By Guest Bloggers, Vicki Cook and Amy Blacklock
During this incredibly challenging time, you’re doing the best you can to manage your personal, family, professional, and financial life.
You might be navigating your job at home while also taking care of your children. Without music lessons or soccer practice, you’re baking cookies and playing board games with the kids instead. Video chatting with your aging parents, relatives in other states, and your best friends becomes part of your new weekly routine.
With all of the lifestyle changes you’ve experienced during the COVID-19 pandemic, you’re also likely managing your finances more closely. Even if you weren’t living paycheck to paycheck a few months ago, layoffs or a reduction of salary or work hours may have taken their toll on your account balances.
While you have to do whatever it takes to get through these difficult months, you’ll also want to take some time to think about the years ahead.
10 Financial Lessons from COVID-19 and How to Apply Them
We can all learn a great deal from the COVID-19 pandemic. By applying these 10 financial lessons from it, you can create a more secure financial future for you and your family.
1. Know Your Personal Cash Flow. You’re probably aware of how much money goes into your bank account each month. But do you calculate how much you spend?
Tracking your earnings and expenses will help you understand why your monthly cash flow is positive or negative. A personal cash flow that’s positive allows you to direct extra funds to pay down debt, boost savings, or increase investment contributions.
But, if you find that you can’t pay all of your bills or save any money most months, you likely have a negative monthly cash flow that you need to address.
There are plenty of free and low-cost apps you can use to track spending like Mint or YNAB. But a simple spreadsheet or notebook will work fine too. When you’ve taken charge of your personal cash flow, you can create a budget and identify necessary and discretionary spending.
Armed with more financial information, you’ll be able to generate an emergency spending plan to control spending when a crisis hits.
2. Reconsider “Rule of Thumb” Advice. Most financial advice suggests saving an emergency fund that covers at least 3-6 months of your expenses. But is that the right amount for you?
When people begin taking control of their finances, a rule of thumb is to put at least $1,000 aside for emergencies before making other financial moves. While this may prevent you from putting a car repair on a high-interest credit card, stashing more money into your emergency fund still needs to be your focus.
Saving 3-6 months of your expenses may provide enough time to financially recover from a job loss, injury, or another kind of tragedy without suffering irreparable financial damage. But depending on your debt load, career field, and family situation, having more than six months of living expenses in an FDIC-insured bank account may help you sleep better at night.
Remember, personal finance is personal. Others may tell you that you have too much in savings but follow your own plan. The idea that your money should be invested and not in a high-yield savings account may work for their risk tolerance, not yours.
3. Minimize Your Debt Load. There’s a good chance you’re paying off at least one student loan. But you might also be paying down credit card debt, car loans, and a mortgage at the same time.
A good credit score combined with a strong economy, record numbers of jobs, and low-interest rates is a recipe for inflating your lifestyle and taking on more debt. Making payments on your debt may not have been an issue until COVID-19 struck.
What to take away from the pandemic is that borrowing money - even for good reasons - still results in you carrying more debt, requiring regular monthly payments.
To take control of your debt load, start by tackling your unsecured debt (credit cards or personal loans) and focus on paying it off as quickly as possible.
Then, establish sinking funds to save for future expenses you know are coming (think children’s braces) and any purchases you intend to make (new stove) rather than using loans or credit.
When you do have to take a loan, shop for the lowest interest rates, strive to make a larger down payment, and reduce the length of the loan term whenever possible.
Reducing your debt load will allow your money to go further at any time, but especially during any future crisis.
4. Monitor Your Credit Score and Report. Opening up credit cards, taking out loans, and making late payments can all impact on your credit score. And you may not realize how much that score and your credit history matter until a crisis happens.
When you need money fast, a poor credit score or red flags on your credit history affects who will lend you cash. It also determines what interest rate you’ll pay.
Lenders have made moves to support borrowers during the COVID-19 pandemic. But you may not see those options during a different emergency.
You can obtain a free copy of your credit report at AnnualCreditReport.com and review it for accuracy once each year. (While there are plenty of look-alikes, this is the only website authorized by federal law.)
Monitoring your credit score is also simple and free. Discover offers card holders a free "Credit Scorecard” - and you can sign up to see your credit score even if you aren’t a customer. Other lenders and credit card companies also have similar services.
5. Consider More Diversification. If you’ve worked at the same great job for years and have always had an aggressive investment strategy, you might be thinking about things differently as COVID-19 passes.
Young investors with stable jobs and long investing horizons may not need to diversify their investments or their income streams now. But others may consider it a real necessity.
With one income source and high-risk investments in limited asset classes, you may be too narrowly focused to weather any future financial storms.
As we’ve seen with the pandemic and past recessions, job losses and the stock market often move in tandem.
Consider speaking with a financial professional about your personal situation, investments, and risk tolerance. You might also consider diversifying your investment portfolio by investing in real estate or other alternative investments that can help you meet your financial goals.
Diversifying your sources of income can help you get through crisis periods too. If you’ve ever considered doing side jobs or starting a small business, now’s a great time to research your options and develop a new stream of income.
6. Manage Your Emotions. It’s certainly easier said than done. Even those people who are generally “calm, cool, and collected” can let their emotions take over during times of significant stress.
It is normal and valid to have waves of emotions in trying times. But learning to manage them is important too. Making decisions based on emotions rather than logic and information can threaten your finances and retirement.
Short-term money moves can seriously impact your finances and long-term investments. Panic selling of investments like stocks usually doesn’t end well. And spending money from a savings account on an impulse purchase, can cause havoc if you suddenly lose your job and no longer have the income to support your monthly budget.
This is why you should consider writing an IPS or investment policy statement, and establish sinking funds for items outside of your regular monthly expenses.
Your IPS will help you identify and define your long-term financial goals. During a significant economic downturn or personal emergency, it also guides you to make informed decisions about your investments. Whereas sinking funds will help you plan your purchases and avoid impulse spending.
7. Keep Learning and Connecting. If you’ve enjoyed working for the same employer for years, you may not be thinking about having to find a new job or different career. But COVID-19 has many people concerned about their future.
It’s easy to skip professional growth opportunities when you’re busy. Attending conferences, taking a course, and learning new skills takes time, and you may not value their benefit until it’s too late.
Don’t ignore the chance to network with others in your field. Serve as a mentor for someone just beginning their career. Or find a mentor if you’re just starting in yours. Keep up with recertification requirements until you’re positive you won’t ever do work in your field again.
By keeping a focus on continual improvement and staying connected with others, you’ll be better prepared to apply for new positions or pivot into a new career option.
8. Protect Your Loved Ones. While you may not be in a high-risk category for COVID-19, you’ve likely seen stories about healthy people of all ages who have become seriously ill or lost their lives from complications of the virus.
It’s a difficult topic to discuss, but it’s time to take action if you’ve put off financially protecting the ones you love.
Life insurance can provide financial security in case of the unthinkable. It can help pay off your mortgage and other debts, pay for burial expenses, and fund your children’s college education.
Having the right policy in place can also help your family maintain their current standard of living.
Do you have an emergency binder to share all the information someone will need to know in your absence?
It doesn’t matter if you’re single, married, have no children or 10, if something unfortunate happens to you, someone else will need to know specific information to manage your personal and financial life until you can resume the responsibility or your estate is settled in the worst case scenario.
Do you have a will and is it updated?
If not, don’t assume your possessions and assets will transfer to your spouse, parents, kids, or the closest family member if you should pass away. By making a will, you’ll save a lot of work for those you love.
Contact an estate planning attorney to help determine if you need any of the following legal documents as well:
- Power of Attorney (POA) - POAs allow you to designate another individual to act on your behalf and make decisions on certain matters (a specific financial transaction for example) or on all financial transactions. POAs can be created with limits to their designated actions and duration or be all-encompassing and on-going.
- Health Care Proxy - this document appoints another individual with power over your health care matters. If you lose the ability to make medical decisions on your own, this legal paper enables a trusted family member or friend to make health care decisions for you during your incapacitation.
- Advance Care Directive - An advance care directive expresses your wishes to medical personnel when you’re unable to communicate your desires yourself. It typically is consulted during end-of-life-care or if you’re permanently comatose. A living will and medical power of attorney (medical proxy) are also advised.
- Living Trust - Unlike a will, which is revocable and amendable (meaning you can cancel it and change it at any time while you are still living), a living trust provides lifelong property management and continues after your death. You as the grantor, or creator of the trust, can name yourself as the trustee and transfer property in and out of it as you please. You’ll name an individual or company to become the trustee and continue to manage the trust, upon your death or incapacitation.
Delaying estate planning, no matter your age or current health status, could burden your loved ones – financially and emotionally – if something happens to you. Estate planning is an essential step in managing your finances and caring for those you love.
9. Accept Help When You Need It. Perhaps you’ve always been very independent. You take care of yourself, your family, and you give both time and money to those in need. But you may also find yourself in a really difficult financial situation because of COVID-19.
During this crisis, use any emergency savings you have first. If you received a government stimulus check, use it to pay for necessities or add it to your savings. Avoid maxing out high-interest credit cards, withdrawing money from retirement accounts, or taking out personal loans unless you have no other choice.
Both now and in the future, don’t let your pride get in the way of accessing government resources that are available to you. Check with current lenders as they may be willing to defer payments in some circumstances. Call to negotiate interest rates on your credit cards, and phone utility providers to ask about any financial assistance programs.
Ask for and accept help when you need it. When you are financially secure, you’ll once again be able to give back to others.
10. Health is Wealth. Few would doubt the old saying “health is wealth” after living through months of the COVID-19 pandemic. If you’ve been putting off improving your physical or mental health, now more than ever, you need to stop procrastinating.
Improving your nutrition and fitness level can help you feel better, lose weight, and significantly better your health. It can increase your ability to fight infection by improving your immune system, and aid you in avoiding chronic health conditions such as diabetes, high-blood pressure, or heart disease. Additionally, it may help to lift mental fog, alleviate mild anxiety or depression, and relieve stress.
Just like avoiding the management of your finances can hurt your financial health, ignoring your diet and activity level can harm your physical and mental health. Plus, focusing on prevention can save you a great deal of money and add years to your life!
Learning from Today to Secure Your Financial Future
More people than ever are realizing the important role of financial wellness as part of their overall health.
If you’re facing an increased level of debt as we emerge from the pandemic, remember to take care of yourself and recognize that recovery may be a lengthy process. But building your resilience to adapt to stress and change, will also help you maneuver through life and protect your financial future.
Even though some may say this pandemic is a once-in-a-lifetime event, you’re bound to live through another recession or global emergency in your lifetime. Prepare for it now.
Focus on living within your means, achieving and maintaining a healthy lifestyle, and becoming a proactive planner. Lastly, avoid becoming overconfident about your wellness – physically and financially – even when COVID-19 is just a memory.
Vicki Cook and Amy Blacklock are the co-founders of the award-winning personal finance website Women Who Money. Vicki, a 30-year educator, and Amy, an administrative professional and entrepreneur, joined forces in early 2018 to pursue passion projects in the personal finance and health & wellness spaces. Together they've launched two new websites and are currently plotting numbers 3 and 4.