Financially speaking, this year has put many of us in a bad situation. Due to the COVID-19 outbreak, over 36 million Americans have filed for unemployment. The ongoing pandemic will have a lasting impact on how we live, work, and handle our money. So far, the year 2020 has taught us the following money lessons:
Having an Emergency Fund is a Must
According to Investopedia, your emergency savings should cover between 3 and 6 month’s worth of living expenses. But, if this exceeds your possibilities, try to set aside at least $1,000 for emergencies. In case of an emergency, this should be enough to prevent you from reaching for your credit card.
Once you have those $1,000, you can steadily work toward building a larger emergency fund. If you believe you won’t be able to easily replace your income if you lose your job, or if you have an irregular income, it’s a good idea to save more than 6 month’s worth of expenses.
Thinking about one’s own death is unpleasant, so most of us avoid it—even when it is the smart thing to do. If 2020 has taught us anything, it’s that deadly diseases do not discriminate. They can take down healthy young adults just as easily as elderly folks.
The ongoing pandemic is forcing many of us to come to terms with the fact that every person will eventually have to face death. Because of this, it’s good to start planning your estate. And, you do indeed have an estate, even if you don’t own a house. Almost everyone does.
Prepare for the worst possibility ahead of time. Your family will appreciate it. At the very least, estate planning involves healthcare directives, making a will, authorizing your financial power of attorney, establishing a living trust, and making funeral arrangements.
It’s Important to Eliminate Debt
Debt isn’t always bad, but it can make it hard to reach financial independence. More debt means more fixed obligations. Too many of these obligations can kill your financial dreams, so it is important to bring them down to a minimum.
The first step to eliminating debt is adding up your recurring debt payments. Take a few moments to figure out how much money you are spending on your credit cards, student loans, car payments, mortgage, and other loans.
What percentage of your monthly income goes to settling these debts? Now, go back to your emergency savings for a moment. How much money do you need to put aside to have 6 month’s worth of living expenses? If you eliminated all or some of your debt, how much less would you need to save?
If you can’t afford to pay off your debts right away, you could try transferring your credit card balance to a lower interest rate credit card (ideally 0%). You can also try to refinance your student loan or mortgage to a low-interest rate. This will save you money in interest and reduce your monthly payment. It can help you repay your debts quicker.
Managing and restructuring debt isn’t always that straightforward, so it’s a good idea to get some professional help. Although most often accountants market themselves as tax experts, they should also be able to analyze your debt and offer you some good advice. If you don’t have an accountant, hiring a financial advisor to help you handle your debts will undoubtedly pay off.
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Going on the Defensive is Okay
This year, our consumption-based economy has taken a 180° turn. Many of us have had to delay major purchases and expenses such as buying a new house, getting a new car, and doing a kitchen remodel.
The ongoing crisis has made us reevaluate our wants and needs. Yes, you probably should replace your old car, and you may need a new kitchen, but putting these major purchases on hold probably won’t hurt.
If such delays can greatly improve your financial situation, they are a great move. For instance, you may eventually be able to pay for a new car upfront, without getting into debt, if you delay the purchase for a couple of years. Going forward, this will give you better cash flow.
But don’t stop with bigger purchases. A return to home economics is one clear advantage of this year’s unforeseen events. Fewer expenses equal more savings.
Due to the coronavirus pandemic, Americans are saving an average of $219.17 a month. At first glance, this doesn’t seem like much, but this adds up to $2,630 in annual savings.
People are ditching their yoga studios and gym memberships for online classes, and this isn’t necessarily a bad thing. If hosting movie nights at home or coloring your roots by yourself can result in an extra two and a half grand per year in savings, isn’t it worth it? Consider keeping your expenses low even when the storm passes.
The events of 2020 will have a lasting effect on our money habits. From DIY haircuts to estate planning and emergency savings, people will be taking a more prudent approach to their finances—and that’s fine. A more mindful approach to money management can lead to much less financial stress.
I’m Rebecca, a translator and avid traveler, a book worm and horror flick enthusiast. My job has given me the amazing opportunity to travel to dozens of countries around the world, and writing on Rough Draft gives me a chance to try to showcase some of them.
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