With the COVID-19 pandemic affecting our lives to an extent that measuring it has become impossible; even our finances have taken a parallel toll but besides all the losses and grief, the COVID-19 crisis has also taught us financial lessons and money management like never before. As most people around the world have confined themselves to the safety of their homes, economies and financial markets are taking a slow ride. Therefore, here are 5 financial lessons that we have learned during these difficult times…
We have often read about pandemics in books or watched them in movies over the years. Now that we have to face one in real, we understand the uncertainty of the period that we are living in. In such changing situations, even though governments are doing all they can to reduce the impact of the pandemic on the economic situation of their countries, people tend to get worried about the finances drawing them to learn some financial lessons. So, MoneyMall, has curated this list of 5 financial lessons that have proved themselves useful during the COVID-19 crisis. They are as:
An emergency fund is of great importance
Before the pandemic started, you might have read about the importance of having an emergency fund in quite a few investment articles. If you are a financial expert, you will know that finances are supposed to be planned only after accomodating for 3-6 months of living costs as an emergency fund parked in a savings account. This period has been calculated taking various factors into account and designed to help you pay your bills and meet your living costs with ease until the crisis tides over.
But if you were not aware of this concept, chances are that you might have come across it at some point but did not pay attention to this part of the advice. It is always beneficial to not be under the impression that you will manage when the time comes. Also, do not think it is needless or tend to avoid eating such a fund just because it does not generate any returns. When an emergency, like the current COVID-19 pandemic, presents itself, such emergency funds are what come in handy.
Do not consider investments to be a part of your emergency fund
If an investor didn’t create an emergency fund and invested all his funds in investment portfolios, he is still in as much trouble as the ones who did not because, during this time, it is quite difficult to redeem investments. Therefore, when you think about emergencies, you cannot consider investments as a part of your emergency fund. Cash in your savings account is the only definition of an emergency fund that matters.
It is essential to cultivate the habit of budgeting
The habit of living within a budget is essential for the efficient management of personal finances. Many households in UAE and across the world have benefited from budgeting for decades. Yet, there are still quite a few people who do not believe in living within a budget or never take the effort to get accustomed to it. If you are one of them, remember that when a situation like a pandemic occurs, your income gets restricted for a while and available resources shrink at a quick pace. Therefore, you can manage your finances more efficiently if you are accustomed to living within a budget.
A secondary source of income gives you something to fall back on
Even in the normal course of life, having a secondary source of income can help you increase your savings, allocate more funds towards investments, and achieve your financial goals sooner. But during times of need like the current crisis, a secondary source of income becomes even more important.
Make sure that you have a diversified investment portfolio
If your investment portfolio is skewed towards any specific asset class or group of securities and the crash affects it adversely, then your losses can be huge. A diversified portfolio, on the other hand, consists of securities that are not correlated to each other. Therefore, even if one asset class or group of securities get affected, your portfolio doesn’t witness huge losses. Therefore, it is important to always create a diversifies investment portfolio so that you are not heavily impacted if and when an economic slowdown triggered by an event like the COVID-19 pandemic rattles the markets.
To sum it up, being adequately prepared for emergencies helps you face situations like the current pandemic. It ensures that you are in a better position to ride out the storm and recover when everything settles down. We hope that you manage to get through this period unscathed but when you do, keep these points in mind to make better financial decisions. Create a diversified investment portfolio and cultivate the habit of living within a budget. You will be better prepared to face a crisis like this if and when it occurs again.