Top 6 Financial Lessons We Can Learn from the COVID-19 Pandemic
The COVID-19 pandemic caused a big disruption in the lives of Americans and people all over the world. The massive job lay-offs caught many off-guard and left people with little to get by. Even with the help of the government, a majority of Americans are still having financial problems. Here are
Because of this, many people resorted to applying for unemployment benefits. COVID forced dozens of companies to reassess their expenses rather than file for bankruptcy.
If there’s one important thing that COVID-19 taught us, it pays to save money. In a world where most retailers operate online, it’s easy to click “add to cart” and lose track of your spending. Before you know it, you’re left with little to nothing in your bank account.
This is the reason why every person should aspire to be financially literate. Financial literacy allows us to manage our money better. It teaches us wise spending habits and makes sure that we have enough savings in case the worst comes.
6 Important Financial Lessons from the COVID-19 Pandemic
But with the recent global pandemic, there’s little we can do to amend our financial situation. The events that took place in this pandemic have taught us valuable lessons which we can carry on to the future. Here are some of the most important financial lessons that COVID-19 taught us:
1. Unpaid Debts Can Drain You
Managing debt becomes especially hard during a crisis. The continuing threat of COVID-19 makes it harder for people to keep up with payments. If you’re living from paycheck to paycheck, it can be challenging to pay off your debt.
For businesses, they may have to resort to taking out more loans to pay their bills. While it’s easy to think that your credit card can save you from this, you can’t expect to rely on it all the time. Otherwise, you’d be putting yourself in a more vulnerable financial position.
While there’s nothing wrong with having debts from time to time, you should learn keep your credit light. In reality, we all have debts. But in this pandemic, it’s vital to keep it in check. As much as possible, don’t add more to it if you’re not confident that you can repay it. Since it’s a time of crisis, you should limit your spending to your basic needs. If you run a business, you may need to cut costs on some aspects. Anything non-essential should be cut-off from the budget.
Debt is cheap when there’s an economic downturn. If you can’t pay your debt right away, you can find alternative ways to reduce the interest and monthly payments. For instance, you can refinance your mortgage or your inventory. This way you’ll have more liquidity and you can pay off your debts faster.
It’s also best to keep your debt at a minimum even before a crisis happens. One way of knowing if you’re financially stable is if you can keep up with the monthly repayments. If not, then you may have to reevaluate your money-handling habits.
2. Having an Emergency Fund is a Must
While many may be lucky to keep their jobs during the economic crisis, other people do not enjoy the same luxury. Without their salaries, it becomes harder for many to hold-up financially.
You may have heard this a thousand times but it holds: an emergency fund is a must. Unfortunately, not all people realize its importance. Because of that, many live off what little they have left and some fall into debt which makes their financial situation more difficult.
An emergency fund is a budget that you set aside that will help you during unexpected situations. This could be a job loss, unexpected medical costs, or other unforeseen expenses. Experts say having 3 to 6 months’ worth of living expenses should suffice. But if you can, aim for a year’s worth of expenses. It should cover mortgage or rent, utilities, essential needs, and other important expenses.
If there’s one thing that we can get from the COVID-19 pandemic, it’s that you can’t predict when an emergency will come. Your emergency fund will act as your back up in case you find yourself unemployed or short on cash. The money you saved acts as your safety net and it will prevent you from using your credit card for a big purchase.
Saving for an emergency fund, however, can be challenging. That’s why it’s important to start as early as possible. Even before a crisis hits, you should always put your emergency fund first. Set aside a portion of your salary to your emergency fund and do it as often as you can. Eventually, you’ll save enough to get you through a few months of crisis.
3. It’s Helps to Keep Your Investments Diversified
The COVID-19 pandemic has created a steep decline in stocks the past few months. The primary thing that we can learn from that is that it’s never a good option to bet all on one investment. An economic downturn can cause other stocks to decline, but it will also drive others to thrive. For instance, airlines garnered a huge loss when the government banned all flights in the beginning of the pandemic. On the other hand, e-commerce businesses saw an increase in their sales as more people stayed home.
This is exactly why it’s important to spread your investments. “Don’t put your eggs in one basket,” as a financial agent would say. Each investment has a different characteristic and volatility. When you invest a part of your money on different stocks, you won’t risk losing all your investments at once. If one of your investments fail, at least you’ll have other investments that will help mitigate the loss.
It’s also important to learn how investments work before you invest your money. There’s a lot to learn when it comes to this topic. While diversifying is helpful, it’s also important not to get carried away with it. Keep your investment portfolio at a minimum. This will help you manage it better. As a good rule of thumb, limit it to 20 to 30 different investments.
4. Insurance Policies are Important
Insurance policies are there for a reason. You never know what will happen during the COVID-19 pandemic. With that, it’s always better to prepare for the worst.
If you can afford to self-insure, then do it by all means. But not everyone enjoys the same luxury. That is why many buy insurance premiums.
If you already have one, be sure to keep these up to date and study the fine print the best you can. A basic life insurance should cover anything related to the pandemic because not all insurance policies has this feature. If you can afford it, shop around for premiums every year or so. Situations change from time to time and your insurance policy will cover you no matter what happens. Be sure to call your insurance agent if you want clarification on something.
5. It’s Better to Live a Simple Life
Pay cuts and job loss have put many financial situations into a fragile state. It forced people to cut down or limit their expenses on the essential things. In this crisis, it’s always important to reevaluate our spending habits. With the limited resources we have, there’s a need for you to restrict your spending to what you can afford.
Living simply in times of the pandemic teaches us a lot of things. For instance, many people learned new recipes as they limit orders and take-outs. Others mastered a craft that they never knew they could do. Some also learned to repair rather than to replace broken items. Through simple living, we give ourselves a chance to discover the talents and skills that we otherwise wouldn’t know if we continued with our extravagant living. Plus, you save money in the process.
6. It’s Okay to Ask for Help
With the increasing threat of the pandemic, you need all the help you can get. The SBA, for one, is helping small businesses cope during the pandemic. For people who lost their jobs, they can apply for government grants that will allow them to pay their bills.
But even with that, there are still some people who are struggling with their finances. If you find yourself in this situation, don’t hesitate to ask for help. People who are close to you might be more than willing to help you out during this time. Instead of relying on loans to get you through the hard times, try asking your friends or family for help. You’ll be better off this way than taking out loans with high-interest rates.
How You Can Manage Your Finances During the Pandemic
Money management is difficult enough. But it becomes even more challenging in the face of a pandemic and economic downturn. The COVID-19 situation had people worried about the future if the crisis continues.
As the world faces an uncertain future, it’s important to ensure that you get a hold of your finances. Here are some financial management tips to help you during the COVID-19 crisis:
1. Spend Less
It’s important to save as much as you can during a crisis. Even if you have a job, there’s no telling until when your company will hold up if the crisis continues. By reducing your costs, you’ll get to save more for your emergency fund and other expenses. This will also help you achieve financial freedom faster.
2. Have a Budget
The best way to track your spending is to create a budget. Make a list of your monthly payables and allocate a budget to each. While you’re at that, consider cutting some costs where you can, too. For instance, if you’re staying home most of the time, you can reduce your budget for gas. With the money you save, you have more to put on your emergency funds and investments.
Now the hardest part is sticking to your budget. It’s easy to get overwhelmed when grocery shopping only to find out that you bought more than you can consume. The best way to avoid that is to create a list of the things you need and buy only that. Aside from it being budget-friendly, you’ll also get to finish grocery shopping faster, too.
3. Prioritize Your Bills
Make it a goal never to miss out on bills payment. If you have a credit card debt or other loans, pay it on time. The least you can do is avoid the interest from piling up making it more difficult for you to pay off your loan. Prioritize your food, rent, and utilities, too. These are the basic things you need for survival. Most importantly, avoid unnecessary spending. Every cent count during an economic crisis.
4. Renegotiate Loans and Rent
Unemployed people may be able to ask for help from the government to pay their bills. If you have a loan, there are options that you can use to defer payments or renegotiate payment terms. Renters can also renegotiate with their landlords for lower payments until they recover from their current financial situation.
5. Always Have Your Emergency Fund Accessible
If you saved enough for your emergency fund, then be sure that you can access it anytime you need it. Again, there’s no telling what the future holds. If worse comes to worst, at least you’ll have your emergency fund ready to save you in times of financial emergencies.
Preparation is Key
The past few months created a big impact on the financial situation of many people. But at the same time, it imparted lessons that will help people prepare for the future. Taking steps to ensure that your expenses are fail-proof will put you in a better position in the future.
Learning how to manage your finances will help you mitigate the risks if the world faces another crisis in the future. Reflect on this unique time and be proactive. If you emerge strongly in this pandemic, take it as a chance to work on your financial plans. Seek help from the financial experts at SMB Compass and learn how you can give your finances a new start and make sure that you’ll be covered in the future.