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COVID-19 has turned out to be one of the biggest economic fallout in the history of mankind. Every country is facing “the worst recession” period and is locked in a struggle between minimizing the damage to their economy and fending off the virus.
We are seeing double-figure unemployment rates, widespread pay cuts, struggling businesses, and freezing of hiring activities.
However, the current situation also brings valuable financial lessons and each one of us should register them into our minds.
Here are 10 financial lessons to learn from the COVID-19 pandemic for creating a secure financial future for you and your loved ones.
1. Create An Emergency Fund
No doubt, investments are a great way to inflate cash and save for your future but it doesn’t provide instant liquidity during emergencies. Financial crises can arise anytime without any predictability or stability. So, if you don’t cushion your bank, you will find yourself in trouble.
An emergency fund is important to get back to your feet again. Nobody knows when the current COVID-19 situation will last, hence it’s vital to save money. It is advised to save up to 6 months of your income in your emergency fund.
2. Invest in Health Insurance
Coronavirus impacts the respiratory tract and causes acute respiratory disease. It has sent millions of patients to critical care since the breakout. The span of COVID-19 treatment could be few weeks to months as the patient has to undergo multiple tests. This brings the requirement of a life-support system that ensures your expenses in case there’s a presence of a virus.
Private labs cost $61.28 and in spite of government subsidizing, the cost would go up to $95.33. The cost of ICU per day is around $408.57-$544.75 on average. So, if you lack adequate health insurance, you can imagine what will be the hospital bill after complete recovery.
Consider getting health insurance and ensure the coverage satisfies the highest pay of the hospital bill.
3. Personal Budgeting
How would you check your expenses and lifestyle when your income grows steadily? Personal budgeting is the best way to keep financial health healthy. It will give you a thoughtful insight into your variable expenses, fixed costs, and more. You can plan long-term with personal budgeting and judge whether you should opt for a credit moratorium or not.
Make a well-planned budget that helps you stretch your financial resources, especially in case of uncertainties.
4. Minimal Consumer Credit
There are tons of people who have entrusted up to 50% of their income to repay EMIs. Imagine if these people face a significant pay cut or job loss, how tough would it be to repay the entire loan EMIs, that too on time. The RBI moratorium on loans will give you temporary relief but it won’t resolve the issue.
The present crisis teaches us that you can take credit but not more than necessary. Your fixed credit payment should not exceed 20-30% of your monthly income. No matter whether you have taken a short-term loan or home loan, the repayment shouldn’t contribute a big chunk of your income.
5. Long-Term Financial Decisions
Recession and depression hurt even the potential investor. When the market becomes volatile, the overpriced entities lose the inflated value, thus shrinking the portfolio by 25-30% in weeks. COVID-19 is the best example in front of you. Investors, who underwent a bearish market, see a decline due to the lockdown and current oil slump.
Instead of a short-term plan, you should go with a long-term investment. The economy is expected to recover by the end of 2021, the same goes for the stock market.
6. Diversification of Investment Portfolio
Experienced investors always put much effort into portfolio diversification. It is seen that when one industry gets affected due to financial crises, ultimately others follow the same. The coronavirus grounded the transportation system and oil demand went down. This fall-off hurts the economy of countries, especially the US.
So, it is important to distribute your cash into commodities, metals, stocks, and more. Just remember, diversify and diversify.
7. Extra Source of Income
Airlines and Tourism are two main industries that are bleeding balding as COVID-19 has stopped their shops. If you have been receiving pay cuts/layoffs only, then this shows the fragility of your job’s security. You should have another source of income to survive better. Just like you diversify your investments, you need to shield your future with a second job.
8. Living On A Budget
When money flows freely into your life, you survive easily without needing a plan. But when your income cut-offs, every penny feels like a million. You actively think about how much to spend on grocery stuff and other expenses.
Living on a budget can teach you a lot. If you have never tried it, start with one month and see how the rest of your life financially turns upside down.
You can create your first budget using tools and applications available in the app store.
9. Be Proactive About Taxes
Being proactive about taxes is one of the most important lessons. Wait until the 4th quarter before harvesting gains on investment. Make purposeful decisions to get astonished by the tax bill at the end of the year. You will see you save a lot of money with this tax advice.
10. Lesson From History
The great depression of 1930 rattled the world and taught us humanity about bad debts. Even the historical pandemic brought many policy changes. COVID-19 is teaching the same lesson on how to deal with insecurities and financial planning.
Remember, an economic downturn is not in your hands but concluding is in your hand. Revisit your finances and find the loopholes. Don’t forget to fix it.
To conclude, “Expect the unexpected”