The Covid-19 pandemic has taught us some financial lessons we would have preferred not to learn. Here are seven personal finance lessons that we can learn from the ongoing crisis, which could make the next downturn little less painful.
Emergency funds are not wasted assets
Many financial advisors consider emergency funds to be wasted assets, but the Covid-19 crisis has shown the wisdom of having adequate emergency funds. If there is a pay cut, a delay in salary, or job loss, an emergency fund can help you tide through difficult times.
The rule of thumb for creating an emergency fund is to have at least 3-8 months worth of bare minimum expenses in your kitty. Going forward, building an emergency corpus should be seen as essential, even as we focus on investment and earning handsome returns post Covid-19.
Short-term investments are unreliable
Panic selling as a result of uncertainty is spooking markets around the world. Therefore currently, you might see around 25% to 30% fall in your equity portfolio. Thus, if you are not having an emergency fund in place and decide to use your investments, this might further prevent you from attaining your investment objective.
Investors with emergency funds in place are encouraged to continue disciplined investing through systematic investment plans (SIPs) and stick to their asset allocations. A consistent, long-term investment strategy over time is what will build wealth.
Having an alternative source of income is not a luxury but a necessity
Putting all of your eggs in one basket is never a good thing, and the same goes for trusting that your 9-to-5 will always be available to you. This is where an alternative source of income will come in handy. It will help you meet these necessary expenses and tide over difficult times.
There is no magical limit as to the number of extra income streams you should create. An alternative source of income need not be additional work with a regular job. Extra assignments over weekends, a part-time job in the evenings after work, or home-based work are good ways to earn that extra income.
Arrange your investments in different kitties
The impact of the Covid-19 pandemic and attendant forced lockdown imposed by national and sub-national authorities will vary considerably across different industries and asset classes.
Diversification premium is an investment cure for coronavirus. Having a mix of assets across sectors and geographies is the best way to ensure that one spell of volatility, as in this pandemic, does not take your portfolio down.
If you don’t measure it, you can’t manage it
As Covid-19 infests income sources, many families are now forced to closely consider how to spend every available naira. If you have lost your job or now receive a reduced paycheque, how long will you be able to meet your basic needs?
Budget, a listing of income and expenses, is the most basic and effective tool for managing your money. Every budget must start from the same place: figuring out how much you’re making and how much you’re spending each month. By figuring out where your money is going, you’ll be more aware of where you need to cut back to have enough money for the things you need and the things that are important to you. It is vital to your financial health and everyone should do it.
Health is also wealth
If there’s anything the COVID-19 virus made us realize, it’s that our health remains our most valuable asset. What good is your wealth if you don’t have a strong and able body to enjoy it? The community quarantine gives you an opportunity to focus on your physical and mental health by reducing your stress and possibly your workload.
As we all know, the penetration of health insurance is very low in Nigeria. However, in such a pandemic-like situation, health insurance helps you to cover any medical cost without disturbing your investments. Even if your employer provides health insurance, it’s always better to have your own insurance. This is because the health insurance offered by your employer won’t be in effect in the event of a layoff/job loss.
The best-laid plans of mice and men oft go astray
The year 2020 was earmarked to be the ’20-plenty’ year. The United Nations labeled it a year that would usher in a decade of ambitious action to deliver peace and prosperity for people and the planet, now and into the future. On a personal level, COVID-19 has affected many facets of life–from career changes, and family vacations, to renovation projects, business plans for expansion and growth, retirement plans, etc.–all have been altered, set back or permanently impaired.
It’s so easy to get caught up in the busyness of the day that we neglect to take time to do the things that we know will bring true wealth as we look back on our lives. The pandemic has provided the much-needed break from our busy schedule to sit back and reflect on life and career or business choices. For many, living a rich life includes a rich family life that involves connection, sharing, closeness, and love. Building a healthy family culture is paramount.
Staying financially secure is a crucial step in getting through your daily life, and this challenging time has once again instilled this lesson. Tough times do not last, but tough people do. In times such as these, let’s try our best to remain optimistic and positive.
This too shall pass.
Article was written by Oluwaseun Oguntuase