A few days ago, Chris Schelzi from AppSumo sat down with finance podcaster Taylor Schulte to give Sumo-lings financial principles for navigating this economic downturn (as well as future ones). We want to make sure you have the personal finance resources to navigate this time. You’ll emerge with greater confidence and (hopefully!) greater wealth than when all this began.
It’s important to remember that hindsight is indeed 20/20. No one knows what the day to day movements of the market will be. That’s why it’s best to stick to time-tested, long-term financial decisions.
In this webinar, Taylor and Chris walk you through the core personal finance systems you need to have in place to stay focused and grow your wealth during COVID-19.
Taylor Schulte hosts the Stay Wealthy podcast, owns a financial advisory firm, and has appeared in some of the most famous financial publications, including The Wall Street Journal, Kiplinger, and Wired.
And because he knows our Sumo-ling audience, he ate a breakfast taco right before his webinar with Chris. (A financial adviser after my own heart.)
Here’s what Chris and Taylor covered in the webinar.
Get your personal finance during COVID-19 right with Taylor Schulte
Let’s start with the important boring stuff. Without these basics forming your foundation, the “exciting” side of investing is a mirage. You need to get these right before you make any other financial decisions.
Without further ado, the boring important stuff:
1. Build a rainy-day fund
A rainy-day fund is the sum of your bare-minimum monthly expenses, multiplied by the number of months you’d be able to stay financially afloat without another paycheck.
If you lost your income tomorrow and absolutely had to cut all unnecessary spending, how much money would you need in the bank to last 3-6 months?
Or if you’re an entrepreneur, Taylor recommends having 9-12 months of expenses instead of 3-6.
It helps to put this rainy-day fund in a different bank account than your regular checking. This makes it harder for you to dig into the rainy-day fund for non-essential spending.
Pro tip: You can put your rainy-day fund in a high-interest savings account like Ally Bank to make sure your money earns you a little extra money month over month.
Now is not the time to skip creating a rainy-day fund. If you invest your money without a little financial cushion, you might hit hard times that force you to cash out of your new investments, likely at a loss. Don’t risk it. Put your rainy-day fund in place before you put any more in the market.
2. Pay off debt
Debt can be a great tool. People use it every day to leverage businesses, lifestyles, or opportunities to another level. But paying off that debt is vital to your financial success. In the same way that debt can provide you leverage when used strategically, it can also leave you overwhelmed when you let it get out of hand.
The good news is, paying off debt is the only investment with a guaranteed rate of return. As you cut down your debt, you save yourself from paying interest.
If you have multiple large debts, there are two common strategies for paying those down:
- Pay down the highest-interest loans first: This method ultimately saves you the most money because you’re tackling your most expensive debt.
- Go for small wins: Pay off your lowest-balance debts first to get some wins under your belt. As you pay off low-balance cards, you’ll see how good it feels and want to pay off others. Use that momentum.
It doesn’t matter which strategy you choose for tackling your debt. The key thing is: Choose the method you’ll stick to.
3. Max-out your tax-advantaged accounts
Max out your tax-advantaged accounts before opening a brokerage account. Tax-advantaged accounts are investment accounts like IRAs and 401Ks that help you prepare for retirement.
These accounts offer the biggest bang for your buck. They’re called “tax-advantaged” for a reason. It refers to investments that are tax-deferred, tax-free, or tax-discounted.
Think of tax-advantaged accounts as protective houses for your investments. They are not the investments themselves. Within an IRA, for example, you can choose to put your money into stocks, bonds, real estate, and other investments. Simply opening an IRA is not the same as investing. It’s a two-step process.
You may have the option between Roth and Traditional tax-advantaged accounts. While these account types have several differences between them, the most notable difference is when you pay your income taxes.
Here’s the order of operations for each:
Earn income —> Invest —> Pay original income taxes in retirement
Earn income —> Pay taxes —> Enjoy all your money
If you’re looking for a good place to start your investment account, go with a trusted firm: Charles Schwab, Fidelity, or Vanguard.
All these firms offer low-cost investment options. And according to Taylor, the best predictor of future returns is the underlying cost of an investment. Lower cost investments do better over time than higher cost investments.
Why prepare for retirement?
It takes a long time to reap the rewards of investing. You can’t build wealth in the short term.
Investing now means you giving your future self more flexibility, options, and stability.
4. Form a financial plan
A doctor wouldn’t give you a prescription before they know your symptoms. In the same way, you shouldn’t invest or make large purchases until you’ve created a clear financial plan.
A financial plan guides your spending and investments. It takes away on-the-whim decisions—saving you from making reckless or short-sighted decisions with your money.
To build a good plan, Taylor recommends reading The One-Page Financial Plan by Carl Richards.
As the name of the book implies, your plan doesn’t have to be complicated. It just has to put your goals in place (i.e. start a side hustle to diversify your income) as well as a few parameters to make sure your financial decisions reflect your wealth and lifestyle goals.
There’s something powerful about writing things down. It forces you to look at your logic and decisions with greater objectivity and criticism. It also helps you stay focused.
5. Track your expenses
Before your eyes gloss over: This isn’t a budget.
Tracking expenses is a way to understand where your money goes every month. This allows you to notice unintentional excess spending. It brings awareness to purchase patterns you want to change.
For example: If you’re spending $200/month on McDonald’s visits, you’ll want to know so you can funnel that money toward TacoDeli instead.
Also, credit card companies and many banks give you expense statements every month. Even Amazon lets you download a spreadsheet of your full purchase history.
The behavioral side of finance
Behavior is one of the most important pieces of investing. In order to be successful at growing your wealth, you have to be in charge of your decision making. (This is where it helps to have a financial plan in place.)
When things become uncertain—like they are right now during coronavirus—our fight or flight responses kick in.
During good times, most people spend a lot of money and make risky investments because they feel optimistic. In hard times, we sell everything and cut costs.
You know what that means? Many people buy high and sell low—literally the opposite of good investing behavior.
Timing the market doesn’t work except with luck because you have to be right twice: You have to first know when to sell and then know when to get back in.
A better option is to buy and hold. Time in the market is better than timing the market.
Consider this: Even Warren Buffett’s assets, on paper, can show losses during a downturn. But he never cashes during those times, which means he never actually experiences the loss. He is patient and waits for the market to come back up.
How COVID-19 may change us forever
There’s so much negative news out there right now. Instead of reiterating some of the stories and disheartening ideas you’re already seeing in your news feed every day, Taylor and Chris went over a handful of positive changes they expect will come about because of COVID-19:
- Better science: Right now, smart people from across the world are coming together to tackle a hard challenge. That’s gotta lead to something.
- Stronger defense against future pandemics: The reality that viruses can cause this many challenges today is surprising to many people, including governments and countries. We’ll be better equipped for similar situations in the future because of the severity of coronavirus.
- Improved online education: This crisis could bring education costs down, provide better online learning experiences, and make it easier for more people to access degrees and professional training.
- Greater efficiency and effectiveness: People and businesses are taking a hard look at their life because of coronavirus. Many are cutting costs on unnecessary expenses. This can help people find essential tools and hobbies, instead of investing in things that don’t meet a real need.
- In fact: AppSumo has lifetime deals on tools to help you replace your most costly monthly software subscriptions. Browse popular AppSumo deals.
COVID-19 Action Steps: What to do once you’re past the financial basics
If you don’t already have the basics in place, go back to steps 1-5 first. These are for people who already have those steps under control. If that’s you, here are a handful of optimal steps you can take during the current downturn.
- Rebalance your accounts
- Super-fund your tax-advantaged accounts (max out your IRAs, 401Ks, etc. while the market is low)
- Review your investments now. Find ways to optimize and improve these things so that you’re primed for success.
- Every investment has a cost. Find out the expense ratio. Make sure it’s low. (under .5%) Cut those costs if you can find a lower-cost account.
- Diversify your portfolio. For example, try the Vanguard Three-Fund portfolio*:
- Vanguard Total Stock Market Index Fund (VTSAX)
- Vanguard Total International Stock Index Fund (VTIAX)
- Vanguard Total Bond Market Fund (VBTLX)
*The Investment Answer by Gordan Murray is a helpful resource for understanding the Vanguard Three-Fund portfolio.
If you get nothing else from this interview, remember to stick to the basics of personal finance success: Build a rainy-day fund, pay off debt, max-out your tax-advantaged accounts, form a financial plan, and track your expenses.
A huge shout out to Taylor Schulte for packing so much sound investing and personal finance advice into one conversation. Learn more about Taylor at YouStayWealthy.com. Then subscribe to his podcast, Stay Wealthy.