Outside the Box: Job and finances under threat from COVID-19? How to get a little more financial certainty

Outside the Box

These hard truths may come with a silver lining


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The COVID-19 pandemic has made the past two months feel like a cruel roller-coaster ride, with sharp drops in the stock market, businesses closing and millions displaced from their jobs. The overall mood has been unsettling, to say the least.

Want a little more financial certainty? There are steps we can take that will give us greater control over our life, both in the short and long term. For me, I’ve gained comfort from revisiting my living expenses. This exercise can have great benefits, especially with COVID-19 threatening our jobs and our finances.

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For instance, cutting living costs can help us pay for unexpected expenses that we hadn’t budgeted for, like those 300 rolls of toilet paper. It also allows us to further shore up our emergency fund, which could be particularly helpful if we get laid off.

The longer-term benefits of being deliberate with our spending are even more striking. Consider the hypothetical situation of two people—we’ll call them John and Mark—which is summarized below:

John

Mark

Gross salary

$150,000

$150,000

Taxes

$50,000

$50,000

Net pay

$100,000

$100,000

Expenses

$95,000

$60,000

Savings per year

$5,000

$40,000

Living expenses saved each year

0.63 months

8 months

Emergency fund needed

$23,750

$15,000

Time to build emergency fund

57 months

4.5 months

Retirement savings needed

$2,375,000

$1,500,000

As you’ll see from the table, both John and Mark make a gross salary of $150,000 and take home $100,000 after taxes. But John has living expenses of $95,000 a year, while Mark lives on $60,000. Thanks to his far lower living expenses, Mark has three key financial advantages over John:

1. Save more. Because John spends most of his income, after a year of working, he hasn’t even saved a month of living expenses, while Mark has socked away eight months of living costs.

2. Need less in future. Because John’s expenses are higher, he needs a bigger emergency fund ($23,750 vs. $15,000) and a larger retirement nest egg ($2.375 million vs. $1.5 million). It takes John nearly five years to build up a rainy-day fund equal to three months of living expenses, while it takes Mark just 4½ months.

3. Greater career flexibility. Because his expenses are so high, John is pretty much locked into his current job or a position that’ll pay a similar salary. Meanwhile, if Mark received a job offer at a salary of $100,000—which would be a one-third cut in pay—he could still accept the position, because his living expenses are far lower. Having that sort of flexibility could be particularly important in today’s challenging job market.

What does all this mean for you and me? My advice: Review your expenses for the past several months and categorize each expense as need-to-have or nice-to-have. You might temporarily decrease those nice-to-have expenses, so you can shore up your cash reserves. The good news is, because of social distancing and sheltering in place, you may have cut some expenses already, including dining out, going to the movies, getting haircuts and traveling.

What else might you cut? Here are some possibilities, ranging in impact from small to large:

• Cut bank fees (e.g. ATM, foreign transaction and late payment fees).

• Cancel unused subscriptions.

• Combine individual streaming subscriptions into a cheaper family plan (e.g. Spotify, YouTube TV).

• Negotiate your phone, internet and cable bills.

• Call your auto insurer and ask for a premium reduction.

• Negotiate your rent.

Refinance your mortgage.

• Reduce the burden of high-cost debt by requesting a lower interest rate or paying it off with lower-cost home equity borrowing.

I admit it, I’m a finance nerd. Still, I really do think that periodically reviewing expenses can be an empowering experience. First, there are the obvious benefits: You immediately gain more control over your finances, expand your career flexibility and perhaps achieve greater peace of mind. But this process might also help you clarify your life choices.

I believe that difficult times can help us grow—if we engage in some hard work and self-reflection along the way. I’ve found that revisiting my living expenses has encouraged me to re-examine my past decisions and define my future goals for a happier, more value-driven life. During this challenging period, that’s what I’d call a silver lining. And let’s face it: We all have a little more free time than we want these days for some good old-fashioned arithmetic.

This column originally appeared on Humble Dollar. It was republished with permission.

Roger Ma is a financial planner at lifelaidout, a publisher strategist at Google and author of “Work Your Money, Not Your Life.” The above article is drawn from his book. Roger lives in New York City with his wife Jenn, son Owen and their two cats. Follow him on Twitter.

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