Photo Credit: MoneyStrands
COVID-19 pandemic is one of the toughest situations modern governments have had to deal with. The pandemic has claimed many lives and endangered others. According to Financial Times, “COVID-19 is the most adverse peacetime shock to the global economy in a century”. Moreover, this recession “is the first since 1870 to be triggered solely by a pandemic.”
However, tough times are great teachers too. COVID-19 has taught us the importance of financial preparedness in order to tackle adverse eventualities.
Here are 6 lessons on personal finance that we can draw from the COVID-19 experience:
1. Emergency funds are not wasted assets:
Some people consider emergency funds to be wasted assets. However, COVID-19 has proved this to be false. According to The Conversation (a network of not-for-profit media outlets that publish news stories written by academics and researchers): “UN agencies estimate that 1.5 billion people – half the global labour force – will become unemployed, with 500 million thrust back into poverty while 250 million could face famine, reversing all the gains of the past two decades.” Emergency funds are funds one can fall back at difficult times such as a pay cut, delay in salary or job loss. It is an important asset class. Money experts advise that one should have 3 to 6 months’ (or even 12 months’) worth of monthly expenses as emergency funds.
2. Don’t take a loan you cannot afford to repay:
When managed well, loans are great vehicles that drive the achievement of critical life goals such as buying an equipment or starting and expanding a business. However, it is critical that you evaluate your repayment capacity thoroughly before signing loan agreements. Do not borrow a loan to spend on personal expenses, else you might become trapped. Wise investors borrow to finance the purchase of assets (i.e. things that will eventually bring more money into their pockets such as a home for rent, office space that can generate rental income, to purchase a taxi or to purchase a car for going to work). It is important to ensure that you can always repay your loans. This saves you from the burden of a loan default which reduces your credit score/rating and decreases your chances of getting loans in the future.
3. Spread your investment funds across time horizons:
Panic selling due to uncertainties related to COVID-19 is taking its toll on all stock markets globally, with significant losses on stocks across markets. For reasons like this, it is advised that investors have a balanced portfolio of long-term (e.g. 5 years), medium term (e.g. 2 years) and short-term (e.g. 6 months) investments. Stocks fall under long term investments. If an investor invests in stocks for short term and has no other investments to fall back on, he will be forced to sell the stocks at a loss in order to solve a financial problem. For this reason, it is advisable to spread one’s funds across different investment horizons.
4. Invest in different asset classes and across geographies:
Experienced investors split their funds across different asset classes. As they become sophisticated, they invest across geographical locations globally to ensure that they can always take advantage of investment opportunities in several countries. You should do so too.
5. If you don’t measure it, you cannot manage it:
As the downsides of COVID-19 lockdown manifests, many families are forced to re-consider how they spend every penny, especially if the breadwinner(s) has received a pay cut or have been laid off. You must not wait till difficult times come upon you to start budgeting. A budget is simply a list of income and expenses. It is the best tool for managing personal income. To create a budget, write down how much you make per month vs how much you spend. By figuring out where your money is going, you will be able to cut back on unnecessary spending and focus on growing your investment portfolio.
6. Health is Wealth:
The pandemic has reminded us that our health remains a very valuable asset. Of what use is our investment portfolio if we do not have the good health to enjoy it? It is therefore paramount to keep practising social distancing, wearing of face masks, washing of hands frequently, using hand sanitizers, and following other safety guidelines to ensure one’s safety. As long as one is healthy, one can always accumulate more wealth.
Photo credit: Nairametrics
Article Credit: Hephzber Ifunanya Nwoka