Afford Anything - PSA Thursday: How Can I End 2020 in a Stronger Position Than I Started It?

Episode Date: May 14, 2020

How can you find business and investment opportunities in today’s tough pandemic bear market? What should you do to emerge from 2020 stronger than you started? We cover 7 specific, immediate actions that can set you up to succeed in this recession. Here's a peek: think about hiring a team, create an original piece of work, take online classes, and keep your plans intact (even if that means quitting an unfulfilling job).   For more information, visit the show notes at https://affordanything.com/psathursday Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to PSA Thursday. This is a weekly bonus segment of the Afford Anything podcast in which we talk about how to handle your money, your work, and your life during a pandemic. How can you come out of this stronger than when you went into it? That's the question we are going to address today. My name is Paula Pan. I'm the host of the Afford Anything podcast. And to kick off today's episode, I'd like to play for you a question that comes from a member of our community and that many of you might be able to relate to. Here it is.

Hi, Paula. I have a question for you about how to best position myself in the changing economy. So a little bit about my situation. I graduated from college in 2010, which as we all know is shortly after our big economic recession. It was a really hard time to enter the working world. I felt like my focus was on getting a job. And even though I could see that there were great incentives for buying a house. house at that time, I just wasn't in a position to take advantage of any of them. And so my personal career has grown along with the economy. Even though now I have a stable job and income and savings, the cost of things is significantly higher. So I look at the houses that I would like to buy and they all seem pretty much more than I feel comfortable paying for. And so I know that I've had a talk with friends at different times and we're like, man, wouldn't it be great if the economy just had like a little bit of a dip, then we could take some of this money that we've been saving and working hard for and putting it into investments that yield decent rates of return. It seems like this is

the time. It's happening. And I just want to make sure that I'm making wise choices and doing things as best as I can to, I guess, optimize as things are a little chaotic and unpredictable. Do you have any thoughts on how to move forward? Thank you. That's an excellent question. and to answer it, I've created a list of nine things that you can do right now to position yourself to come out of this bare market strong. First of all, good for you for recognizing that bare markets and pullbacks are opportunities. While it's terrible that so many people have lost jobs, that so many people have seen huge declines in their businesses, while it's terrible that people have suffered losses in their portfolio, The unfortunate reality is that from time to time, these things happen.

Bare markets are cyclical. Recessions are cyclical. And with it, all the fallout from portfolio declines to unemployment spikes, those factors and more quite often come with bare market and recession territory. And it's by looking at the current market and asking the question, what opportunities are present? It's by virtue of doing that, that we help contribute to the recovery. So let's talk about the nine things that you can do right now. Number one. Do keep your plans intact.

Now, obviously, I'm not talking about your travel plans. Those are going to have to change. But if you had previously planned on taking a one-year mini-retirement so that you could focus on writing a book, if you had planned on starting a small business, which you hope to grow in that, the next three to five years, if you'd planned on going back to school so that you could make some type of career change, or even if you had planned on retiring at the end of 2020 or 2021, don't change your plans as a result of fear. Certainly, you can take stock of your plans and reassess your plans to make sure that the finances and the logistics are on solid footing. Certainly,

you can take a close look at your emergency fund or at the money that you planned on living on during your one-year mini-retirement, or at the total balance of your portfolio as you head into total retirement, certainly you can look at the finances and ask yourself at a very practical level, am I prepared or am I as prepared as I thought I was? But be wary of moving the goal post. Be wary of just one more year syndrome. Because if you are in a solid position to be able to act on these types of long-term plans, don't let the fear or uncertainty of what might happen in the markets waylay the plans that you have been making for the past 5, 10, 15 years. If you have been planning to take a mini-retirement or a total retirement, and if you have asset allocated and budgeted

correctly, then you should already have the next three years' worth of expenses in cash. So you don't need to convert paper losses into real losses, because if your asset allocation was correct to begin with, then you have enough cash to get you through the next several years. Now, again, that's why I say take stock of your current situation, because if your asset allocation going into this was not correct, if your investments did not mirror your timeline to withdraw, then that changes the game. But if your foundation is strong, then don't cast aside the benefit of all of the planning that you've done for the years leading up to this. I know it feels scary to quit your job

in the middle of a recession. I quit my job in 2008, and the rest of the world thought that I was nuts, because not only were we at the start of a massive recession, but also I was in a declining industry, print newspapers. And who quits a declining industry in a recession? But I knew that that's not where my future was going to be. And I knew that if I stayed simply for the security of getting a biweekly paycheck, I would ultimately end up wasting precious years, years that I could be spending doing things that are more purposeful, more meaningful, and that will ultimately lead to making a bigger positive impact. I knew that fear-based stagnation would stifle my growth, it would stifle my potential, it would curtail the amount of value that I could offer the world, and, finally,

financially, I had enough to be able to support myself for two years from my savings as long as I practiced geo-arbitrage. So as long as I went to countries where the dollar exchange rate worked in my favor, places with a low cost of living, I knew that I could do it. Now, obviously, the situation today is different. Global travel and geo-arbitrage are far more complicated concepts in an era of COVID-19. And that's one of many reasons why I say, take stock, assess make sure that your assumptions and make sure that your financial projections are flexible enough that you can adapt to changing environments. It is wise and laudable to rerun your numbers, but if you do so, if you rerun your numbers and see that you can still do it, don't let

irrational fear restrain you from continuing to execute on your long-term plans. So that is number one. Do keep your plans intact, assuming that you've run the numbers and it all checks out. Number two, do top up your emergency fund if required. Everyone should have a minimum of three to six months worth of living expenses saved in an emergency fund. And if you face financial vulnerabilities, extend this out to between six to nine months. at a minimum. If you want to take it all the way to 12 months, that's okay, but you don't feel like you have to. I'm just stating minimums here, and the minimum is three to six months for everybody, and six to nine months if you have particular income or financial vulnerability. So, for

example, if you think that you have a high likelihood of losing your job or getting furloughed, or if you are self-employed, or run a business, or if you are single or a single-income household, which means that you don't have the risk diversification of incomes coming from two people. In those circumstances, raise your emergency fund levels to between six to nine months of your living expenses. If you'd like more detail on how to do this, we have a previous PSA Thursday episode called How to Build an Emergency Fund in the middle of an emergency. You can find a link to that episode at afford anything.com slash PSA Thursday. So that is number two. Number three. continue making regular periodic contributions to your retirement accounts.

Now, these can be monthly contributions. They can be per paycheck contributions, but continue making periodic contributions, meaning at regular intervals. The beauty of this is that it allows you to dollar cost average into the markets, and that automates taking advantage of market dips. So if you are regularly investing the same amount of money per paycheck or per month, then when the market is low, that same $500 or $1,000 buys more shares because the market is low. When the market is high, that same 500 or 1,000 or whatever amount it is, buys fewer shares because the market is high.

So people often ask, how do I take advantage of dips? How do I take advantage of pullbacks? If you are dollar cost averaging, you are automatically naturally doing that. you don't have to worry about manually buying on the dip because the very act of dollar cost averaging inherently creates an automated system for taking advantage of market declines. So tip number three is to continue to make these regular contributions to your retirement accounts and if you have the capacity to do so, up it just a little. I have many times in the past challenged the afford anything community to improve.

embrace what I call the 1% challenge, which means whatever your current savings rate or whatever your current contribution rate, increase it by 1%. If you're currently investing 10% of every paycheck towards retirement, invest 11%. Now, 1% is $10 for every thousand that you earn. So if you're bringing home $5,000 a month, that 1% increase is $50. And what's beautiful about automating a 1% increase is that it's so small that you don't feel it, But over time, it creates a huge compounding effect. And if you get into the habit of increasing your contributions by 1% every month or every three months or every six months or even every year, then over time, each of those successive increases stacked on top of each other will result in you making some pretty impressive contributions.

And you might not even notice it. You might not even notice any changes to your lifestyle because it's happening. so incrementally. So that's the third tip. Tip number four. Invest any lump sums that you receive. Maybe you get a commission or a bonus at work. Maybe you decide to sell your car

to downsize from a two-car household to a one-car household. And as a result, you get a big lump sum of money from the sale of that vehicle, that second vehicle. Maybe somebody who has owed you money for a long time finally pays you back. There are many reasons that people receive lump sums of money, yes, even during recessions. And if you have a lump sum, invest it.

Now, you can invest this in whatever way fits your strategy. So you can put this into rental real estate, either in the form of a down payment or in the form of buying a cheap property in cash. You can invest this into a small business that you're starting by giving that small business some early seed funding. You can invest this into the market. So how you want to invest this is up to you. But do not hesitate to invest.

these lump sums. One of the big mistakes that people make during times of uncertainty is that people are scared to invest. People are scared to put their money into the market only to see it go down the next day. People are scared to put their money into starting the side hustle that they've always dreamed of starting because they know that this is a tough time for small businesses. And what if their side hustle idea doesn't work out? People are scared to buy rental properties because what if your tenant loses their job? But by keeping these lump sums out of the market, which is another way of saying by sitting on too much cash, you miss the opportunity to pick up undervalued deals, to find the deals that other investors don't have the cash to buy right now.

And you miss the opportunity to begin building momentum so that when the economy does rebound, you're already established. You already have your projects in place. I mean, think about it. if you want to start a side hustle, let's say that in 2020, year one of your side hustle, you are just getting yourself set up, you're learning what to do, you're figuring out what product or service you want to offer, you're figuring out who your target client or customer is, you're building a website, you're setting it all up, you're getting the initial work done, and maybe it doesn't make money in year one. But in year two, year three, year four,

as the economy begins to recover, you now have that foundation built so that you now have that foundation built so that your revenues can grow alongside the economy. And that puts you in a much better position than delaying this project, saying, oh, I'll invest after the economy gets better, and then waiting for another two years and starting from scratch in the middle of the rebound. The same thing with a rental property. Your first rental property is, in many ways, your learning curve property. Everything is new, and you are doing all of this for the first time. you're figuring out your systems.

You're building checklists and processes. You're hiring a team. And in that first year, maybe you do price the rent lower than you otherwise would, or maybe you do offer concessions or deals in order to attract and retain new tenants. But by virtue of doing this, by virtue of getting yourself set up during the recession, you then enter the rebound already established. And in the case of a rental property, that means your systems are in place, your processes are in place, your team is in place. Perhaps you have a tenant with whom you have a great relationship.

And so even if you raise the rent or you cease the introductory deals, they will continue to stay there as a long-term tenant. If you put that in place now, then you won't be scrambling to try to put it in place later. So again, don't be afraid of investing. And to be clear, it is crucial to have a strong emergency fund, and that priority is first and foremost above all else. But beyond that, once you have a very strong emergency fund, don't let fear lead you into hoarding an excessive amount of cash. And again, excessive looks different for everyone. And that's going to be based on your goals, your timeline to withdrawal, your age, your risk tolerance. If you are a baby boomer or Gen X, you're going to want to hold more cash and take a more conservative position than a millennial or Gen Z.

So, of course, as always, make sure that your risk fits your age and your time frame. Your investment strategy needs to be a good fit with your life. But the lesson that I keep coming back to is don't let fear throw off that good fit. Number five. Do develop your knowledge and skill set around sports. specific things that you want to learn about, things that will be meaningful, enjoyable, and profitable. This is a fantastic time to take online classes, distance learning classes, in absolutely

anything that you are interested in learning, photography, programming, learning a foreign language, learning how to do voiceovers as a side hustle. If there is anything that you have been interested in learning, this is a great time to do it. Most of us are at home a lot these days. And spending even 15 or 20 minutes a day watching an instructional or educational video, taking a class, filling out a worksheet, doing a quiz, a habit of doing that for 15 or 20 minutes a day, over the span of 8, 10, 12 weeks adds up to some pretty impressive knowledge and skill acquisition.

So if there's anything that you have been wanting to learn for a while, start just start that is tip number five on my list of nine tips that can help you come out of this pandemic come out of this shutdown stronger than you were when you entered it tip number six create something original create a piece of creative work write a book or an e-book build an app design a website repair or renovate some aspect of your home start a podcast, start the side hustle that you've always been thinking about. This relates strongly with the last tip. Remember the last tip was about learning and acquiring a new skill set? Well, part of learning is formal instruction, which will come from an online classroom, but the other part of it is experience. It's learning by doing. So if your goal is to emerge from this stronger than you were before, if your goal is to end 2020, better than you started it, the dual forms of skill set development and knowledge acquisition

that come from both direct learning as well as experimental doing, those two combined, will give you the knowledge and the skills and the confidence that you need to be able to build on that as we go into 2021 and beyond. And if you want to monetize or build a business around the thing that you built, even if it's a side business, approach that project with the idea in the back of your mind of how and when can I hire people to help me grow this. And that leads to tip number seven. Hire people or make plans to put yourself in a position in which you can hire people in the future. This is, of course, an amazing time to hire people. There are many smart, talented, dedicated, hardworking

people who are looking for work, including people who are looking for gigs that they can do remotely while they're working from home, setting their own hours. There are a lot of people who are looking for remote work flexibility. And if you have a side hustle or a small business and you're looking to grow your team, that's the type of thing that you can provide. And if you start a small business or if you make an investment and that leads to your being able to provide some of that work, then you're creating a massive win-win. And you become part of the recovery. So maybe you have some cash. Remember, we talked about not holding on to excess cash. Maybe you have enough cash that you want to make renovations or repairs or upgrades or improvements to a rental

property that you own. Well, this could be a great time to hire contractors in order to provide that work. Contractors have been in high demand for the last decade, in general, and also the last five-year in particular, and the more work they have, the more that they can be selective about who they work with and what projects they take on. But now, a lot of people are putting off discretionary home renovations. A lot of people are putting off consumer renovations. And that has caused a crunch in the supply of work that's available to contractors. That means that if you hire a contractor right now to take care of necessary but long-deferred renovations, it's more likely that they may bid on your project competitively. They may be able to start right away rather than, oh, I can start in a month,

and they may be able to give you their full attention rather than scattered attention. Or let's say that you run a small business. You might be looking for a team of writers, photographers, researchers, assistants, data entry people who can help you with that small business that you're running. Now, if you are already prior to the pandemic, if you were already a rental property investor or already a small business owner, then you're set up, you're established, and even if you have taken a revenue hit, even if you are trying to beef up your emergency fund so that it can be a bit stronger, you still at least already have your business or your investments established and in place so that as the rebound begins, as revenues increase, you'll be able to grow alongside

the rebound. So what if you don't yet have that in place? How? How do you get started now? Well, ask yourself, first, what skills do you have that can be translated into a product or a service? So, for example, I have a friend who right now is making pretty good money selling homemade masks on Etsy. They're not just any old mask. He's amazing at sewing. Working with a sewing machine is absolutely one of his talents and his skills. And he creates these really creative, incredible-looking masks with great patterns and great design.

And he sells them for $15 each, and that's how he's supplementing his income. Once that demand grows, he can then, if he wants to, he can hire somebody to do assistant-level tasks, such as package up the masks, package up the product, wrap it, put an address label on it, take it to the post office. He can hire an assistant to handle that so that he can focus on what he does best, which is the design and creation. Likewise, if he wanted to, he could hire a bookkeeper to organize his records. So he has this opportunity right now to have a side hustle that's humming along pretty

nicely and to hire and build a team around that. And it feels good to be able to give people jobs. That's always true, but I think now more than ever, it's particularly fulfilling. And so to the question of, how do I end 2020 stronger than I started it, you might not be in a position to hire somebody right now, but keep that thought in the back of your mind. And as you approach your side hustle, as you approach your investment choices, as you approach the decisions that you're making, keep that question, the question of how do I hire, keep that an open question in your mind. Because once that question is planted there, you will begin to see those opportunities.

And they might not be immediate, but you may be able to see where that opportunity could exist for you in six months or in a year. And so that is tip number seven. Now, the final two tips eight and nine, both deal with the market. For most people, these are the investments that you'll be making inside of your retirement portfolio or in a taxable brokerage account. Tip eight is to stick with broad market index funds. I know that it can be tempting to want to speculate on which companies are undervalued right now

or on which companies are going to be runaway growth stories. It can be very tempting to speculate and make individual company bets at a time like this. But seeking alpha, making those bets on individual stocks is not a sound strategy for the majority of your portfolio. If you are going to do it, if you're going to indulge in that, do that with 5% or less of your portfolio. The other 95%, I'd say between 95 to 100 percent should be in broad market index funds. Now, if you are curious and if you want to play with different sectors or types of index funds, I don't see anything wrong with that. So, for example, if you wanted to reallocate your assets so that you have more exposure to

large-cap-stable U.S. companies because you feel like large-cap stocks are more of a defensive position, that is perfectly okay, assuming that your overall asset allocation is sound. If you wanted to put a part of your portfolio in a broad market ETF that tracks consumer staples, I don't see anything wrong with that either. Or if you wanted to reallocate a portion of your portfolio to put it into value funds, a broad market index fund that focuses on value stocks so that you can go bargain hunting, you can take advantage of low prices on stocks that have strong fundamentals. Again, in the context of a broad market index fund or a broad market ETF,

and in the context of an overall asset allocation that is reflective of your age, your timeline to withdraw, your goals, your risk tolerance, then go for it. Make an investment in a value index fund and see where it leads. It's very natural. It's very human to want to apply some of your ideas about what my happen in the future to your holdings. But if you do this, and you don't have to, but if you choose to do that, if you choose to go into sector-specific funds or market-weighted indexes, do it in a way that is restrained and that does not disrupt your overall strategy, your overall asset allocation,

do it in a way that does not throw a wrench into the long-term plans that you've had. If you have an investor policy statement, reread that before you make any big changes. Those are the rules that set for yourself. And in times in which we are tempted to speculate, that's when we need to review those rules the most. So that is tip number eight. And finally, let's close out with an idea that you should always keep in mind, which is do expect volatility. The economy is surprising. The markets are surprising. The relationship between the two is surprising. There have been many surprises in the past and there will continue to be surprises in the future. Particularly during a bare market, volatility spikes. And the balance in your portfolio as a result is going to WIPSA up and down,

up and down. On March 12th, Thursday, March 12th, 2020, the S&P 500 sustained its worst drop since 1987. And a day later, that was followed by one of the greatest one-day jumps in history. So that type of roller coaster volatility of everything's crashing, everything's rebounding, now everything's crashing again, that has been with us, and we can expect that it will continue to be with us. That is an attribute of bare markets. Moreover, as many people are seeing, the market is not the economy. We can have Great Depression-level unemployment and have the NASDAQ be up for the year simultaneously. Do not waste your time, energy, attention, speculating about what might happen in the future. Even the smartest economists and analysts in the world get it wrong more frequently than they get it

right. So any one of us playing armchair economist is not going to do better. What we can do is look not at what might be in the future, but rather look at what is right now and make decisions from a place of what is rather than a place of what may be. In other words, cast aside speculation about the future and make decisions about side hustles, about rental real estate, about market investments, about any financial decisions that you're going to make, make those decisions not based on what you think might happen, but rather based on what's the opportunity in front of you right now and is it good or is it bad? Do you want it or do you not?

The best investors in the world, Warren Buffett, does not sell at the top and buy at the bottom. He simply buys when it's a good deal and sells when it's a good deal. He's not worried about those relative comparisons because as long as each individual decision is sound, as long as he's buying investments that are good deals at the time in which he buys them and selling them such that they are a good deal at the time in which he sells, well, do that repeatedly over the course of your life and you end up up. So expect volatility, but remember that it is noise. That applies to the stock market.

That applies to the supposed zestimate value of your home. That's all noise. The numbers only matter at point of transaction. Everything that happens in between is noise. So don't get caught up in the noise. Know that the future is uncertain. know that there will be surprises, there will be volatility, know that speculation is futile, and make your decisions based on current circumstances, make your decisions from a place of what is.

Those are nine tips that could help you emerge from this pandemic, emerge from the year 2020, in a stronger position than you were when you started. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. If you are interested in investing in rental properties, we have a 10-week-long online course that we make available only twice a year.

We are about to open our doors for enrollment for the Spring 2020 cohort. So if you are interested in learning how to invest in residential rental properties, you can enroll from May 18 through May 25, 2020. After that, after May 25th, we close our doors so that we can give our students our full attention, and our doors will remain closed until September or October of this year. So again, if you would like to take this time to learn how to invest in rental properties,

you can learn all about our premium rental property investing course at afford anything.com slash enroll. That's affordanthing.com slash enroll. That page will give you loads of information. Plus, while you're there, you can sign up to join our view. VIP wait list so that you will be the first to know the minute our doors open. Again, enrollment is May 18 through May 25th, 2020, and you can find out much, much more by going to afford anything.com slash enroll. Thanks again for tuning in. My name is Paula Pant. This is the Afford Anything podcast. If you enjoyed this episode, please share it with a friend or a family member. That's the single best way that you can spread the message of financial literacy and financial independence. And make a sure that you hit subscribe or follow in whatever app you're using to listen to this show so that you won't miss any of our awesome upcoming episodes. Thanks so much for being part of this community,

and I will catch you in the next episode.