EDITOR: Jeff Mount | MARCH 17TH, 2020
Experts keep telling us to “put it all into perspective,” “stay the course,” and remember that we are “in it for the long-term.”
These clichés don’t make anyone feel more secure, nor do they provide the unique risk management characteristics of sound financial planning. This is canned, institutional word salad that only serves to maintain someone else’s revenue stream.
The coronavirus is highlighting the most important law of economics: supply and demand. With a massive disruption to supply from closed factories in China, we are seeing the world slip into a bear market, and probably, a recession.
A recession isn’t achieved until we see two consecutive quarters of declining GDP. The bear market (a 20% decline) has already occurred. China reported an increase in unemployment to 6.2%, a drop in January/February retail sales of 20.5%, and a drop in industrial output of 13.5%.
Anyone who has history tracking the reporting of Chinese economic data always has a healthy level of skepticism to how accurate the numbers really are.
My point is, as bad as these numbers are, they might really be much worse! Since the supply chain will be distressed for some length of time, the question then remains to whether demand slows or remains steady. If it slows, a recession will result and the pain will be felt for some time. If it remains the same, we can expect price increases that might shock all of us (we haven’t seen inflation in a very long time.)
Since many of us will be locked in our homes for the next couple of weeks, we should take some time to think carefully about our next steps financially. Each of us have unique circumstances that come with opportunities and challenges. Many people think financial planning begins with a budget. I have found this exercise to be one most people avoid, or they do it very poorly.
Since we will be projecting into the future, it might be more helpful to identify our rate of spending instead. If we can effectively manage our rate of spending, then we can be better prepared for tougher times in the short-term, and more able to seize opportunities as we exit this challenging chapter in our lives.
This process is called “dead reckoning” and was created by Mike Helgesen, who was an early adopter of the CFP. As an example, let’s assume each of us spends the income that comes in from month to month. By simply adding up all revenue, monitoring savings, subtracting all hard expenditures, and matching the balance of our debt statements over the period, we can quickly identify our rate of spending. Here is an example:
Identify all income and we’ll adjust it up to account for the other elements of consumption that occur in the course of everyday living like your savings and debt.
The only items that you’ll need to decipher your rate of consumption are:
- Gross income for the period being measured. (We’ll use a quarter in our example, but any period will work as well.)
- Savings account and credit card statements from the preceding and current periods. The preceding statements establish starting points which are compared to the present ones.
- A simple calculator, pencil and paper.
OK, here’s the process in 3 steps. Once you get the idea set your stopwatch and try it using your own data. It may take more than three minutes the very first time but once you get the essentials down, you’ll be pleased to see how fast and easy it is.