The COVID-19 crisis derailed the global economy on an unprecedented scale. With millions of jobs lost and massive pay cuts, the financial implications are historical. The unemployment rate spiked to a level not witnessed since the Great Depression and surpassed previous peaks of the Great Recession.
In spite of the heightened financial hardships, the crisis has taught us timeless lessons on budgeting and emergency funds. Here are seven lessons we ought to reflect on and remember.
Learn to Budget Better– It’s Crucial Throughout Life
While most people find the budgeting process quite unpleasant, it’s a time-tested tool that can help you wade through financial uncertainties.
In good financial times, you can get away with little budgeting. But you’d still be leaving too much room for financial distress. When done right, a budget will help you understand your living expenses and the minimum amount you need every month.
The more proficient you become at budgeting, the easier it becomes to adjust your expenses depending on the situation at hand. During a financial crisis, being adept at budgeting is vital for better management of limited finances.
Living on a Budget Nurtures Intentional Spending
When you are doing well financially, the need for a spending plan may not seem as important. But when you’ve just had a pay cut or some of your income streams have ran dry, every coin becomes important. During the pandemic-induced crisis, more people embrace budgeting with 60% of the population becoming more of “savers” than “spenders”.
In a way, following a budget consistently is akin to getting a pay rise. That’s because you take the time to think through all your expenses. After a few months, you start creating some extra money each month simply by cutting your expenses.
Beware of Lifestyle Creep
As your income grows, the number of your presumed “needs” tends to increase. Before the pandemic, employment rates were high as well as access to credit. A lot of people were living an inflated lifestyle. It wasn’t rare to find high-earning individuals living paycheck to paycheck to support a lifestyle they can’t afford.
When the crisis got more serious, 37% of the population was struggling to cover household expenses.
Keeping your expenses lower than your income creates a buffer in your budget and helps you get through financial uncertainties. The best way to keep off lifestyle creep is by creating a spending plan. Whenever you get some extra income, tuck it away in a savings account or use it to offset debts.
Always Have a Clear Understanding of “Needs” and “Wants”
Job losses and reduced salaries have forced many people to revise their budgets. A glance over your credit card statement can show that there are some non-essential items you can avoid spending on and still enjoy a happy life.
COVID-19 has reminded us that very little can be done to lower fixed expenses on essentials. Moreover, lockdowns have demonstrated that expensive entertainment habits are not vital to living a happy life.
Avoid Planning Your Finances Based on Future Income
The future is uncertain and often full of surprises. Unless your projected income is definite, avoid planning your finances around future income.
Before the global pandemic, some people were expecting a pay rise and had plans for the extra cash. Instead, salaries were slashed while others lost their jobs. According to a survey by FlexJobs and Prudential, 53% of Americans are earning half of their pre-COVID income while 31% have lost their entire income.
Emergency Funds are Vital
Emergency funds are meant to help you sail through difficult times with financial uncertainties. For years, financial experts have emphasized the need for an emergency fund. But many people haven’t put this advice into practice. Those who have followed this logic have had an easier time than anyone without a contingency plan.
Globally, the pandemic has led to massive unemployment and pay cuts in multiple industries across the globe. As the concept of job security gets murky and people start questioning its reality, the need for an emergency fund becomes even clearer.
As cruel as it has been, COVID-19 has imparted a priceless lesson upon us- Building an emergency fund is by far important than spending money on “wants”.
You Need a Bigger Emergency Fund
Before the COVID-19 crisis, some experts thought that an emergency fund that covers three months’ expenses is sufficient. Others felt that having $1,000 in your rainy-day fund can be enough. In a small short-lived crisis, the logic is applicable. But for a catastrophe as huge as COVID-19, you’ll need more money.
This logic has left people unprepared for the crisis after exhausting their savings. According to a recent SurveyMonkey study, 14% of Americans have exhausted their emergency savings. An additional 11% have resorted to borrowing money to cover the usual household expenses.
In a study by FlexJobs and Prudential on COVID-19 & Personal Finances, 62% of Americans don’t have enough emergency savings to ride out the COVID-19 crisis. Moreover, the CNBC reports that 38% of the people who’ve either had a pay cut or lost a job can’t last more than a month off their savings.
Whether you had an emergency fund or not, now is the time to reflect on building a bigger emergency fund. Saving over six months’ worth of expenses takes discipline and commitment. While it may look impossible, you can start small and save consistently.
The Bottom Line
Even the brightest economists couldn’t foresee one of the worst catastrophes the world has faced. While the COVID-19 crisis has been ruthless, it has imparted upon us crucial financial lessons. By learning from this situation, you can plan ahead and be more prepared to deal with future downturns.