Essential Building Blocks to Future-Proof Your Finances
July 25, 2020
There's no time like the present to build a budget that can deal with the worst financial effects of the COVID-19 pandemic The ongoing COVID-19 pandemic has pumped the brakes on the world economy. Aside from the direct threat to human health, the outbreak has also hit people hard in their wallets. The resulting market downturn has dramatically affected investments and savings worldwide, forced thousands of businesses to shut down, and shattered household incomes, as job losses and salary cuts mount across the world. Despite the uncertainty it’s caused, the pandemic may present a good time to re-examine your relationship with money. Use this time to tweak your financial habits: this can keep you on track toward achieving your financial goals, COVID or no COVID. Revisit your budget. In these challenging times, you’ll need to revisit or create a new household budget to cope with your current situation. A realistic, sustainable COVID-era budget should be enough to sustain your household during this pandemic, even if it means foregoing wants in favor of needs. As such, it helps to determine which expenses are contractual and non-contractual. Contractual expenses, such as the rent and utility bills, must be prioritized, whereas non-contractual expenses can be easily reduced without impairing your current budget. Considering current social-distancing rules, you don’t need to spend so much on out-of-home entertainment, public events, and eating out. Manage your debt wisely. You’ll need to think harder about which debts and bills to pay off first. You must prioritize debt repayment prior to investing, as the interest rate on debt is often much higher than the return on most investments. Pay the debt with the highest interest rate first, as its balance will grow the fastest. You can also opt to make larger monthly payments, as this means taking less time to pay off your debt. If you can, always pay the balance on your credit card instead of the minimum balance, as the latter option will still accumulate interest. Take advantage of grace periods. In your desire to hold on to available cash as much as possible, you might have delayed payments on some important household expenses such as rent, utilities, and other outstanding loans. Fortunately, a missed monthly payment is not the end of the world thanks to grace periods. Homeowners, especially those who enrolled their properties through home loans with banks, are protected by Republic Act 6552, otherwise known as the Maceda Law. It states that homeowners are entitled to a 60-day grace period if they have finished two years of installment payments on their properties. Due to the pandemic, some banks and insurance providers have also extended their grace periods from 30 days to 60 days and even 90 days. Keep in mind, however, that extended grace periods will still incur interest—the longer you defer your payments, the higher the interest may be. As such, it would be best to schedule your payments and run them against your current household budget. Rebuild your emergency fund over time. Even if you had an emergency fund, you might have already used up your savings over the course of this pandemic. Remember that you can always rebuild your buffer stock of savings over time. Save for an emergency fund equivalent to two to three months’ worth of expenses to avoid getting further into debt due to lack of liquidity. Instead of holding the bulk of your savings in your checking or savings account, invest them. Take advantage of the lower interest rates and the fluctuating stock markets during this pandemic. You can also consider real estate as an alternative investment, as real estate prices are experiencing a significant COVID-induced drop. Diversify. Make your money grow, but do not put all your eggs in one basket. Take advantage of the lower interest rates and fluctuating stock markets brought about by this pandemic, so you can diversify your portfolio at a lower cost. Diversification strategies usually select assets and asset classes that have a weak relationship with each other, reducing risk in the portfolio overall. Picking individual stocks requires significant time, often dedicated to due diligence and making educated guesses about future price movement. Mutual funds, on the other hand, typically have low expense ratios and are thereby easy ways to diversify within and among asset classes. Seek out available financial assistance. National and local governments are doing the best they can to help alleviate the financial burden of this health crisis. There are numerous government assistance programs you can join, most notably the emergency subsidy provided through the Social Amelioration Program (SAP). Local governments are also providing ongoing subsidy and cash gifts to different vulnerable groups, such as senior citizens and solo parents. Get in touch with your local government unit to know if you’re eligible for any form of financial assistance. Take care of your health. Getting sick during this global pandemic can put the biggest dent in your finances. People who recovered from COVID-19 report that, on average, a 15-day stay in a private hospital cost around PhP1.3 million. This is why taking care of your physical and mental health should be a top priority. First on your health to-do list: getting a health insurance policy for you and your family. Some insurance policies have even been updated to cover COVID-19-related risks and hospital costs. The effects of the COVID-19 pandemic reveal not only weaknesses in our relationship with money, but also the repercussions of our past financial decisions. However, there’s no time like the present to learn our past financial choices and establish a COVID-proof financial plan for your future.