5 financial lessons from COVID
While casually chatting with one of my friends recently, he mentioned that he had never expect the current COVID situation to happen in our lifetime. Worldwide travel restrictions, recession looming, massive lock down etc. Businesses are forced to shut down resulting in livelihoods being affected.
For some of us, we can take on this crisis without any worries about money or while some can hold on for a while but not for too long. However, for some, this might be a very testing period for them.
Including myself, I did not expect such a situation will happen in this generation. Going through this crisis was a reality check for me. On the bright side, this crisis has made me learn five important financial lessons on managing my finances.
- Having adequate emergency fund
As written in some of my previous articles, having an emergency fund is critical to ride out any short-term crisis. This current situation is real, it makes me realize in real life, the importance of having an emergency fund. In fact, not just during crisis, even during normal period we can expect some unexpected expenses to crop up. Thus, having a 3 to 6 month of emergency fund is critical.
So, what is an emergency funds? Emergency funds are savings that are liquid. When the unexpected crops up, this savings will help you to tide over the situation. For example, if there is a retrenchment, you will still have this amount of savings to pay for your bills, daily expenses, mortgages, food etc.
What is the correct amount of an emergency funds to set aside? Just total up your total monthly expenses and multiply it by 3 or 6. Set this amount aside in your bank account to be used only for unforeseen situation.
So, why don’t I set aside as much as possible emergency fund? Perhaps 50 month or even 100 months? Indeed, you can really feel very safe with a huge amount of emergency funds. However, the returns from the bank savings is low and will not be able to beat inflation. Therefore, it may not be wise to set aside too much in savings for this purpose.
If I do not have any emergency funds today, how to I accumulate this amount? Set aside a fixed amount to save into a bank account every month, soon you will have it!
- Having additional savings for opportunities
If the pandemic pans out to be a long-term crisis, the emergency funds may run out in the near term. If this crisis period drags on for more than 12 months, having additional savings to see us through will be critical.
What is additional savings? The difference here between emergency funds and additional savings is that emergency funds are funds set aside for unexpected purposes. Whereas additional savings are money set aside for the next investment or asset purchase. In any prolonged crisis, we can dig into the additional savings for survival. Funds that are originally intended to be used for assets purchase can now serve to tide over the crisis.
If the additional savings amount is huge enough, this savings be used to do more investment. In any crisis, we can expect the prices of investment assets to be lower. Having additional cash, this present one of the best opportunities to invest.
So how do I accumulate this additional savings? If you have been setting aside an amount every month to build up your emergency funds, once you have accumulated sufficient emergency funds, the same monthly amount that you saved can now be used to create this additional savings.
- Gaining investment knowledge
Even if I have enough savings to invest now, do I know which investment asset to pick up? When should be the right time to invest? What if I pick up the wrong investment and lose all my investment?
Over the years, I learn that if I do not have the correct investment knowledge, I am likely to make the wrong investment decision. As a result, I may not even dare to make any more investment even when the opportunities are present. Investing without any knowledge is akin to gambling (investing with excessive risk).
Having the right investment knowledge now, is the key to know when and what to invest in. One way to pick up this knowledge is to start reading. There are many good books on investment that you can get your hands on. Alternatively, you can attend courses/ seminars or even find your own mentor/ advisors to gain the various investment knowledge.
- Different streams of income
If the lock down were to be prolonged, some businesses may cease to operate. In the long term, jobs could be taken away or jobs may experience a pay cut. If I must take a pay cut for the next 12 months, do I have another stream of income to supplement it?
This has made me realize the importance of having different streams of income to supplement my daily expenses. Where can I find other steams of income? Some good examples of income streams that we can create are:
- rental income from the lease of your investment property,
- income from REITs investment,
- dividends from stock investments etc.
Even if we have another stream of income, there is also a need to consider if our investment is well diversified? In case of a downturn in one industry, will it adversely affect our overall income stream.
Today’s situation could well be a peek into our retirement years whereby we no longer have any active source of income. Do we have other income steams to sustain our retirement? Therefore, always keep a look out for investment that can give you a good plus stable passive income.
- Living within my means
During this period, I have witness how seemingly rich person can run short of cash. They may have a lot of money in their bank account, but when a crisis hit, they can barely last for more than 6 months. Why?
This makes me realize that it is not how much money we have, but it is how much we have compared to our expenses. For example, if I have $500,000 dollars of savings, but my monthly expenses are $20,000 a month, I will spend all my savings in 25 months. Conversely, if I only have $90,000 savings but my monthly expenses are $1,500 per month, this amount can last me 60 months which is more than 2 times longer. Thus, it is not just how much we have, but how much we have compared to our standard of living.
We can do a simple test today. Simply sum up all our savings today and divide it this by our monthly expenses. What is your number? Will this number be enough for you?
The COVID situation has spurred me to relook at my current financial condition and how far am I from my desired financial freedom. I thought I am on track with my retirement plans until this crisis sets me thinking again.
For now, gaining investment knowledge and building the different streams of income will be my top priority in the days to come. There will be less procrastination now as this crisis is indeed a wakeup call. Before the next crisis hits, I have a window of opportunity now to take charge and get myself financially free as soon as possible. Of course, to do all these, it will take discipline plus a conscious effort to do it. I believe, if we are focus, we can all do it.
I tell myself:
I can start something today that I will thank myself for in the future.