MONEY MATTERS

THREE IMPORTANT MONEY LESSONS FROM THE COVID-19 PANDEMIC

By Kevin Zhang

We live in uncertain times.

This column was supposed to be about how to avoid debt traps when buying a vehicle. But since I wrote my last column, the world has been flipped upside-down. So, instead, I will look at some important money lessons we can draw from this crisis.

LESSON 1: Emergency funds are not “nice to haves,” they are an essential component of a healthy life Growing up, we all heard Grandma tell us the importance of “putting a little away for a rainy day.” But a significant number of people today are still woefully unprepared for the rain.

In a recent Ipsos poll commissioned by Global News, a whopping 58 per cent of Canadians surveyed indicated they have less than four weeks of emergency savings, of which 31 per cent have essentially no savings at all. My heart goes out to those who are in this situation and have lost their jobs.

If you do not currently have an emergency fund, please start one today! Start with something attainable, like $1,000. In a non-pandemic world, $1,000 is a good cushion for most common emergencies you will run into. Put this money in an account that is not easily accessible, but can be made readily available in an actual emergency. Once you have that in place, slowly work toward building it to the recommended threshold of three-to-six-months of expenses.

This is not quick or easy to do. It means having a proper budget, where you write down every dollar you are going to spend before you spend it. It means cutting back on everything, even the things you would never normally think about cutting. It means saying “no” far more often than saying “yes.” But in the end, it will be worth it.

I saved my first $1,000 while making minimum wage. Today, our family emergency fund is well over the recommended threshold, and we would not trade that peace of mind for anything in this world.

LESSON 2: There is no such thing as “good” debt In recent years, certain credit “experts” have gotten very good at using mental gymnastics to justify our culture’s growing reliance on debt as a way of life. They say debt is “good” when you use it to purchase assets that appreciate in value (like houses, mutual funds, etc.), and debt is “bad” only when you use it to purchase assets that depreciate in value (like cars and every other form of consumer debt).

Now, in an actual global emergency, the “good debt vs. bad debt” theory is being stress-tested to the extreme. As it turns out, lenders do not care if the underlying asset appreciates or depreciates. They only care about one thing: can you make your payments on time?

For many people, the answer right now is a resounding “no,” and they are at risk of losing everything they own. This is because major economic downturns rarely affect only one aspect of an economy. The 2008 financial crisis wiped out the real estate market, the stock market, and the jobs market simultaneously. People who overextended themselves and borrowed too much money to purchase houses and other investments found themselves underwater overnight. With their jobs gone, they were put under extreme financial duress to liquidate their investments at a loss to pay off their debts. Many have lost everything, and never recovered.

I am not saying you need to avoid debt at all costs. For most people, this is not a realistic way to go through modern life. But we need to adjust the attitude our culture has toward debt. There is a prevailing sentiment in the current zeitgeist that it is perfectly okay to go into “good” debt and stay there. When I speak to my friends who hold this attitude, the justification is usually along the lines of, “Well, when invested properly, your money will make a much higher return than the interest you would be paying on the debt, so it is actually a good idea to borrow money to invest.” This rationale makes perfect mathematical sense, in a world where nothing ever goes wrong. But now that things have gone horribly wrong, and as the economic tide recedes, we are very quickly finding out who has been financially skinny-dipping.

As a wise investor once said, “The debts are assured, the returns are not.” Debt has never been a good thing and never will be a good thing. If you must go into debt for anything (including a house), your only focus should be how to get out of it as quickly as possible, and how to avoid going back into debt.

LESSON 3: Never panic-sell your investments during an economic downturn Toward the end of March, when the mass panic first began to set in, my wife received a frantic phone call from her parents. “We sold all of our stocks! You should too! It is getting really bad!”

We simply shrugged our shoulders and went about our day.

We knew the market was going to take a beating in the short term, but we also knew that it will eventually bounce back. The 2008 crash was the worst financial crisis in a century, and yet the people who simply held onto their index and mutual funds tripled or quadrupled their money by 2020.

Anecdotally, I would say that only 20 per cent of people who sold their investments at a loss did so under real financial duress. The other 80 per cent sold because they let their negative emotions overwhelm them, and they sold when there was no immediate financial need to do so. In either case, the result was the same: severe and sometimes crippling financial losses.

My in-laws’ reaction is the stereotypical reaction during an economic downturn. The stock market, for all of its complexities and technicalities, is almost exclusively driven by human emotion. When people are scared, the market reflects that fear. When people are hopeful, the market reflects that optimism. Fear is highly contagious. When people are watching the value of their investments (which are often their whole life’s savings) plummet in real time, their natural instinct is get out and save what they can. But doing so not only guarantees the losses they were trying to prevent, it also robs them of any future gains they would have incurred.

Overcoming the urge to panic-sell is a two-fold exercise. First, understand that periodic fluctuations and financial crises are part of the normal ebb and flow of the world. Investing in the stock market is a long-term wealth-building exercise. Over a 40-plus-year time span, the value of a properly diversified portfolio will always go up, therefore any phantom losses in the short-term are completely irrelevant to your financial future. For investors who are within five years of retirement, action may need to be taken to protect your portfolio, but even then, decisions should be reasoned and based on sound advice, not heightened emotion.

Second, and more importantly, never put yourself in a position where liquidating your investments at a loss is your only way out. This is much more difficult to do, and it goes back to having proper emergency funds to weather the storms, getting out of debt as quickly as possible, and having the proper insurance to cover unforeseeable tragedies in our lives. As boring as it sounds, the secret to living a blissful and stress-free life, even in times as dire as this, boils down to proper risk mitigation. Those who do it well will never be afraid of life’s toughest challenges, and those who do it poorly will never be more than a minor breeze from financial ruin.

I wish all of you the best of luck in these trying times. A crisis like this is a major test of our resolve. Despite all the tragedies and setbacks, I have no doubt that Canadians will prevail. We are the hardy bunch of the North, and we will persevere in the face of adversity.

Kevin Zhang is Internal Audit Accountant in the Finance department at the OECTA Provincial Office. He is a

Chartered Professional Accountant (CPA) and holds a BA in Economics from Wilfred Laurier University.