The world is different now than it was a couple of months ago. We’ve seen unprecedented changes happening almost daily for weeks, and things are difficult for almost everyone. We often learn our most important financial (and other) lessons in times of adversity.
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 to have. 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?