We are in midst of uncertain, never before seen times. The world hasn't responded to a pandemic in this way before, and we don't know how long this is going to last or how tough of an economic recession will follow.
In response to this, I've made some changes to my finances. I feel compelled to share my plans with you in detail, in case you're taking a closer look at your money as well.
FINANCIALS DURING COVID-19
RECESSION = FRUGALITY + CASH SAVINGS + INVESTMENTS
Note: The Investment Section will be most helpful for American readers who make 50K or more each year. I'm not a financial advisor- this is just my personal stance so please don't sue me haha
I recently upped my 401K contributions to the max I can contribute. For 2020, that's $19,500. I don't know what the market will do from here, but I do know that most stocks are half-off from what they were a couple months ago. I believe it's a good time to be buying low, so I can hopefully sell high when I retire.
I'm also adding additional funds into a traditional IRA account. (I would normally add funds to a Roth IRA, but I currently make pretty decent money, and it doesn't make sense for the tax bracket I am in.) I'm doing this so I can invest in specific ETFs (exchange-traded funds) that aren't available in my 401k.
Note: Are you lost and you'd would like me to explain ETFs, 401Ks, different types of IRAs, and more? Tweet me and I'll make a special blog post explaining these things.
Here's where I'm putting my money:
- The usual suspects are good here. I already have a lot invested in VBR (Vanguard Small-Cap Value ETF) and VTI (Vanguard Total Stock Market Index Fund) so I chose some new ETFs, but these also look like solid options right now, and if I was just getting started, this is where I'd put my money.
- I invested in VDE (Vanguard Energy ETF). Gas and oil has been hit hard, makes sense since no one is driving or flying these days. This ETF includes all the big oil companies, which means they're not very likely to go bankrupt and they're likely to rebound after this situation is over.
- I also invested in VNQ (Vanguard Real Estate ETF). This is only because I want to diversify my portfolio, because Real Estate is down right now, and because it pays a high dividend and REITs (Real Estate Investment Trust) are tax exempt so you get a higher yield.
Why aren't I investing in travel related funds?
Tbh, I called my Dad (the savviest investor I know) and asked for his advice here. He pointed out that a lot of these travel companies can seriously go bankrupt, and it's a pretty risky place to invest because you could lose your money.
My Dad pointed out that pretty much everything tanked in March. So if everything is currently down a lot, might as well put your money in areas that have less bankruptcy risk.
Cash Rules Everything Around Me
I'm also going to keep my cash savings high in case things really hit the fan. I don't think they will, but no one ever regretted saving too much money.
I will save at least $2K in cash each month on top of my 401K investments. This cash will go into a high-yield savings account.
I'm saving cash for two reasons:
- It's good to build upon my existing emergency fund during uncertain times. If I didn't have an emergency fund, I would probably put a bunch of cash into a high-yield savings account before I put anything into the stock market, in order to have easily-accessible emergency money.
- I plan on buying a house in late 2021 or in 2022. For any large purchases in the next 5 years, I always save cash vs investing the money. This is because, for example, if I had $80K for a downpayment in January but then a recession hit and now I only have $40k... that would suck. Long-term, things will correct themselves, but in the short-term, I want to know I have the right amount of money for things I'll be buying soon.
In Q2, I am going to be living off of rice and beans- cutting all my variable expenses down to bare bones, and saving every single extra penny I can. Right now it's worth it to live at a lower level than I'm used to.
I have some exceptions where I'll continue to spend money:
- Continuing donations/subscriptions to Indie makers and their communities, such as Women Make
- Contributing to a Roth IRA for my little sister (it's her college graduation present)
- Supporting local businesses that are at risk of bankruptcy due to COVID-19
Recessions are scary, but they are also opportunities. Taking this time to max out my 401K, invest in VDE and VNQ, and build up my emergency fund in a high-yield savings account will set me up for money-stability, both now and in the future.
What are you doing with your money during this time? Let me know on Twitter; I'm always eager to learn from you too!