Our net worth plummeted by more than $600,000 when S&P 500 took a massive dip in March. We've also been losing $3,000 of rental income per month on our Lake Tahoe vacation property, while still having to pay the monthly mortgage of $2,480.
While we feel very lucky that the pandemic hasn't affected us as severely as it has for others, the economic downturn was so swift that I even considered re-entering the workforce to boost our finances.
To make up for the losses, my wife came up with a new financial strategy:
Over the past 15 months, about 60% ($13,260) of our monthly passive income ($22,100) was spent on living expenses.
Luckily, since April, we've managed to cut back by at least 32% (to only spending $9,017 per month). We plan on using the money saved to invest in more real estate opportunities.
Cutting back on the expenses below hasn't been easy, especially when you're raising a three-year-old son and a five-month-old daughter in an expensive city like San Francisco. But we're willing to do whatever it takes.
1. Night doula
Monthly savings: $8,000
Our expenses were significantly higher this year because we hired a night doula (a professional who provides overnight, in-home support for families with newborns).
This was never part of the plan, but our toddler had been waking up several times in the middle of the night (hence why I regret not doing enough sleep training when he was younger). We were able to handle it at first, but things got increasingly difficult as my pregnant wife was nearing her due date. And by the time our daughter was born in December, we needed the additional help.
Our hope was to continue hiring her until both kids learn to sleep more soundly, but a doula is by far one of our biggest expenses that we know we can do without.
2. Food and groceries
Monthly savings: $500 or more
In 2019, we spent an average of $2,500 per month on food. This year, however, our spending went up to about $3,500 per month — partly due to having a second child, but mostly because we had to rely more on food deliveries. The tips and fees really add up!
So far, our new strategy to cut costs by $500 or more per month has been working (we currently spend an average of $16.50 per person, per day):
Monthly savings: $1,000 or more
We've been able to cut back on non-essentials by 90%, from roughly $2,000 to $200 per month. This may sound too drastic to be true, but the lockdown has forced a new kind of frugality (e.g., no entertainment or restaurant outings).
We also haven't spent a penny on new clothes, gifts or electronics. Our only recent splurge was a small $100 slide and a $50 push car. We figured it was a smart idea since the local playgrounds have been closed.
Even as the economy reopens, we will continue to cut back on non-essentials — just in case there's a second wave of virus cases and the economy falters again.
To identify what sources of income we should — and shouldn't — spend time and money on, we reviewed the risk levels for each of our passive income streams.
Surprisingly, our real estate investments in single-family homes have been promising. The two tenants from our San Francisco properties have been paying rent on time; both have essential, high-paying jobs, so we're not concerned about any payment issues down the line.
To boost our passive income, we've been searching for a good real estate deal in the city. Our plan is to buy and rent it out (or move in and put our existing property up for rent).
Our real estate crowdfunding investments, however, are at highest risk of decline. Two of our investments, both in hospitality, took a massive hit due to shelter-in-place orders. We have very little control since we're minority investors, so our only option is to ride out the storm.
I've also been writing more frequently on Financial Samurai, the financial site I started in 2009, to increase advertising revenue. Hopefully, this will lead to other profitable opportunities. (Last year, it generated roughly $50,400, thanks to an e-book that readers can only buy on the site.)
When chaos strikes, it's easy to feel paralyzed and do nothing. But, as the saying goes, you should never let a serious crisis go to waste. Although it will take some time for our new strategy to make up for the losses, we're already starting to save thousands of dollars.
Plus, now that we've been forced to change our spending habits (for the first time in a while), we will be more financially prepared for the future.
Sam Dogen worked in investing banking for 13 years before starting Financial Samurai, a personal-finance website. He received a B.A. in Economics from The College of William & Mary his MBA from the University of California in Berkeley. Sam has been featured in Forbes, The Wall Street Journal, The Chicago Tribune and The L.A.Times.