Gods Must Be Strong – FIRE, Resilience and COVID-19

The current situation with the COVID-19 pandemic has affected different people in different ways, but almost everyone has taken a hit in one form or another.  In some cases that’s been to their income or their net worth or mentally or to their health, or any combination of the above plus a bunch of others.

And at the risk of being the millionth blogger to quote Mike Tyson on this, “everyone has a plan until they get punched in the mouth”.    There isn’t much we could have done to prevent this particular punch in the mouth.  But there are things that we can and could have done to build up our resilience and reduce the impact so that we can bounce back from this and future crisis situations.

Resilience is the capacity to recover quickly from difficulties, or even better not have them affect you much if at all in the first place.  So how does pursuing FIRE help with being resilient?

Having an emergency fund

One of the first things that anyone new to FIRE gets told is that you should have an emergency fund, I posted about this a while back and talked about how much you should have in there.  What I came up with was at least 3-6 months of living expenses, plus some more money for possible expenses like home/car/investment property repairs, plus medical expenses and replacing white goods.

At this stage nobody has been laid off for even 3 months because of COVID-19, but there are going to likely be some people who for whatever reason were laid off in December of last year or January of this year for other reasons and are very happy now if they had that emergency fund in place, and probably in a fair amount of trouble if they didn’t.

Likewise anyone who got laid off because of the coronavirus in mid March and had their car blow up/needed some emergency home repairs/had their fridge or washing machine break down etc is probably pretty happy if they had an emergency fund, and potentially in trouble financially if they didn’t.

Having some money in the bank that you can immediately access when you need it to tide you over for a while or to make repairs when you need them is incredibly useful in keeping you afloat and thus making yourself more resilient.

Having other sources of income

The end goal of FIRE for most people is to have enough money coming in from passive income that you no longer need to work to support yourself.  Now obviously the closer you are to achieving that goal the more income you will already have coming in, and the closer you are to the start, less so.

If you had a side gig which was bringing you in a bit of money, maybe that is doing enough to keep you going or at least reduce the impact of any other loss of income you have had.

At the moment if you’re invested in shares unfortunately you might not be getting as much of that extra income as you might like given that a number of publicly listed companies have announced they are cutting their dividend either partially or entirely.  I’ve warned about this happening in previous posts, during the GFC Australian dividends were reduced quite a bit as were dividends in other countries.

Likewise if you own property your tenant may not be paying the full amount of rent if they have also been affected, or in some cases the tenant may have moved out and you’ve got no rent coming in. 

Still, for most people although the income they are receiving may be cut to some extent, there is probably still going to be some amount coming in.  And hopefully that extra income that you receive from your investments saves you from a knockout blow, helps you get back on your feet quicker, or maybe not feel the impact of a hit much at all.

You already had a gap between income and expenses

Unfortunately a lot of people spend every dollar that they earn, and sometimes even more in which case they rack up debt.  If your income has now been reduced, or even eliminated entirely, well you are in a lot of trouble.  Maybe you’ve got an emergency fund you can dip into, but unfortunately most people don’t.  In which case you’re probably forced to borrow from friends or family, or put more debt on the credit card.

But if you were saving and investing money for FIRE, then it means that you weren’t already spending all of your income.  That gap between income and expenses means that you have the ability to not have as much money coming in but still be covering your living expenses.  And the higher your savings rate was, the more room you have to cut costs.

As I’ve talked about previously everyone has a different savings rate depending on their personal circumstances, but everyone pursuing FIRE has at least some gap between their regular earnings and expenses so that they can absorb at least some amount of reduced earnings without needing to dip into their savings or borrow money and are more resilient.

Owning investments that you can sell if you need to

It’s generally not ideal to have to sell your investments while you’re supposed to still be accumulating them.  However if it’s a choice between being able to put food on the table and selling some shares, well that’s a no brainer.  Unfortunately most people don’t have much in the way of assets besides their home (if they have one) and their superannuation, but if you’re into FIRE then you probably do have some investments you can sell if you need to.

If you own shares or bonds then you can sell them pretty much immediately and get the cash a couple of days later, albeit they are worth less than they were a few months ago.

If you went down the property route though then it’s a bit different.  You’re very unlikely to be able to sell an investment property and get the proceeds immediately, however you are hopefully a bit ahead on your loan repayments or have an offset account and you can access the funds there.  As I said it’s not ideal, but hey at least you have the option and it can help you keep your head above water.

You may have been stocked up on groceries already

We’ve all seen the restrictions on how much you can buy of a lot of staple goods at the major supermarkets at the moment, although some of them are starting to be removed now. 

On top of this Coles and Woolies both vastly reduced the amount of specials they had on for a while, although they are making a bit of a comeback now.  So for a while there you potentially couldn’t get much of the food that you wanted, and you had to pay full price for it. 

But if you’re into FIRE chances are pretty good that you already had a stockpile of groceries at home because you bought up big when it was on special.  Burning Desire for FIRE posted about this recently, and we follow much the same strategies in my house.  Reading the comments on the article it seems like a lot of FIRE people do exactly the same thing.

So instead of having to go out and get limited supplies of food to feed the household, you can start eating through all the food in the freezer and the cupboard that you already had.  And now that the specials are starting up at Coles and Woolies again, you can start replenishing the stockpile as well.

Having a written plan to reassure yourself

One of the many things I want to write about in the future is the importance of having a written plan for your journey to reaching FIRE.  Unfortunately I haven’t written that post just yet, but some of the points were going to be that if you have a written down plan then a) you’re more likely to actually do what it says and b) when the proverbial hits the fan you can hopefully look at the plan and be reassured that you expected that the journey wouldn’t be smooth sailing the entire time.

For me this blog basically serves as my written plan, with the added benefit of having others be able to critique my plans and tell me about stuff that I haven’t even thought of.  I practice what I preach so I have an emergency fund, I have personal insurance, and I have a portfolio that is diversified across various asset classes and geographies.

Happily for my family and myself I haven’t been impacted beyond a portfolio that has dropped a fair amount in value, but given that I’ve written pretty extensively about sequencing risk and used to trade volatility for a living, I always expected that would be the case from time to time.  Sure it’s not fun, but it’s not as though I’d never thought about it previously and it has come as a shock to me.

So if I were to get worried I can very easily look back at what I’ve written in the past and tell myself that this was to be expected.  Obviously not everyone has a blog, but I think that everyone should have a written plan.  If you don’t have one already and don’t want to wait however long it takes me to write a post about it (which will likely be a while!) then this is an excellent post on the subject from a US based blogger.

Reducing stress and avoiding bad decisions

There are plenty of studies which show that financial stress tends to lead us to making  bad decisions.  Basically if you’re worried too much about any one thing then it tends to reduce your ability to make good decisions about other areas of your life.

So if you’re worried about money because you lost your job, have no emergency fund and no investments to sell, you have a reduced ability to make decisions not just about your money but also about other areas of your life and may end up making some bad choices.

But if you do have an emergency fund which can tide you over for a while, you know that if that gets exhausted then you can sell some investments, and you have a stockpile of food at home so at least that’s one less thing to worry about, well then although the situation is stressful it’s not an immediate problem and you have breathing space to think about how to get through it all.

How has pursuing FIRE helped you weather the current crisis?  If you enjoyed this post and would like to read more like it then please  subscribe, and feel free to share with your friends!