In the US, the coronavirus crisis has deeply undercut a formerly burgeoning economy.
Millions of Americans have filed unemployment claims, with the total now in the range of 20 million. If you have clients fearing unemployment, immediate steps must be taken to help them lock down a measure of financial security.
Protecting clients from losing their jobs is outside your brief, of course. It’s a touchy subject in any case, but it makes fiduciary sense to contact clients and learn of their prospects. It’s always the case in financial planning: the sooner you start to prepare, the better the results – and the less painful the shocks, when things turn sour.
Start off with the discussion we’ve held since our parents first talked to us about money: where is all that cash going? Analysis of spending habits is an ongoing process, if ever there was one. Even the most disciplined penny-pinchers sometimes fall into impecunious habits. It’s easy to waste money, but with proper motivation – fear comes to mind – careful money management can return to the fore.
If a client is worrying about possible unemployment, emphasize that every dollar counts – you’ll likely be met with quick agreement. Examine where their money goes, with no amount too small for consideration and analysis. The usual suspects are minor luxuries, easy to shed or replace with only minor discomfort. Ask a client to record every cent they spend for a few days or a week – they may be surprised at what they record. The potential for major reductions is often quickly uncovered, surprising many a client.
Counsel that now is the time for painful cuts. When the situation normalizes and the economy starts to recover, enjoyable excess can return to their lives, but for anyone facing unemployment, financial discipline is the order of the day. Indeed, the tight fist can help edge out anxiety.
People worrying about job security often act preemptively to pay down debt, in fear of delinquency and gargantuan credit card interest. It seems a reasonable course, but we don’t recommend it. If a job is lost, cash in hand is what you’ll be needing. Major loan obligations, like mortgages and car payments, must be met, though they usually aren’t too burdensome (if they are, something went wrong long ago). Keeping up payments is essential for future financial health.
This might even be a good time to borrow, as interest rates are attractively low. This strategy can support clients who have major expenses ahead that can’t be delayed. Borrowed funds could even be conservatively invested to create an emergency fund, with the gains partially offsetting the loan’s interest charges.
A bear market might not seem like a good time to sell shares, but if unemployment is on the horizon, clients may need to consider it. Conservative investment is essential for these customers. The market will recover one day and fortunes should be restored, but for the immediate future – and we admit this horizon is hard to determine – protection from further share price declines is the primary and demanding goal.
Advisors should focus on tax protection, which suggests that securities held in IRAs or 401(k)s should be sold off first. Recall to clients that any losses today can serve to reduce their tax bills for this year and potentially into the future.
Homeowners should examine the benefits of refinancing their mortgages. A 30-year, fixed rate credit in the maximum amount available should reduce the monthly house payment. If this approach doesn’t suit the client, have them consider a home equity line of credit. We normally don’t recommend this vehicle, but in a crisis, it can keep the wolf from the door.
For more information, please read:
Advising Clients on the Brink of Unemployment | Wealth Management