To say the COVID-19 pandemic has been a burden on millions is an understatement. It has impacted health and economics on a global scale. The financial impact in particular has brought a chilling callback to the 2008 Great Recession. Though different circumstances caused each, in either case, people had to pivot the way they handle money. COVID-19 has culminated into 2 personal finance revelations many experts have been shouting from the rooftops for years: the need for an emergency fund, and the need for multiple streams of income.
- The Need For An Emergency Fund
Many have been out of work for at least 90 days dating back to March of this year. Others are still trying to find employment. The unemployment and stimulus benefits set in motion by the CARES Act have no doubt helped. But like many things, both are a means to an end. So it’s our own responsibility to save for a rainy day. Saving 3-12 months of expenses in a high yield savings account or money market account keeps years like 2020 manageable. 3 months expenses would’ve helped many employees return to work this summer (June/July) from furlough. 6-12 months expenses would provide a bigger buffer for job interviews and starting up a side hustle. Or maybe, just making it through a challenging year. Ladies and gentlemen, do whatever you need to do to focus on bolstering your savings. Cut expenses. Sell what you can. Get extra hours. Get paid for your gifts and talents. COVID-19 is Murphy’s Law incarnate.
Emergency Fund Guidelines
- Beginner Emergency Fund: Save $1000 ($500 if your income is less than $20,000 annually). This creates some breathing room for you financially. 40% of Americans cannot even handle a $400 emergency (CNBC). Doing this will put you ahead of the pack.
- Intermediate Emergency Fund: Save $3000-$5000; Maintaining this amount puts a little bit more buffer between you and life.
- Advanced Emergency Fund: Save 3-6 months expenses; 3 Months Expenses: Save this amount if you have a 2 income home and 1 spouse/partner has a more stable job/industry. 6 Months Expenses: Save this amount if you’re a 1 income home and/or self-employed.
- Expert Emergency Fund: Save 12 months expenses. Saving a year’s worth of expenses gives you more margin in the event of a recession or career change.
- Master Emergency Fund: Save 2 years expenses pre-retirement; Can help balance withdrawal rate on retirement nest egg.
2. The Need For Multiple Streams of Income
Establishing an emergency fund is foundational to a financial plan. But what happens if your income becomes jeopardized? This is why multiple streams of income is important. If one pipe stops flowing, another can keep money in motion. Job security may or may not be guaranteed in times of crisis. Generally speaking, there are 3 categories of income outside of a 9-5 job: entrepreneurship, real estate, and the stock market.
Do you have exceptional skills, gifts, and talents? A perfect opportunity to make money is to start your own business. Besides generating your own income, there are tax benefits to owning your own business. Consult a tax professional and an attorney to help you pick which kind of business entity to register as.
- Real Estate
Perhaps the most tried and true way to generate income is to invest in real estate. From rentals to house flipping, the possibilities are wide open. Consider getting your real estate license and perhaps understudying an experienced agent or broker to learn the ropes.
- Stock Market
The S&P 500 Index (a composite of top U.S. companies) has produced a rate of return of approximately 10% over the last 100 years. When you invest money into the stock market, you take advantage of the phenomenon known as compound interest. According to Investopedia, “Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.” Albert Einstein called compound interest the 8th wonder of the world! Consult a financial advisor to get started investing.
The Goal: The ultimate goal with these 3 categories of income is to produce passive income. Create scenarios and business models where you can earn money in your sleep.
Time to put this knowledge into action. What do you need to act on? What do you need to change? What do you need to teach or tell someone else? Oorah!