In case you haven’t noticed, the markets have taken a beating recently and the new year hasn’t made much of a difference.
The downturn in oil is magnified where I live (in Alberta). The subtle differences between this year and last are starting to add up, and can no longer be ignored by anyone in the area.
Before last year things were pretty rosy – with $100 oil everything seemed to be going well. House prices were rising, stock markets were headed up (especially oil stocks) and business across almost all sectors was booming.
This year? Not so much. Splashy headlines aside, I’ve noticed a significant (and interesting) difference in my daily life:
- There are more homeless people than I’ve ever seen here. I can’t walk 3 blocks without being asked for money.
- In 2014 any property could be rented within hours. Now landlords are so desperate to rent their properties they offer incentives like gift cards, flexible terms and even the first month free.
- The overall number of businesses is going down, and fast. In 2014 virtually every office space was filled to capacity, but now I notice numerous empty businesses everywhere.
- Traffic is much better because there are less people heading to/from work each day.
- Two years ago what seemed like every 3rd house had a fully loaded, $80,000 pickup truck. Now I rarely see them and most have either downgraded to a smaller vehicle or sold their expensive ride.
The downturn is affecting everyone who works in the energy sector, and it’s taught me a few important lessons related to finance.
Cash is King
The belief that cash is king is usually applied to businesses. The more cash they have, the more opportunities they have to invest in new equipment, pay down debt, or even pay excess cash back to shareholders through a special dividend.
But cash is also important when it comes to personal finance. The more cash you have the more flexibility you have – just like a business you can pay down debt, invest the money or continue to save it for a rainy day. Nothing is more liquid than cash and having a decent amount on hand means you’ll be able to choose the best way to use it during an economic downturn.
The economic downturn has taught me that those who have a reasonable amount of cash set aside are stressed less about their money and as a result make better money decisions.
Emergency Savings Matter
In the past few years I think some people (and not just here) have dismissed an emergency savings as not important. They believed it was a wasted opportunity to either invest in stocks, buy property or simply spend it on consumer items. They thought an emergency savings didn’t matter as most investments have performed well in the past 5 years (between 2010 and 2015 the TSX went up about 30%).
Times have changed and so have the markets. Stock prices are coming back down and house prices are also falling in some areas.
In the event of a job loss, family emergency or large unexpected costs, having an emergency fund has suddenly taken on more importance.
Most people aren’t sure how much to set aside for an emergency fund, and I always say 90% of the battle is setting aside any amount as emergency savings given that a large percentage of people don’t have anything saved for a rainy day. Estimates range from 3 months of expenses to 24 months, but it all depends on your own personal situation and comfort level.
If having only 3 months of expenses saved up concerns you then aim for more – but the key is to get started. The easiest way to do this is to set up an automatic transfer each month (to an account created only for savings).
Personally I have cash set aside in case of an emergency and use a high interest savings account to maximize the amount. Sure, the interest rates aren’t great, but the key is that I have almost immediate access to the money if I need it.
The economic downturn has taught me that those who have an emergency savings are better able to handle their finances – they can plan better, make better decisions that aren’t rushed/desperate and will save by not having to borrow money at high interest rates.
Investing Can Be Emotional
As much as we hate to admit it, investing is emotional. It’s hard not to be at least a little emotional when making decisions about your savings and retirement. After all, no one would be happy to see their investment go down 20-30% weeks after they bought in.
I think investors who are able to separate their emotions from investing have the potential to make impressive returns.
Separating emotion from investing isn’t easy but it helps to take a long term (10-30 year) view when investing. If a stock is good enough for you to invest in you should be happy to hold it in the long term and not worry about a temporary drop in the markets. Good companies survive a downturn and come out even stronger.
Conclusion – the downturn in the oil and gas sector has been a huge shock that no one saw coming, but it’s come with some important lessons. People who manage their money effectively will do fine, and it all starts with having enough cash on hand in case of an emergency.