[Editor's Note: I'm not the only one who has learned some financial lessons from the pandemic and associated economic downturn. Today Passive Income, MD shares what he has learned.]
A lot of things have moved from theory and into reality – including some things I thought I had all figured out. One thing’s for sure: in times of crisis, you very quickly find out what’s really important.
Over the last few weeks, I’ve learned three very important financial lessons, and I’d like to share them with you.
#1 An Emergency Fund Is More Important Than I Thought
Years ago I wrote a post called Why I Don’t Have an Emergency Fund. Of course, an emergency fund is a buffer for events like job loss, health costs, or other unexpected life events. Most financial professionals recommend that you should have 3-6 months of full expenses set aside for such an event. Some even recommend 9-12 months.
I thought that was totally crazy. Haven’t they heard of inflation? Leaving cash just sitting there means that it’s essentially eroding away. I’m young, and that money could be sitting there for a long time. Rather than “wasting” it, I want my money working at all times.
I had a lot of great arguments for why I didn’t need an emergency fund. We’re a dual income family, I have great disability insurance, a HELOC, multiple sources of income, and delayed reimbursement from work.
But I never expected the economy to just . . . freeze.
I expected that if there was a downturn or recession, I could be quick and nimble and find my cash sources.
I’ll be honest with you. Early on, there was a moment when the media was going nuts with coverage, the stock market was tanking, unemployment was skyrocketing, and it looked like banks would freeze. I didn’t panic, but I started hunting for all my cash.
I did execute on my original plan, which was to draw cash from my HELOC and have it safely tucked away somewhere. There was a moment, though, where I was concerned that I'd be locked out of the HELOC. Apparently this happened during the Great Recession of 2008.
My anesthesia group told us to brace for a significant drop in incomes and we’ve all seen that come to life.
Fortunately, when I actually sat and reviewed my finances, I realized I would be fine. But I quickly learned how much tolerance I truly have in an emergency situation. And as it turns out, I felt uneasy and a bit scattered without a defined cash reserve.
Because of this experience, I’ve made the decision to change my tune a bit. From now on, I’ll be keeping an emergency fund of three months' expenses. This is one of many important financial lessons that is going to impact me significantly moving forward.
#2 I Need to Have Everything Better Organized
When all this began to happen, I was deep in the process of refinancing. I’m not sure if you’ve ever done a refinance or purchased a home, but suffice it to say, they ask you for every piece of information that you could possibly find.
In the past, I’ve relied on my accountants or financial advisors to have all this information. But trying to reach them during one of the biggest economic disasters of our lifetime is . . . difficult.
Plus, as I’ve mentioned before, thinking about my own mortality made me think about what my estate plan looked like and the policies I had in place (life, disability, etc). Because of this, I had already planned to organize my documents – this just provided extra motivation.
Still, finding everything I needed proved far too difficult for my liking.
Even apart from this unprecedented economic upheaval, how would my family be able to find anything if anything would happen to me?
To address these issues, I used the In Case of Emergency Binder and virtual vaults to organize. Now, not only is everything squared away, but I feel much less stress wondering if I’d be able to find something when it’s needed.
#3 Having Multiple Income Streams as a Doctor Is No Longer Optional
As you may already know, I’ve always thought that having multiple streams of income was an important thing. After these recent events, though, I’ve realized it’s not just important – it’s vital.
People will likely look at this time as a once-in-a-generation event. But when I’ve spoken with physicians who were practicing in 2008, they say that medical practices and hospitals were, financially speaking, hit extremely hard during that time. Elective surgeries were down. Reimbursements were down. Practices closed.
Financial security in medicine is a myth. It’s not recession-proof like people think. Because of this, everyone needs multiple streams of income. Ideally these income streams would be in multiple industries that aren’t necessarily correlated.
That way, if one dries up, if regulations change, if politics change, or if technology changes and disruption occurs, people have options to not only maintain their lifestyles, but to thrive.
When it comes to our investments, we know that diversification is crucial. It just makes sense. But when it comes to diversification of income, people seem to have a much harder time with it. I strongly believe that if you haven’t begun to diversify your streams of income, beginning immediately should be high on your priority list.
Bonus Lesson: The people you surround yourself with make a huge difference in handling tough times.
I’ve been fortunate to be able to surround myself with extraordinary people (see post: You Are the Average of the Five Physicians You Spend the Most Time With). During this time, they’ve been a source of support and inspiration.
They’ve challenged me to take a real look at where I’m at, to control what I can control, and also to look for opportunities. I like to think I’ve done the same for them.
So please, I can’t stress this enough: find a group of people that will challenge you, not just agree with you. It’ll make you stronger, and it’ll get you through these tough times like nothing else.
What have you learned during this time and what adjustments are you making? What are the most important financial lessons you have learned during the coronavirus pandemic?
Great post!
I agree completely that diversification of income streams is huge. It extends to investing as well. The classic argument is stock market vs real estate investing. I support a hybrid approach for just this reason: diversification!
I personally learned the importance of financial education and really started down the path to financial well being during the pandemic.
The Prudent Plastic Surgeon
Where do you live that you are the first commenter on every blog post I write and schedule to publish in the middle of the night?
After reading the comment by PPS on this post, I had the EXACT same observation as WCI, who beat me to the punch! With all due respect, and not at all trying to be snarky (😜), you are either not sleeping enough, reading enough, or working enough. Or more than one !
Or lives in Alaska or Hawaii and reads the blog posts before going to bed rather than after waking up. That’s the usual case. Or just really, really dedicated to building his new blog and willing to stay up late to do it. Or maybe works nights. But that seems unlikely for a plastics guy.
hi WCI,
you must remember what it was like when you just started your blog, don’t you? Prudent plastic surgeon seems to be a truly nice guy by the way (read his blog and comments he is leaving and his replies). I love your blog and you are doing a great job but replies like this one make me regret that I didn’t just stick to reading the main post only. No need to be mean to somebody!:)
I didn’t think WCI was being mean. I’ve been wondering the same thing about the comments since TPPS came onto the scene. I agree, he does seem nice. And he seems like he really wants to make his new side gig work. One more thought, maybe he’s holding a newborn baby that won’t sleep so his wife can?
Ha ha. I don’t think newborn behavior is quite that regular!
Relax. Nobody is being mean and we’ve had 10X the offline conversations as you have seen online. And yes, he is a truly nice guy. Over the years there have been four or five people who have left the first comment on a blog post for every post for a couple of months. They’re usually new bloggers motivated to get their name out, (go back to 2016 or so and look for PoF posts) but sometimes it is someone in AK or HI. The new blog posts go out at 12:30 am mountain time so it is odd for someone on the East Coast to be up every night at that time.
These are great lessons. Being retired I don’t have a traditional emergency fund but rather several buckets of cash that cover both two (or more) years of normal expenses and a fairly large amount for special ones. I can’t have medical expenses as insurance takes care of that and our house is new so no large maintenance either. Having a diverse set of income sources is also good, however I do something else. I have utility stocks that pay dividends, sure they could decline a little but if all them stop I am in more trouble than could be taken care of. Several of my investments have stopped paying dividends, and others that should be liquidating are not due to the virus. Thanks once again for both providing valuable advice and having things to keep your mind active.
Another thing you will learn is the Bogle admonition to keep it simple. Death or major loss of income is complicated enough without having to sort through a complicated multi-dimensional investing plan that is trying to do better than a plan you could explain to an 8-year old. And clearly you actually have to have an emergency fund.
A Fixed Income Floor + 2-fund investment portfolio + emergency fund should make you and your heirs have time to live and you are ready for the unexpected. You have enough. Stop playing and tinkering. —Advice from an OF still reading the white coat investor but having also read 350+ investing books to look at all the trees in the forest.
A Great post that will help others start thinking too. Thank you & Bravo!
I appreciate this post and these tips. The emergency binder is a great idea and something I had conceptualized (but not yet figured out how to implement) a few weeks ago in the middle of the night when I awoke with a coughing fit and my mind started racing down a worst-possible-scenario rabbit hole. I’ll definitely be setting this up.
I am early in my career and feel comfortable with a high level of risk, but agree that the entire economy coming to a halt was not something I had considered and gave me considerate angst. As another example: I was starting a mortgage refinance and was planning to go with a 15-year, but changed course to a 30-year due to the pandemic. I now don’t think I’ll ever go with a shorter mortgage again. I can always pay it down early, but the flexibility offered by that lower payment really came in handy when there was uncertainty about our salaries (it took my health care organization around a month of being slowed-down/shut-down to actually give us any information on how our compensation was going to be affected) and would again in the future if there are any similar situations.
Agree. Never understood why people would take a 15 year mortgage. Maybe the interest rate is a little lower? But you can always double payments and make it a 15 year or whatever, but that 30 year lower payment sure helps in a time of crisis.
Yes, the interest rate is a little lower. I paid off my 15 in less than 7. No regrets. No payment at all helps a lot in crisis.
You should always own some bonds
No need for a fund like a mm today earning nothing
Kiss. Keep it simple. That is your portfolio
Investing is hardly rocket science
Excellent post by the Passive Income, MD. For me, and perhaps for others, the greatest benefit of a significant emergency fund is lower stress. I personally feel that until financial independence is reached, having at least a years worth necessity spending, in cash form, is crucial. The loss of a few percentage points insignificant vs. the stress of dealing with a recession, job loss, etc. I view it as cheap insurance.
It also insures against the stress of another type of adverse career event. Very few people, in any profession, will go through an entire career without being told, by someone in a position of power, to do something they consider ethically repugnant. We always believe, perhaps hope, we will do the right thing. Having a large emergency fund in the bank will make the decision that much easier.
Good article but after thinking about it, other than an emergency fund what other source of income could you have coming in that isn’t recession-proof? Or is it that you mean you hope the different streams of money won’t all be affected the same way? I think the one potential problem is increased risk. For example, real estate owners could also be hit hard now if their tenants can’t pay rent and you don’t get mortgage relief depending on your reserves and leverage. I’m fortunate that my rental place that all the tenants are doing better than anticipated but could totally see depending on the tenants, locations, etc. being in a worse position than just staying in a simple investment plan with emergency fund. Curious about what other methods of diversifying income you are referring? Also, curious how your real estate is doing? Would be interested in others way of diversification on income that would be less affected by these past 2 recessions.
The only income stream I have other than my primary job is my index funds. If that pot is large and diversified enough, I don’t see any reason to complicate things by dabbling in various side businesses.
As for medicine being vulnerable to recession, I think that’s true to some extent depending on the specialty, but it’s still far more secure than most industries. Throughout human history, people will always get sick and they will always need medical care. Our office closed down for a few weeks, but we’re pretty much back to pre-COVID levels now, and this event was truly a once in a generation occurrence that, in the grand scheme of things, wasn’t all that financially bad to physicians who were well-prepared. Having an emergency fund and plenty of bonds certainly helped.