Piggy bank with Face Mask, Financial crisis and market crash due to virus spread.
It’s safe to say that the Covid-19 pandemic caught most of us off guard. While some people prepared a few weeks in advance and bought food and other supplies, most of us watched in slow-motion horror as events unfolded. Many of us are still recovering from the aftermath and ongoing events.
Though millions of people were put in a bad situation, things could have been much worse. The government acted quickly by passing the CARES Act, which provided stimulus checks for individuals, expanded unemployment benefits, loans and loan guarantees for businesses, and forgivable small business loans for qualifying companies.
These were helpful measures that put cash in people’s pockets and prevented millions of people from becoming unemployed. However, these measures were simply a stop gap. They couldn’t prevent over 40 million workers from applying for unemployment benefits, stop dozens of companies from filing for bankruptcy, or help the millions of other people who are struggling to get by.
We don’t know when the unexpected will happen again. And we don’t know how much the government will be able to help us, and if so, whether it will be enough. For example, a second stimulus check would help millions of people, but it is unknown at this time whether or not one will be passed.
Right now, the best thing we can do is prepare for the unknown. Here are some lessons learned that we can apply to help us prepare for a second wave or a future unexpected event.
It’s Time to Rethink the Emergency Fund
Most financial experts recommend having an emergency fund. The amount they recommend you save varies. The baseline recommendation is having at least $1,000 set aside for an emergency. This is a great start, but it’s generally only enough to prevent most people from automatically reaching for their credit card at the first sign of a large, unexpected expense.
Other experts recommend having at least 3-6 months of living expenses set aside. This is a much better recommendation, as it gives you a lot of runway should a major unexpected event occur. 3-6 months should usually cover a period of unemployment or other major expenses.
However, most of us haven’t lived through a period such as the one we are currently experiencing. It’s not common to see over 10% of the workforce file for unemployment benefits in less than two months.
How big should your emergency fund be?
This will vary by person and situation. At the minimum, I would aim for 3-6 months of living expenses, if you can swing it. If you can’t save that much, then steadily work toward building your emergency fund as large as you can.
Should it be bigger? It’s not a bad idea to save more than 3-6 months of living expenses if you have irregular income or you don’t believe you would easily be able to replace your income if you were to unexpectedly lose your job or incur some major expenses.
Eliminating Your Debt Has Become More Important Than Ever
I’ve often heard it said that debt is the killer of financial dreams. There is a lot of truth in that statement. Having debt means you will always be working for someone else. It also increases your fixed obligations, making it more difficult to reach financial independence.
Take a few moments and add up all of your recurring debt payments.
- How much do you spend on your mortgage, car payments, student loans, credit cards, car payments, or other loans?
- What percentage of your monthly income do those payments make up?
Now, look at the previous section about saving money in an emergency fund.
- How much do you need to save to meet 3-6 months of living expenses?
- How much less would you need to save if you eliminated some or all of your debt?
Debt is cheap right now. Interest rates are low and companies are trying to extend credit so they can sell more inventory and remain in business. But that doesn’t mean it’s a good idea to take out an unnecessary loan.
Instead, you will be much better off in the long run if you eliminate your debt. If you can’t do that right away, then look into refinancing your mortgage or your student loans to a lower interest rate. You could also transfer your credit card balance to a 0% balance transfer credit card. This will reduce your monthly payment and save you money in interest each month. This will allow you to repay your debt more quickly and give you more long-term flexibility.
It’s OK to Go on the Defensive
We live in a consumption-based economy. That got turned on its head over the last few months, with forced business closures making most of us delay major purchases, such as buying a new car, buying a new home, making expensive home renovations, and making other major purchases.
In many ways, the Covid-19 pandemic forced us to reevaluate wants and needs. Yes, sometimes we need to move to a new home or make major home repairs. And sometimes a car just needs to be replaced. But there is also nothing wrong with delaying these major purchases if your situation allows for it.
Delaying major purchases can even be a great move if it helps you improve your financial situation. For example, delaying a car purchase by a year or two may allow you to save enough money to make the purchase with cash instead of taking out a loan. This will save you from making monthly payments and give you better cash flow going forward.
You Need to Think Beyond Money - Preparation is Key
Money solves a lot of problems. But it won’t put food on the table or medicine in your cabinets if the store shelves are bare.
This is a good time to rethink how many supplies you keep on hand. You don’t need to become a hoarder. But it’s not a bad idea to stock up on supplies such as shelf-stable foods, medicines, paper products, feminine products, or any other supplies you use on a regular basis that could become compromised due to supply chain issues or by people making a run on those products at the stores.
Make Sure Your Insurance Policies Are up to Date
Insurance serves one purpose: to transfer risk from you to someone else. If you are independently wealthy and you can afford to self-insure, then go for it. But most of us are not. That is why we have health insurance, life insurance, car insurance, homeowner’s insurance, and other policies as needed.
Now is a great time to review your current insurance policies. Make sure you have enough coverage and the right policies. Sit down and read the fine print and understand what your policies do and do not cover. You might be surprised. Finally, it’s a good idea to review these policies and shop around for rates every year or so. Your situation may have changed and you may need a larger or smaller policy than you previously held. Or you may find that you can get lower premiums by moving to a competitor. You won’t know until you review your policies and shop around.
Planning Goes a Long Way
We all hope there isn’t a second wave. And we all hope we never have to experience a similar event in our lifetimes. But that is the thing about Black Swan events. You simply don’t know if or when they will happen. These are just a few ways you can prepare for the unexpected.
