What can COVID-19 teach us about Personal Finances?

What can COVID-19 teach us about Personal Finances? 06/11/2020

The COVID pandemic has been a troubling and testing time for all of us. Financially, at best it has brought a period of uncertainty and for some, it has resulted in the unexpected and sudden loss of employment.

However, economically, it’s not too dissimilar to other recent economic downturns such as the global financial crisis of 2007-2008 and the dot-com bubble of the late 1990s.

Although each of the above events arose from a completely unique set of circumstances, the general economic impacts are similar and it is almost inevitable they will repeat. History teaches us that we as individuals cannot afford to write off the current economic situation as a one-off fluke event.

However, there are some simple and effective strategies we can use in future to equip ourselves and our families against future economic disruptions.

An emergency fund can really save your ass

If you do find yourself in a difficult situation after losing your main source of income, an emergency fund is designed to tide you over for at least six months of barebones essential living expenses, such as food, bills and housing costs. Having this fund in place in advance will avoid you having to try to lend or borrow money at a time when you may struggle most to secure it.

Perhaps most importantly, an emergency fund gives you the peace of mind that, if the worst happens, you and your household have a security blanket to fall back on, which is priceless.

It’s vital to have an awareness of your essential outgoings

It’s always important to track your expenses or at the very least keep an itemised list of all of your essential and non-essential outgoings. If you suddenly find yourself in an unfortunate situation with no or reduced income, you can quickly consult this list to know what non-essential subscriptions you need to cancel immediately to make your savings last, and how much you need to budget for housing, food and energy costs to survive.

An awareness of this figure is also essential when establishing your emergency fund. 6x your essential monthly living cost = your six-month emergency fund figure. If six months seems daunting, start with three months and then build it up to six once you reach that goal. As is always the case with finances, the most important thing is starting now.

Income diversity is invaluable

Diversification is a recurring them in personal finance. And it’s as important for your income as it is for your investment and savings strategy.

If we only have one source of income i.e. our primary job, we’re at a much greater risk of suddenly finding ourselves with absolutely zero income should the unfortunate happen.

If our primary income is suddenly cut short due to a job loss, a secondary source of income could be the difference between burning through our savings very quickly and being able to get by until we can replace our main income source.

The options available here are truly limitless. Your second source of income could range from letting out a spare room in your home to a lodger, having your own blogging website and generating income from affiliate links to running an Etsy store or providing a local dog-walking service. A side income can be anything that makes you money, but ideally, it’s something that you’re passionate about. Even better if it’s in a different industry to your main job to avoid burnout and putting all of your eggs in a single-industry basket.

Be ready to take advantage of opportunities

When the fears and uncertainty around the COVID situation initially broke, the world stock markets almost instantly crashed. This temporary blip should be of no real concern for long-term investors, who should know to hold tight and ride out any storms.

However, if you were one of the fortunate ones who found themselves in a relatively secure job situation and with a fully-funded emergency fund in place, you would have had the opportunity to invest any extra unallocated cash savings or surplus income in the stock markets during this downturn.

Purely for illustration purposes, since that initial full impact of the crash the US S&P500 index has almost fully returned to its initial pre-crash value. An investment on 23rd March, the lowest point of the dip, could now have produced a 30% return just four months later.

Of course, I believe that, for most, investing should be considered a long-term strategy and that timing the market is only easy in hindsight. However, there’s no doubt that if you have any faith that the worldwide markets will recover from any dip, as they always have done in the past, buying at any or even multiple points during a dip is a fantastic position to be in.

Thank you for reading; I hope you’ve found this post useful. If you’d like to learn more please consider subscribing to my email newsletter to receive future posts.