shows the difference that market conditions can make. But that should be secondary to making sure that you stay afloat during the current crisis. If you have extra you can invest then sure, do so. Your super fund is presumably dollar cost averaging for you as well. But your emergency fund is separate to your investment fund for a reason.
Dividends will likely get cut, possibly quite substantially
Given earnings are likely to be down significantly for most companies it is highly likely that most of them will cut dividends to some degree at least. How much exactly they will be cut depends very much on how long the current situation goes on for, but I would certainly assume at least a 15% to 20% cut assuming this goes on for a couple more months at least, I’ve seen forecasts of cuts of up to 50% as well.
So if you’re relying on a steady or increasing income from dividends to fund your early retirement, you’re likely in for an unpleasant surprise.
Yes yes, LICs may decide not to cut dividends or by some minimal amount. The money for these stable dividends does not magically come from nowhere, it means they have either had cash reserves and not been fully investing for you which likely means you’ve missed out on some of the rise the stockmarket has had over the last 10 years, or they’ve sold shares to pay for the dividend. These two articles talk about some of the issues with LICs, and I would highly recommend reading them.
Your fixed living costs are now very important
I’ve written before about how there is only so much that you can tighten your belt. As it turns out some of those costs like swimming lessons for my kids have gone away given that the pool is currently shut down and membership suspended.
But my rates, utility bills, all the various insurances like health and personal and car and house etc, car registration, phone and internet, aren’t going away. My food bill has stayed pretty steady and if anything is likely to go up given the major supermarkets are no longer doing specials on most of their stuff, although we are also not eating out much so it’s probably about break even. Our car will presumably still need to be serviced, although we aren’t driving much so we’re saving a bit on petrol at least, not that we used much in the first place.
All up we’re still looking at annual spending of about $27k on our basic living expenses. As I said I’m still working, and even if I wasn’t I could cover over a year of this from my emergency fund which would hopefully be more than enough to get me through.
There are plenty of people though who would have all of the above plus a rent or mortgage payment on top, and if their income has stopped coming in or reduced dramatically then they could be in real trouble unfortunately.
Lean FIRE or Barista FIRE probably doesn’t look so attractive right about now
Because of the above fairly fixed costs that most people have, if your investments were only just generating enough income to get by previously (Lean FIRE), well they’re probably not now. This means that you may have to sell some of your investments to generate income after the market has already fallen 25% or so from the highs. This is obviously not ideal, although you should still hopefully have a fair amount invested (and hopefully not levered) so it’s not as though you’re going broke, it’s just going to mean potentially having to go back to work at some point.
If you were doing Barista FIRE, then you presumably didn’t have enough assets to retire and relied on your income from your barista job (yes I know it doesn’t have to be a barista job) which may well have disappeared now. Unfortunately now is likely not a good time to be searching for another job, although to be fair the supermarkets appear to be hiring plenty of people.
There will be a huge split in outcomes for different groups of people
If you’re still in the accumulation phase of FIRE, or just a typical working person, then this is going to have very different effects for different groups. I’m fortunate enough to be in a job where I can work from home pretty easily. I’m even more fortunate in that my wife is a SAHM and can look after our two young kids while I work from home. So for me, I still have a job, it’s still getting done, I’m still getting paid, and I’m hopeful that this state of affairs will continue. If it doesn’t I have backup plans.
A lot of people though who work in other industries can no longer go to work and therefore no longer have an income. That’s not their fault, and in fact it’s really no one’s fault. But it means they will have zero income coming in from their regular jobs, although they will presumably be eligible for some sort of government assistance but that may not be much compared to their usual wages. And if you’ve gone from earning $80,000 a year to a hell of a lot less, that’s going to have a huge impact on your financial situation. It’s even worse if you were previously a reasonably high earning couple and now neither of you can work.
There do seem to be a bunch of measures in placeor proposals to help with this such as mortgage holidays and possible rent holidays as well, but so far I haven’t seen anything about holidays for car leases or personal loans or margin loans etc. In any case as I’ve written about before there is only so much tightening of the belt that can be done. Some people are just not going to have enough to cover their costs, even with the reduced spending they are likely to be doing. Which leads me to my next point.
This is going to lead to a huge drop in wealth for some, in particular those who are leveraged
There are unfortunately going to be at least some people who borrowed money to buy their home or to buy an investment property or shares and now can’t make the repayments whether it’s because they’ve lost their job or a significant amount of income, or their tenant has lost their own job and can’t pay the rent.
Getting a mortgage holiday from the bank may help for a while but that interest is presumably just going to get added on to the loan which just moves the pain down the road. And if it’s an investment property which was negatively geared then they already needed more money to keep afloat, so if their regular income from their job has disappeared then they’re going to be in real trouble.
That may well mean having to sell their property or shares into a fallen or falling market, and depending on how levered up they were, they may end up with zero or even still owe money after paying out the loan. That’s going to be a huge hit to their wealth and their standard of living.
As an example if you bought a $750,000 house with a 20% deposit of $150,000 and the house drops in value by 20%, well you now have zero equity in the house. And if you are forced to sell because you no longer have a job or your employer has vastly reduced hours and you can’t make the repayments, well you’ve now lost $150,000 which might have taken you several years to save up. This is probably more of a factor for those who have recently purchased property, but there are going to be other people in trouble as well. Repayment holidays etc will only help so much, particularly if you can’t find work again fairly soon after things return to normal.
Margin loans are likely to be even harder hit because you don’t get to pretend that the value of your investment is still the same, it’s marked to market and you need to keep within the leverage limits. If not, you’re a forced seller at the worst possible time. This is when you can lose a huge amount of money and go negative on your investments. Leverage is great when investments go up, but it really hurts when investments go down, particularly if you’re forced to sell.
If you were about to hit FIRE and retire, you’re probably a ways off again
I’ve written previously about not being able to control when you hit FIRE. Basically because returns are volatile there isn’t a nice smooth path to FIRE, it’ll really depend on what investment returns are. If the market drops 20% or so which it has, well then you’re almost certainly not hitting FIRE at the moment. If you were investing in property rather than stocks the hit to property values probably hasn’t come yet but I’d be getting pretty nervous about whether that rent is going to keep coming in. In either case I’d certainly be holding off on pulling the pin on work unless I had a pretty big margin of safety already built in.
The more you have the more it hurts
If you’ve got $10,000 invested in the stock market and are saving that much each year, well you just dropped roughly $3,000 but you’ll make it up again through savings alone in a couple of months time, no big deal. It presumably still hurts to see it drop that much, but it’s not that big a deal.
If you’ve got $1,000,000 invested in the stockmarket and are saving $50,000 a year, well you’ve just dropped around $300,000 and it’ll take another 6 years to make that up through savings alone. Sure the market will probably help you out at some stage, but that’s a hell of a difference in time frame between the two scenarios.
Think about the financial impact on others
I’ve seen a bunch of posts on various social media platforms about how wonderful the fall in share prices is and stocks being on sale! And this is true if you still have a secure job and you’re young and still in the accumulation phase with a long time to go before you need to rely on this money to support you in retirement.
You may want to think about how your parents or grandparents feel about it though given it could be doing a lot of damage to their retirement plans. If they’ve just dropped a couple hundred grand in the last month or so they may not be too keen on hearing about what a great opportunity it is for you. Likewise your friends who work in hospitality or entertainment or tourism etc and are wondering how on earth they’re going to pay their rent and other bills probably don’t want to hear about it either. Be sensitive when talking to others about financial matters.
Someone has to take the (financial) hit
There are currently a bunch of proposals to have rent holidays, mortgage holidays, reduce utility bills etc. But most of what that does is just shift the financial hit to somebody else.
As an example if there is a rent holiday for people, that means their landlord doesn’t get any rent for however long this lasts. If they have a mortgage on the property, maybe they can get a mortgage holiday from the bank, although this means they will still have to make the payments down the track with a bit more interest tacked on. So if they can get a mortgage holiday, maybe they’re ok. What if they can’t though for whatever reason and now they’re forced sellers into what is likely to be a weak property market?
Alternatively, what if the landlord is a 70yo retired couple who own two investment properties outright with a value of maybe a mill or so between the two so they can’t get any age pension because they are over the assets test threshold, but now they don’t have any income from rent either. Should they end up taking the hit? How are they supposed to pay their bills if that’s their only source of income?
It’s the same story with something like utility bills or rates, can your electricity provider or local council afford to miss out on a bunch of income or would it send them broke or force them to sack more people to stay afloat?
And if it all gets kicked further down the road so it’s the government taking the hit, well that’s just another way of saying it’s the taxpayer taking the hit ie you and I, and maybe our kids and grandkids.
There’s no right or wrong answer as to who it is that should end up taking the loss here.
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You bring up some pretty good points AHF. I think what’s become really obvious over the past few weeks is how unprepared most people are when a crisis like this hits. No one is spared, not even those of us who are working towards becoming financially independent and presumably have a large war chest to get us through this time.
Those who do have a larger than usual cash allocation and are lucky not to have been affected too much by income losses are in the best position to take advantage of this and step up their investing more. Though you’re right in saying that the focus now should be to make sure that we’re all making sure we cover the basics first like living costs before even thinking about anything else.
The one (admittedly far out) thing I’ll add as well is that when this is over, I think we’ll see a greater focus to making our own stuff instead of outsourcing – kind of a return to a more production based economy rather than a service based economy. I think this highlights the importance of economic diversification and self sufficiency so that we’re not over reliant on everything coming from overseas or one country in particular.
Also I hope that after we’ve gotten through this event more people will start getting educated on how to become more financially resilient, even if they don’t ultimately take up FIRE.
Thanks FireMum. I really enjoyed your excellent post on what to do to get through the current crisis, I’d highly recommend my readers take a look.
I agree 100% that countries will hopefully start taking a good hard look at what sort of stuff they need to be able to produce domestically. We import a fair amount of stuff that is important in a crisis, and there’s no guarantees that the countries that produce it are going to keep exporting it if they need it as well. I’m very happy that we are at least food independent because not every country can say that.
I’d like to think that when this is all done people still start working to be more financially resilient, and there certainly are some who will. I think some people though will take the opposite lesson, that if it all goes really pear shaped the government/taxpayer will be there to save them so they might as well spend money while they can, YOLO after all. We can hope for more of the former at least though!
I agree Ms FireMum that people will focus more on making our own stuff. We are currently making plans to grow our own veggies and I’m looking more at what I can bake (eg. bread etc). While we have been lucky to be okay during this crisis, it has made me realise that we would be completely lost if something like supply chains or supermarkets were completely cut off. Definitely food for thought!
Great post mate.
I always laugh when I would read posts on forums and Facebook from young whippersnappers (I’m 30 now so I can say that 😂) praying for a recession in hope that it would tip the scale in their favour. When in reality they’re probably going to be hit the most in such conditions. There’s more money to be made in a crash and it’s usually the wealthy ones who do well when it’s all said and done.
I was actually chatting to my parents about how it’s a great time to be buying stocks if you’re in the accumulation phase. They are retired now though and have taken quite the hit but are still investors and were my original mentors.
I think it’s ok to talk about potential opportunities in the right space. I would never start bragging or boasting about all the potential discounted stocks to my friends or family over dinner when I knew someone had just lost their job. But discussing this topic specifically within a group/forum/Facebook page dedicated to reaching FIRE is fair game in my book.
Cheers
Cheers mate! How are things going in the UK, hope it’s ok over there for you and the missus?
I think there is a lot of naivete out there about what a recession and mass unemployment looks like, particularly from those who have never been through one which is the case for most young Australians! Even a 40 something like me has only experienced it in my working life due to living in the UK. Unfortunately as you say they’re likely to be hardest hit and in a lot of cases focussed just on getting through rather than being able to invest much.
I’ve talked to my Mum about things as well, she’s been through a fair few market crashes now so she’s pretty relaxed about this sort of stuff, that’s not going to be the case for everyone though.
And yeah it’s absolutely fine to talk about this sort of stuff in FIRE forums or FB groups etc. I’s just important to remember not everyone is in the same space as yourself (generic you, not you personally!) and this may be a catastrophic event for them. Hopefully everyone has enough emotional intelligence to know their audience!
Great post AHF! I agree with a lot of your points but in particular, what you mentioned about supermarkets no longer running specials is very true. I am used to trolling the Woolworths 50% off specials when making my grocery list. I almost never buy food from that list, but toiletries and other household items I do. I don’t think I’ve paid full price for such items in years. That has gone away and, while I know it’s a very #firstworldproblem it has bummed me out. It was a bit of a ritual I used to enjoy doing. But we are fine financially and can certainly afford to pay full price for these things. My heart definitely goes out to those folks who can’t afford it in this current crisis.
It’s funny what stands out to different people! Happily Woolies and Coles both seem to have a reasonable number of specials on again down here, although still not as much of a discount or on as many items as normal. I would imagine that a lot of the kinks in the supply chain are getting worked out which is great.
Great to hear that you and Poopsie are doing fine in the current situation!
This post is spot on.
Agree 100% with staying afloat being the key. I can’t remember who said it but will always remember that it’s not about making the most money but being able to survive the longest. And it’s times like this which nails that home.
Also that part about LeanFIRE is well said. I’ve always been of the opinion that LeanFIRE is dangerous and somewhat naive in my eyes. Because income is a variable line item, whereas expenses are a fixed cost. A silver lining to this is that those who were contemplating LeanFIRE can realize that it’s not all it’s made out to be. Mitigation of risk is key.
Hi Frugal Samurai!
Yep you need to keep your head above water if you’re going to make it through!
It’ll be interesting to see if we end up with less people aiming for Lean FIRE and instead aiming to have a bit more of a safety net that’s for sure. I like knowing that there is a fair margin to play with rather than living right on the edge!
hey HIFIRE, Good read. I definitely agree with you that an emergency fund is there for an emergency, not for use trying to time the market haha! I think as long as people still have a steady income and can live well below their means, that continuing to invest as per their investment strategy is the best course of action – taking a healthy bite of the low information diet and just crack on!. I also think you raise a very good point about the problems of leverage and how a situation like this can wipe people out. I actually have a colleague who was totally wiped out during GFC because they foolishly listened to a financial adviser who got in their ear about margin loans and leveraging into shares that had no real intrinsic value. I think its a great lesson about conservative investment and not over stretching living outside, or investing outside, your means.
Cheers,
Capt.
Glad you enjoyed the post Captain FI, and I hope you’re doing ok!
Your graph at the top doesn’t give a Y scale. Is it linear or exponential? 🙂
Haha very good! 🙂