We lived in an interesting time where our normal way of life is being challenged.
To halt the progress of this Covid-19 virus, governments around the world are asking people to keep a safe distance, work from home. Certain non-essential businesses are closed down.
As an individual who is interested in financial independence, financial security and retirement, it feels like Covid-19 may have a profound impact on how people feel about certain themes within the financial independence movement.
This post hopes to give you something to think about.
Work From Home is Simulating Your Ideal Life
Many of us are forced to work from home, do split teams or go into office on alternate days.
With work from home, it gives you the opportunity to test out how life would be if you are
- A freelancer working in a knowledge-based role
- Semi-retirement lifestyle or a cruising retirement lifestyle
- Working while your children and spouse are at home over a prolonged period
- If you do not need to commute
The reason why we aspire for financial independence is maybe because we wish
- To have optionality in life
- Have more time
- Be able to spend more time with family
- Get away from toxic work culture
- Spend time on our hobbies
We can test a few of these things to varying degrees. We discussed a bit in our Financial Independence Telegram group about this.
One individual is using this period to test out a life of working, exercising and see if this is really the ideal life. Another came to a conclusion retirement is boring.
Most are trying to adjust to working from home while in close proximity to family. A few are adjusting to doing too much compared to when there is clear segregation of personal and working life.
Reflect upon this period
- Is this a more balanced life for you?
- Do you miss working in the office or seeing co-workers?
- Were you able to focus on working a certain hours, then switch your brain off and do stuff you enjoy?
- How big of a deal is not having to commute?
Your idea about financial independence may be re-calibrated.
Identifying How Lean Your Expenses Can Be… and is Still An Acceptable Living
One of the key aspect about planning for your financial independence is answering the question of how much income you need.
That is a function of how much your family and yourself need in terms of annual expense.
I do advocate for people to look upon each expense line item as two component:
- Essential expenses
- Less Essential expenses
It is always a debate what are essential and what is less essential.
Spending only on essential expenses is basically close to survival mode living that is acceptable. You are not giving your family the best, just enough. You are also not going to the bare minimum.
You would realize that it is not a question of whether vacation is essential or tuition is essential. For each expenses, there are different grade to this.
For example, everyone feels that food is an essential expense.
No. There are different grade of expenses. Fine-dining is one grade. Eating at restaurants is another grade. Kopi-tiam food is another. Cooking Maggie Mee and Steaming Buns at home is another.
If you classify food into the minimally acceptable level and the extravagant one, then you may be able to split your expenses to essential and non-essential.
During this period, you may be able to figure your essential expenses out better.
Government is asking non-essential services to stop working from Tuesday onwards. You are restricted from traveling. Some of you might see your job turned temporary or might have lost your job.
Almost everyone is going into maintanenance mode.
If you pay attention to your expenses, you might be able to extrapolate and figure out your annual essential expenses. It would be best if majority of your transactions are recorded in credit cards and bank statements.
At the end of April
- Take a look at how much you spend
- Contrast that to how much you were spending previously
- Reflect upon also your views about this quality of life
Some of us find that our spending does not differ much. At most, we save on transportation cost.
Some realise their expenses are lower.
Folks come into planning with some outrageous income needs. This is a time to reflect if it is outrageous.
If you need less, you are closer to your financial independence goal.
If it is a struggle for you here are a trigger list to think about:
- Home for living
- Insurance for Protection (not investment or saving)
- Household (Utilities, home improvement, ancillary services like maid)
How Much Slack Do You Need in Your Life?
This COVID-19 crisis somewhat highlights how much slack we have in our way of living.
Slack means having enough room to operate, enough to sustain some margins for error.
This crisis highlights perhaps the downside of an efficient system:
- Businesses operate without excess cash holding. If your company has too much cash, activist shareholders will question why do you need so much cash. It is not doing anything and it brings down the company’s return on equity.
- Paycheck to paycheck. How much we earned, it is paid out or deployed through recurring payments to insurance companies, mortgage payments. Our savings are in the form of lock-in commitments that cannot be stopped.
- Retirement Planning for the bare minimum. This probably going to contrast against what I said in the previous section. Because our retirement needs are so much, we planned for just enough. No slack. When the economic situation do not work our way, we find it hard to react.
The solution to all this is sensible saving for the rainy day and have enough buffers:
- Save a healthy percentage of your income
- Ensure you have an emergency amount of cash
In personal finance, we preached about it, but it took me a while to realize that not many firms can take the kind of shock where there is almost zero revenue coming in. Fixed costs like labor and premises still need to be paid despite less business. Interest payments need to be paid as well.
If your business is a low margin business, high fixed cost, it is hard to survive with not much revenues coming in.
On a personal basis, low margin means high income but end up very little free cash flow after all the expenses. High fixed cost means a lot of expenses that you cannot reduce despite no work coming in.
I think while having an emergency fund would be good, the way to visualize your cash and investments is someone like what I wrote in my article about managing the money of a freelancer.
Imagine your cash and liquid investments queueing up in a conveyor belt.
How long of an expense or income runway would you have?
In exceptional times, you might need to liquidate your investments or to frantically find cash flow. That is a hard decision to make. But it is still a pretty good thing to have that option available.
The equities and bond market can be illiquid in times like this (the individual bond market became real illiquid at certain points), but it is still more liquid than many other things. Selling a bond worth $1 previously for $0.80 is painful, but you still have $0.80 when you need. And you do not need to sell off all your bonds at one time.
Often, there are virtues for turning more of your human capital into financial assets.
The Last Word
I am not some guru who is going to tell you how the world would be like in the future.
But I think in a way, most people would feel more strongly about what they really like, and could not get access to during this time.
In a way, this retrictive period also helps you amplify what you really enjoy and are being short-changed.
I hope that some of my friends could see the light after a period where their lifestyle is re-calibrated and optimize their spending. However, experience tells me if this event is short lived, things will get back to normal.
I think many companies will start rethinking their office optimization strategy. Not in the name of productivity but in cost. A lot of times companies do things not because it is the right thing but based on herd mentality.
This might be good for you if got adjusted to work from home, working shorter hours during this restrictive period. There might be more work opportunities that opens up for you.
On the other hand, you may not enjoy this so much that you will prefer to have a 9-5 job in the office. But at the same time, this period might make you realize that despite that, it is good to build up some financial security.
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