How Should You Prepare for the Economic Fallout of COVID-19?
COVID-19 has caused financial markets to tank and slowed economic growth around the world. Some economists are predicting recessions across major economies. These can be scary times for everyday consumers. In this article we highlight some key financial tips for those that are concerned about the economic uncertainty.
When It Comes to Retirement Investments, Think Long-Term
It can be scary to watch your portfolio's value fall significantly during times of market unrest. However, unless you are planning to retire very soon, there is no reason to panic. Historically, while periods of volatility are not uncommon, stock markets have traditionally shown strong growth in the long-term. This is especially relevant for those that invest in funds with retirement target dates. If you are the type to invest in individual stocks and bonds on your own, it is important to maintain some level of diversification in order to blunt the impact of a crash.
If you feel that you need more guidance when it comes to your investments, it's worth considering enlisting the help of professionals. Unfortunately, wealth managers are typically expensive and only available to high net-worth individuals. However, the advent of online robo advisors, everyone has access to low-cost investment advice. These advisors typically charge annual fees of less than 1% for their services, which leverage complex algorithms in order to reduce their operational costs.
Build Up an Emergency Fund
A fundamental aspect of managing one's personal finances is creating a budget. Regardless of your financial circumstances, it is important to save at least some money each month for an emergency savings fund. For many, this will require assessing spending habits and cutting out some unnecessary expenditures. Typically, experts recommend accruing 3-6 months of living expenses worth of savings. This way, if you have an significant unexpected expense such as a medical procedure—or worse—temporarily lose your job, you'll have money to tide you over until you get back on your feet.
When it comes to choosing a bank account for your savings, it is important to note that not all accounts are created equal. For example, the best savings accounts have interest rates that are 2-3 times higher than those of other accounts. Therefore, if you are looking to earn the most that you possibly can from your savings, it's worth comparing the best rates currently available. It is also important to keep in mind that your emergency fund should be a separate category of savings than your other savings (e.g. retirement, home purchase). To avoid future disappointment, it is important to keep these funds separate in your mind.
Get Debt in Order
If you currently have outstanding debts, such as a personal loan or credit card debt, it is best to pay down your balance before you find yourself in a pinch. Even commiting to slowly repaying the debt is better than letting it continue to accrue interest. For example, credit cards typically charge approximately 25% p.a. on average, so it is crucial to reduce your monthly rollover balance before you have any added financial pressures. Debt consolidation plans can be a good way to consolidate your outstanding debt, all with a better interest rate. If you've got debt which you could repay within a year, you might be better off with a balance transfer loan, a similar product which typically offers interest-free periods of up to 12 months.
Pick Up a Side Hustle
If you're already on top of your budget, savings and investments, and want to take some other action, you might want to consider picking up a side hustle. Perhaps you have a car and some free time, and would make a good part-time driver. Or maybe you have highly sought after skills such as web design or copy-editing and could earn an extra buck on sites like Upwork, Freelancer or Guru. Regardless of your specific skills and experience, you might be able to earn some extra money and peace of mind while markets remain volatile.
Have a Plan & Stay Calm
The bad news about a stock market crash or a recession is that your personal finances could take a hit. The good news is that if you are prepared, you will be better able to sustain an economic downturn. Creating or re-assessing your personal budget is a great place to start. Once you've got a handle on your spending, reducing your debt and optimising your investing strategies are good things to address. Regardless of what actions you deem most important for your personal finances, it is best to stay calm and protect your future finances by acting with prudence.