The expression "waiting for the other shoe to drop" originated in late-19th century New York. Apparently, you'd commonly hear your upstairs neighbor take off one shoe and drop it on the floor. Then, a moment later, you'd hear the other shoe fall. Investors right now are stuck in that terrible waiting game -- and, unfortunately, the stock market seems to have an unlimited supply of shoes.
On Feb. 19, 2020, the S&P 500 (S&P) closed at 3,386. Four weeks later, on March 23, the large-cap index had lost almost 1,150 points or 34% -- closing at 2,237. Given that COVID-19 now has several states under shelter-in-place orders, the economic uncertainty and market volatility are here to stay in the immediate term.
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As a 401(k) investor, you could check your balance daily and run through all kinds of terrible scenarios in your head. What if the recovery is years away, or your portfolio sheds another 40% of its value? What if retirement is now only an impossible dream? You could also take a break from worrying about your finances, only to start worrying about your health. All of these responses are reasonable, given the unprecedented circumstances we're facing.
But I encourage you to redirect your attention to the things you can control. Even in these crazy times, you can take steps to strengthen your finances. Sure, they're small steps, but doing something small feels much better than doing nothing at all. Here are four ways to regain control of your finances today.
1. Check in on your emergency fund balance
First, check in on your emergency fund balance. In normal times, you should have enough to cover at least three months of living expenses. But these are not normal times. In this environment, there's a higher likelihood you might face multiple financial emergencies simultaneously. You could see your income drop and you could have health issues, for example. That double-whammy would dry up your cash stores pretty fast.
You obviously can't whip up several thousand dollars out of nowhere to pad your emergency fund. But you could make adjustments to your budget and your insurance deductibles to reduce your exposure.
2. Revisit your budget
Even if you're not experiencing a loss of income currently, it's a good exercise to review your spending in detail. That deep-dive might reveal expenses that no longer seem necessary. Perhaps you've learned in the last couple of weeks, for example, that you prefer a homemade lunch over a $12 sandwich from the deli. That's an opportunity to reduce your spending on meals out, permanently.
You'll probably also realize several temporary savings opportunities. Social distancing naturally leads to lower expenditures on gas, dining, entertainment, and shopping. Quantify all of these savings opportunities, temporary and permanent. Plan on transferring these amounts into your emergency fund regularly.
3. Look at your insurance deductibles
Insurance protects you against life's most expensive disasters, but only to the extent that you can afford the deductible. If you can't name your deductibles for auto, home, and health insurance off the top of your head, it's time to revisit these numbers. A cheaper auto policy with a high deductible may have been the right decision five years ago. Is it still the right decision today? It depends on how much you save in premiums and how big your emergency fund balance is.
If you don't like the size of your emergency fund, check with your insurer on the cost of lowering your auto and home deductibles. It may be worth it, if only for the peace of mind.
4. Review your debt balances
Big, revolving debt balances are bad for financial flexibility. You know this already. If you have credit card debt, you'll have to choose between extra deposits to your emergency fund and faster debt paydown. This can be a tightrope walk, though, especially if you're worried about income loss in the immediate future.
A fresh paydown strategy can help. If you have good credit, look for low-rate balance transfer offers. The best credit cards offer 0% for six or nine months with a 3% transfer fee. Even with the transfer fee, 0% interest can help you build paydown momentum. You could also try the snowball approach. This involves making a larger payment to the card with the lowest balance, and minimum payments to the others. That'll expedite getting one balance down to zero, which frees up more monthly cash to pay off the rest.
Take action where you can
Rather than waiting for the next stock market shoe to drop, take action where you can. Streamline your spending, stash a few extra pennies in your emergency fund, lower insurance deductibles where it makes sense, and make a plan to pay off your debt. You'll shore up your finances -- and feel more empowered as a result.
