Due to the coronavirus pandemic, the current unemployment rate was reported to be 13.3%, according to the U.S. Bureau of Labor Statistics. While a $2 trillion economic rescue package, which included government stimulus checks and increased unemployment benefits, has been helping people buy essential items, a lack of savings will make the economic pains of the coronavirus pandemic much worse for many families.
Suze Orman, financial expert and author of author of The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime, told Ladders that she hopes that this economic downturn will help professionals from all ages learn an important lesson about how they handle their money.
The most important financial lesson to take from the coronavirus pandemic
What Orman wants people of all ages to take from this crisis is that you need to create an eight month to one year emergency fund. For people who have the attitude that they deserve vacation once a year, the new iPhone as soon as it comes out, or a new car every three years, Orman wants you to adjust that attitude right away.
Many times, when Orman recommends an eight month emergency fund, people will say, “What else is money for if I can’t use it to buy what I want? I deserve Starbucks every day. I deserve to go out to eat. That’s what life is about, and you’re telling me that I should cut down on all those things so that I can have an eight month emergency fund?”
“This is why I have begged you…for 20 years now I have begged you to have an eight month emergency fund,” Orman said.
According to Orman, thousands of people that have listened to her Women + Money podcast over the years have reached out to thank her for convincing them to create an eight month emergency fund.
She has heard from those that have been furloughed and are not sure if their company will hire them back at the end of pandemic. Regardless of this uncertainty, these people are doing okay because they have enough money to last at least eight months, and possibly longer, since expenses like gas, restaurants, and gyms are no longer in the picture.
Orman has heard stories from those that have lost their job due to the coronavirus pandemic, but don’t have any debt to worry about at this time. These listeners tell her that they will receive unemployment and their stimulus check, but admit to not even needing them, and view them as icing on the cake.
Orman has a message to those who didn’t have an eight month emergency fund ready for a time like this:
“If any of you are out there, and you are now standing in a food line, and you never thought you’d be standing in a food line or going to a food bank. If you are scrambling because you don’t know when your stimulus check is going to come. And you don’t know about unemployment. And you don’t have a penny to your name, but you owe rent. You owe all these things and your landlord is saying to you, ‘No, I need you to pay me,’ or maybe your credit card companies aren’t willing to deal with you….I just want you to think about the stress you’re under right now and think to yourself, was that vacation really worth it?” Orman said. “Were all the holiday gifts that you gave your kids really worth it for toys that they haven’t played with them since right after you gave them to them and yet you don’t have the money to feed your own children…was it really worth it? Or have you now learned the lesson that rather than going on vacation, that money is much better used going into an emergency fund for yourself?”
Is an eight month emergency fund enough for everyone?
Older professionals and those in retirement need longer than eight months for an emergency fund. According to Orman, those who are 60 years old or older need a three year cash cushion because most are living off of their income that’s coming from their retirement accounts that are invested in the stock market.
“The last thing you want is to have to withdraw money from a stock market that’s down 38% like it was at one point,” Orman said.
In the occasion of a bear market, like we are currently in, you want to be able to leave the money that you need from your stocks for at least three years. Orman recommends three years because it takes on average a little over three years, and can take up to five years, for the market to go from the top, to the bottom, and then back to the top again.
How do you know what a three year cushion is?
Well, let’s say you have expenses that total $50,000 per year and you are getting $2,500 a month from Social Security, which is $30,000 a year. That $30,000 is all that is guaranteed. So, you then need $20,000 more to get you by besides the money from Social Security.
As a result, your cash cushion would be $60,000 for the three years. If you have the $60,000 cash cushion, you can leave the money in your retirement accounts alone if the bear market happens to last for three years.