The Covid 19 pandemic has hit the world hard and hit it fast. It was the quickest 20% fall in stock market values ever recorded. People turned up for work only to be told that they were closing and they wouldn’t be paid until they reopened again. Those who work in hospitality and retail have been hit particularly hard. These industries are not particularly well paid and most of those who work in these industries need to work to pay their bills, with little back up.
It differs depending on your occupation, work industry, comfort zones and debts. For instance, a public servant is unlikely to be made redundant and will get their salary each month no matter what. Whereas someone who is self employed gets nothing if they can’t earn an income.
Your debt levels also have to be taken into consideration. The more debt, the more you need to have in cash (another good reason not to have too much debt). The last thing you want in periods of unemployment is pressure from the bank or defaulting on your loans and damaging your credit rating.
Deposit rates are rubbish at the moment and you can expect to earn 0% – 0.01% for a demand account. You need to accept that and don’t look for a return outside of current deposit rates from your emergency fund pot.
We have seen in the current crash, that bond values (as well as gold, crypto and everything else) fell as people scrambled to liquidate positions as they needed cash reserves. Just keep it in cash and in an account that can be accessed quickly, so no 12 month fixed term accounts!
Your emergency fund isn’t just for if you are laid off your job. It can be used for anything; if your car breaks down, you need a root canal and crown, roof leaks. These are examples of things that you don’t want to happen and so don’t plan for. You can also use it for things that you do plan for such as holidays or weekends away. The important thing is to build it back up as you spend it.
When I advise clients on investing money, the most important criteria I look at before making a recommendation is their capacity for loss. That is, when your investment falls by -15% or -30% in 22 days, is it going to have an impact on your lifestyle?
If don’t have a sufficient emergency fund in place, you may have to sell falling assets to maintain your lifestyle and that’s going to hurt. Having cash in your account, means that those horrible losses in your investment account won’t become real if you let it run for longer and let it recover.
It may be tempting for some to use up some of your cash now to pile into the market while they are cheap. Do not do this. We do not know when or where the bottom of the market is. The US market rallied over the last few days as a $2 trillion rescue package was agreed but with employment figures due to come out and future earning figures in the summer, it could get bad again.
As always, if you have any questions, please let me know at steven@bluewaterfp.ie