This post is based on a session I gave at the Thrive Effect's Re-Defined Conference on 29th May 2020.
Before the lockdown, I spent much of my time scampering around the South East, delivering workshops and facilitating group coaching sessions. Once the government started taking the pandemic seriously, all my work was cancelled. I had events booked through until the end of July and had planned my finances accordingly. On a memorable day in late March, I watched in mute horror as one email after another landed in my inbox. All of them began "sorry but…". I allowed myself a couple of hours swearing and catastrophising, but then I did two things:
1) I spent a lot of money (and I don't just mean on gin, crisps, and other essentials)
2) I turned down some offers of work
Why on earth did I do that? You're probably thinking this woman's deranged, doesn't she realise there is a recession coming?
In this post, I'll explain my reasons through three main ideas: thinking long-term, investing in assets, and being intentional.
At the beginning of the year, I often had to explain Zoom to clients. Now many of us spend most of our lives peering at a webcam and hiding our laundry. Suddenly the market has become huge and shares in Zoom have rocketed. Investors are cursing themselves for not having spotted the potential of this technology – “if only I'd got in a bit earlier, now I'd be rich”.
But a much wider user base has exposed many flaws with Zoom, and video conferencing has become a hugely lucrative market. Existing players like Google and Microsoft are ramping up their products, while new competitors are entering the marketplace - competitors who are much more nimble than Zoom. By the end of the year, this will be a very crowded market and Zoom perhaps will be no longer pre-eminent. As with any stock market investment, you only get rich if you choose exactly the right time to buy and sell.
While Zoom has been riding high, airline shares have crashed. Nearly everyone is dumping their aviation stocks, including Warren Buffett. Consequently, airlines are going out of business or making huge changes to their workforce. But once travel restrictions ease, there will be high demand for air travel. Those airlines that survive will be busier than ever and this will be reflected in their share price. The airlines have collapsed immediately are those without a good long-term plan - they were carrying lots of debt and couldn't afford the repayments once passenger numbers dropped. It’s the same risk if we run up large credit card debts. So long as we’re enjoying a regular salary and can make the minimum payments, it’s fine; when the income stops, the strategy falls apart. The airlines that are still going and aren't desperately begging the government for support are those that have cash reserves and can ride it out.
Both business and personal financial models are often based on the good times. They rely on the easy availability of credit and a steady income. If one dries up it's a problem, if both dry up it's a catastrophe. We need, therefore, to think long term. What are the implications of pursuing this strategy in a changing economic climate? How can we mitigate some of those risks?
One way is to not treat our business like a cashpoint. If we have a bumper month, there's the temptation to trouser as much of the cash as possible. This only works if we enjoy a succession of bumper months. It collapses when there's a month where we don't get any work, a big client doesn't pay us, or we have to replace a spiteful computer that exploded at exactly the wrong moment. By drawing a regular modest salary, we can ride out some of these fluctuations. Admittedly, it's not very exciting – we feel we deserve a bonanza if we've done really well - but then there's nothing in the tank when times get hard.
Equally, we need to think long term regarding the types of work we take on. Is this project we’re offered going to give us a quick cash boost, but also take up a lot of our time and involve the purchase of new equipment? It is going to occupy all our headspace over the next three months, leaving us with no time or energy to think about the longer-term strategy? This is why I turned down some work just after the lockdown started. I needed time to consider a new direction for my business, and that direction is one that involves a lot of planning and preparation. Turning down short-term income means I can pursue a longer-term strategy. Of course, I’m in a fortunate position of not desperately needing that cash. Having treated my business like a cashpoint in the early days, I’ve been paying myself a modest and consistent salary for the last few years.
This isn’t about predicting the future – none of us can do that – it’s about preparing ourselves for the unknown. All we can predict is more unpredictability.
Investing in Assets
Although it might sound like financial jargon, an asset is something that provides you with a return on your initial investment. Although gold is often referred to as an asset, you only realise its value when you sell it – then, of course, you no longer have it. It provides you with no income while you hold onto it. Gold is often popular during economic downturns because it's perceived as safer than money. Once the economy recovers, the price of gold dips once more. Again, to prosper with investments you need to buy and sell at the right time.Fortunately, I'm now more sensible. After my work was cancelled, I started investing in assets. Not gold bars or shares in Zoom, but:
An expensive car can be an asset if it allows you to drive further in search of better paid work, or if you're a chauffeur. But it's a liability if you just use it to drive to Waitrose, which is what happened when I had an early midlife crisis and bought a Mercedes. My Popemobile was steadily depreciating while I was making fixed monthly repayments.
It’s time to assess your assets:
As business owners, we need to invest in assets. And as business owners, we are assets.
The best way to future proof our finances and also to deal with any immediate shortfalls is to be intentional. Both with personal and business finances. This means:
Overall, cut what you spend on boring or unnecessary stuff, then you have some spare cash to invest in assets or in what makes you happy.
The rest of this year and probably next year will be difficult for us all as we adjust to a changed social and economic climate. Why not, then, seize this opportunity to think about different ways of doing things. It's going to be disruptive anyway, so why not seek some positive disruption, too?
If you're really struggling at the moment, then perhaps just being intentional is all that you can do, but do consider your long-term strategy and investing in assets when you're building yourself back up again.
Many of us are likely to have much less money over the next few years, maybe forever, so we need to redefine our idea of wealth. Is it about having as much money as possible now, or is it about securing a long-term future based on what really matters?
- 1Identify potential assets you can invest in
- 2Consider any liabilities you can ditch
- 3Create a spending plan for you and your business
- 4Eliminate any unnecessary expenses
- 5Build an emergency fund/cash reserve