Stay the course. It’s going to be alright.
You’ve heard countless similar phrases over the last two months from “We’re in this together” to “We’ll get through this.” (Go to several bank websites and note how many state one of those two sentences.) Another favorite is“The new normal.”
We’ve heard over and over again how many things have changed, and social media is abound with talking about the things we might not want to go back to when we return to a “normal” life: a life not focused on social distancing and wearing masks.
Truth be told, a lot has changed, but how you approach your finances should not be one of the things that change right now. How you have approached your past finances should have set you up well for how you can continue interacting with them. Saving and investing with smart choices is how to make the most of your finances. So, here’s another phrase to throw into the crisis that we could be hearing a lot more of: Stay the course. Let’s take a look at what staying the course means in terms of financial stability during tumultuous times.
Long Term Wealth
Building long-term wealth depends on not jumping the gun when things get shaky. Even on the most volatile days of the stock market, it’s imperative that you use your brain to make great decisions for finances and leave the stress and emotions in another room of your house. There’s nothing good to come from panic buying or selling, in the same way that stocking up on physical goods that you don’t need does not benefit you.
If you were investing during 2008, you remember the housing bubble and significant associated crash. Even if you hadn’t yet invested, you may remember many experts reminding people that this will pass, and that the stock market will recover. 11 years later, we were all waiting for another burst of the bubble, not aware that it would arrive as a black swan, but awaiting a drop none the less. However, most people held on, even as investments rose at rates that were simply appalling, creating the longest-running bull market. They stayed the course to improve their position for long-term wealth.
Now is the time to continue doing that. In another 11 years, the crisis of 2020 will be a reminder that staying the course pays off, especially during the hardest times. Being patient now, during volatile times, will reward investors.
It is inevitable that some people will have to take out loans against their retirement. We are, afterall, in a severe economic crisis. Yes, it will recover, but for some, it simply won’t be quickly enough.
If you need help understanding how a 401K loan works, it’s fairly straightforward.
First, since you’re taking money out of your own account, it’s not a loan in the traditional sense. Together with your employer, the IRS has set up regulations on how you can borrow against your own 401K. Depending on how much you have in your 401K, the most you can ever borrow is $50k. You are required to repay the loan within 5 years, and the repayment plan is established the moment you go to borrow money from your retirement. Ideally, you will simply pay back the loan with regularly scheduled payroll deductions.
Here’s a more thorough breakdown of how 401K loans work and how they may or may not be beneficial for your situation.
One of the reasons that loaning against your own 401K is not an ideal way is that your 401K is tax-free, but paying it back means you’re using income that has already been taxed. While there’s no direct interest on the loan, the fact that you are paying back what you borrowed with taxed income implies that there is actually a significant fee involved. So, when taking a 401K loan, take just what you need, and if possible, avoid taking it at all. If you can stay the course by cutting costs elsewhere to help get you through, do so.
Additionally, if your stocks have been hit hard by the crisis but you are financially stable, continue matching your 401K as you have in the past years. Your future self will thank you.
If you pulled money out of the stocks in December or January, concerned that the bull market was just too good to be true for much longer, you’re likely in a great position to reinvest. In fact, there’s not a lot of evidence that stocks will continue to decrease in value in the short term, and now is a great as time as any to choose smart places to invest.
Consider choosing stocks for small-cap growth stocks that allow you to invest at a lower valuation that may prove profitable for long-term wealth.
If you’re not entirely sure where to begin investing your cash though, here is a list of stock websites that can help you get started right now. From Investopedia to Yahoo Finance, these options can help clarify any concerns you have, and allow you to use free resources to educate yourself on various stocks, terms, and investment opportunities via affordable investment apps like Robin Hood. In an earlier article, micro-investing is an option discussed, and Robin Hood is the ideal option to use for micro-investing for the DIY investor who is looking to make some smaller investments.
Stay the course in 2020
Right now, you might feel like it’s time to pull out your investments, and store what remains next to your excess stocks of toilet paper.
But, should you really be doing that?. Rather than flushing your investments down the drain along with your toilet paper, continue what you’re doing. You may want to switch some of the stocks you’ve invested in, but taking it all out will not greatly improve your long term wealth. When the hardest things hit financially, it is the most important time to stay the course.