The COVID-19 pandemic has certainly disrupted our daily lives, forcing us to close entire industries and change our behaviour overnight.
With the lockdown directly affecting jobs and the economy, many people’s thoughts quickly turned to their finances. Whether or not your income has been affected, now is a good time to get your finances in order.
Create a spending plan
The first step to good financial health is understanding your spending. That’s where a spending plan, or budget, comes in. Start by identifying how much you need or want to spend in different areas of your life, like household expenses, leisure, travel and savings.
Then automate your cash flow by setting up multiple bank accounts to match the different categories. Automating your cash flow allows you to understand exactly what’s coming in, where it’s going and what you’re going to save every month. If you already have a spending plan in place, review it now and check that your expenses actually match what’s in your plan.
Make use of savings
Gym memberships, haircuts, travel, takeaway coffee and lunches – the list of expenses we’ve been asked to put ‘on hold’ is almost endless.
With social distancing measures limiting our discretionary spending, many people will find a little more cash than usual building up in their accounts.
While there’s not much we can do about the lockdown, it does create an opportunity to re-evaluate your spending habits. So if you have to go without your daily flat white, think about ways you can redirect those savings to improve your financial health. Below are three areas to consider.
Build up your cash reserves
If there’s one thing the pandemic has shown us, it’s the importance of having an emergency fund to protect against the unexpected. If you don’t have one already, set up a high-interest account or use an offset account to reduce the interest on your mortgage if you have one.
You should aim to build up enough cash in your emergency account to cover six months of living expenses, including housing, to protect you in the event you lose your job, fall ill or can’t work. Ideally the funds will be in cash, so that they’re easily accessible and aren’t subject to market fluctuations.
Pay down debt
We’re pretty big on debt in Australia, using it to fund everything from housing to cars to travel. But falling behind on your loan repayments, or struggling to juggle debt and living expenses, can lead to serious financial stress.
So take anything extra you’re saving and use it to pay off your credit card, personal, home or car loan. Every little bit counts, as it helps reduce the interest you’ll pay on the balance going forward.
Supercharge your super
Once you’ve built up your cash reserves, and have your debt situation under control, you can look at putting any extra savings towards investments, like superannuation.
For those nearing retirement, or reliant on superannuation income, the recent market fluctuations can feel worrying. But now is not the time for sudden changes, or you could be undoing years of hard work.
Switching to cash can feel safe, but taking this course of action is almost certainly locking in the losses. Remember that markets are forward looking and will generally recover before the economy does.
While the COVID-19 pandemic won’t be with us forever, good financial management will. By taking a few simple actions now, you can help protect your way of life far into the future.
Source: FPA Money and Life