Experts keep telling us to “put it all into perspective,” “stay the course,” and remember that we are “in it for the long-term.”

These clichés don’t make anyone feel more secure, nor do they provide the unique risk management characteristics of sound financial planning. This is canned, institutional word salad that only serves to maintain someone else’s revenue stream.

The coronavirus is highlighting the most important law of economics: supply and demand. With a massive disruption to supply from closed factories in China, we are seeing the world slip into a bear market, and probably, a recession.

A recession isn’t achieved until we see two consecutive quarters of declining GDP. The bear market (a 20% decline) has already occurred. China reported an increase in unemployment to 6.2%, a drop in January/February retail sales of 20.5%, and a drop in industrial output of 13.5%.

Anyone who has history tracking the reporting of Chinese economic data always has a healthy level of skepticism to how accurate the numbers really are.

My point is, as bad as these numbers are, they might really be much worse! Since the supply chain will be distressed for some length of time, the question then remains to whether demand slows or remains steady. If it slows, a recession will result and the pain will be felt for some time. If it remains the same, we can expect price increases that might shock all of us (we haven’t seen inflation in a very long time.)

Since many of us will be locked in our homes for the next couple of weeks, we should take some time to think carefully about our next steps financially. Each of us have unique circumstances that come with opportunities and challenges. Many people think financial planning begins with a budget. I have found this exercise to be one most people avoid, or they do it very poorly.

Since we will be projecting into the future, it might be more helpful to identify our rate of spending instead. If we can effectively manage our rate of spending, then we can be better prepared for tougher times in the short-term, and more able to seize opportunities as we exit this challenging chapter in our lives.

This process is called “dead reckoning” and was created by Mike Helgesen, who was an early adopter of the CFP. As an example, let’s assume each of us spends the income that comes in from month to month. By simply adding up all revenue, monitoring savings, subtracting all hard expenditures, and matching the balance of our debt statements over the period, we can quickly identify our rate of spending. Here is an example:

Identify all income and we’ll adjust it up to account for the other elements of consumption that occur in the course of everyday living like your savings and debt.

The only items that you’ll need to decipher your rate of consumption are:

• Gross income for the period being measured. (We’ll use a quarter in our example, but any period will work as well.)
• Savings account and credit card statements from the preceding and current periods. The preceding statements establish starting points which are compared to the present ones.
• A simple calculator, pencil and paper.

OK, here’s the process in 3 steps. Once you get the idea set your stopwatch and try it using your own data. It may take more than three minutes the very first time but once you get the essentials down, you’ll be pleased to see how fast and easy it is.

Step 1: Identify your income

This is easy. Nearly everyone knows how much their income is. The source of income for most households is salary or salaries. If you have other sources of income simply add them together. All income is counted whether it’s from salary, rental income, business income, pensions or royalties. So when you think of your salary or your business income, pension or royalties etc., think of it as also being a component used in the calculation of your spending rate.

Use gross income; that’s the greatest value of your income before any reductions for taxes, or expenses. Taxes, contributions to retirement plans, health insurance, and other typical reductions from paychecks, pensions, or Social Security deposits (Medicare is a health insurance reduction) are just expenses. They are not special categories.

Notice to those people who receive income from sources other than from salary:

• If you own a business, your personal gross income is what your business earned after business expenses. It’s derived from schedule C of your tax return.
• If you are an investor, add the gross value of any distributions from your investments. Disregard growth and reinvested dividends and interest.
• If you’re retired, use the gross Social Security and pension values not the net check after taxes are withheld and Medicare has been taken out.
• If you have rental property, your gross income is the net income after rental expenses derived from schedule E of your tax return. Please add back any depreciation expense that you took since you never really wrote a check for that unique expenditure.

Add up all your gross income. In the example that follows $20,000 was collected during the preceding quarter from the following components:

Part time consulting income $7,000

Social Security 6,000

Pension 4,000

Rental income 2,000

Book royalties 1,000

Total Income for the quarter $20,000

Since income will act as our proxy for your rate of spending, we will refer to it as your rate of spending. Draw a simple map next with one vector traversing the page from left to right and label it as follows:

Tentative rate of spending: $20,000

The tentative rate of spending needs two adjustments to become your actual rate of spending. In making these two adjustments we perform a similar function to the one a ship’s navigator carries out when reckoning a ship’s speed by noticing how much time elapsed between two known locations. In our metaphor, the ship’s speed is your rate of spending and the two known locations are the known value of your accounts in two periods of time.

Step 2: Adjusts the tentative rate of spending by dollars which you saved or withdrew during the measuring period:

We know with certainty that you didn’t consume the money that you saved therefore we can reduce your rate of spending by an amount equal to the amount of money that you saved during the measuring period.

If, on the other hand, you made a withdrawal from savings then financial dead reckoners make the very reasonable assumption that you consumed the money that you withdrew, and would increase your spending rate accordingly.

Please look at the two examples below. The first demonstrates the effect that saving has on the tentative rate of spending during the period and the second illustrates a withdrawal.

In this example $1,500 was saved during the measuring quarter so $1,500 is subtracted from the tentative rate of spending as follows:

Income for the quarter: $20,000

Savings for the quarter: -1,500

Adjusted revenue: $18,500

Before moving to the second example please model the change by adding a second vector to your map. The new map shows the effect that savings has on the tentative rate of spending.

Tentative rate of spending: $20,000

Savings adjustment: subtract 1,500 saving: 18,500

In the next example we assume that money which you withdrew from savings during the measuring period was spent. With very few exceptions, which are cited in endnotes (3), financial dead reckoning is unconcerned with the specific items that make up your total expenses.

Some of those expenses may reveal a surprise or a private matter. Navigators using financial dead reckoning don’t reveal where money is spent, so no judgement from others can disrupt your planning. The process simply assumes that money earned, withdrawn or borrowed has been consumed and that repayment of consumer debt and savings were not consumed. In the example that follows a third vector is added showing that no money was withdrawn from savings so no further adjustment is made:

Previously adjusted Income for the quarter: $18,500

Withdrawals for the quarter: 0

Adjusted revenue: $18,500

Tentative rate of spending: $20,000

Savings adjustment: subtract 1,500 saving $18,500

Withdrawal adjustment: add 0 withdrawals: $18,500

Step 3: Adjust income by changes in debt:

If you borrow using a credit card, financial dead reckoners assume that you consumed the amount borrowed so your rate of spending is increased by the amount which you borrow.

Add the outstanding balance of all of your credit cards from the prior period in order to establish value of debt at the starting point. Now sum up the credit cards for the current period and compare the current sum to the prior period. A reduction in debt indicates that you spent less revenue than you received. You must have done so or you wouldn’t have had the dough to pay down your credit cards. We’ll subtract that reduction in debt from your income. In the example that follows a fourth vector is added showing that debt did not decrease so no further adjustment is made:

Previously adjusted Income for the quarter: $18,500

Reduced debt for the quarter: 0

Adjusted revenue: $18,500

Tentative rate of spending: $20,000

Savings adjustment: subtract 1,500 saving: $18,500

Withdrawal adjustment: add 0 withdrawals: $18,500

Debt reduction adjustment: subtract 0: $18,500

If on the other hand, debt increased then you were probably short of revenue so we’ll add the increase in debt to income revenue. In the example that follows a fifth vector shows that debt increased by $1,000 so that amount is added to the spending rate as follows:

Previously adjusted Income for the quarter: $18,500

New debt for the quarter: + 1,000

Adjusted revenue: $19,500

Tentative rate of spending: $20,000

Savings adjustment: subtract 1,500 saving: $18,500

Withdrawal adjustment: add 0 withdrawals: $18,500

Debt reduction adjustment: subtract 0: $18,500

New Debt adjustment: add 1,000: $19,500

Stop! You have just calculated with great accuracy a spending rate for one quarter of $19,500.

As you can see, this method is easy to use on an ongoing basis and can help some of us tighten the belt while waiting for better times. This method is equally useful for people who live paycheck to paycheck or for those who have seven figure incomes.

For people who have assets invested in some way, I strongly recommend creating a contingency reserve account (one that has very little risk in it), a bear market reserve (low risk assets that can be tapped if needed during a bear market), and an inflation reserve account (one that is invested in asset classes that historically do well during inflationary periods like commodities and Treasury Inflation-Protected Securities). These accounts help investors keep their more aggressive investments in place while they recover from market shocks like we have seen.

For investors who meet the classic definition of the middle-class millionaire, consider segregating assets into purpose-based accounts. Each of these accounts will have their own distribution schedule at some point in the future. I am a fan of a risk management process known as “aging.”

This process encourages taking on the most risk at the point farthest away from the distribution date and gradually migrating those assets to low risk investments as the distribution date nears. Some have compared this philosophy to “target-date” investing, but I see one enormous difference. Portfolio managers of target date strategies assign a certain level of risk management benefit from diversification of sub-asset classes.

Although this benefit is felt during normal times, these sub-asset classes all correlate to “1” during periods of crisis and the risk management is sacrificed at exactly the time the investor needs it the most.

The coronavirus won’t last forever and the markets will recover. Please don’t quarantine your assets but do take the opportunity to consider these helpful tips for a more successful financial future.

Jeff Mount is president of Real Intelligence LLC. Jeff has been active in the financial services business for the last 25 years. His unique skill set includes sales, sales coaching, strategy and client service modeling. In 2008, he created a very unique training program, which is now called the Essential Family Office, which has helped financial consultants achieve significant growth of their assets under management and in a more scalable format. On average, these consultants saw an annual increase of $28 million in new assets under management in the first year upon completion of the training.