Watch the Lifestyle Creep: 6 Financial Lessons Learned From COVID-19

Covid-19 Financial Lessons

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In a summary from an article from The Globe and Mail we take a look at some very important financial lessons learned during COVID-19.  The rapid economic changes caused by the virus have taught us critical financial and business lessons.  Here they are in no particular order.

1. RISK IN OUR INVESTMENT PORTFOLIOS

The massive stock market volatility of the last couple of months has shown many people that their risk tolerance is far lower than the arbitrary number they filled out on their investment-policy statement. Now that you have been on the roller-coaster ride, you can quantify your risk aversion. Spend some time thinking about whether your equity or other risk-investment allocation suits your investment objectives and if the potential volatility of these holdings is appropriate for your risk tolerance.

2. KEEP EMERGENCY MONEY

Standard investment advice has always been to keep a few months of money to cover living expenses such as mortgage payments and groceries in the case of an emergency. Many people did not listen to  that advice and are now struggling to make their monthly payments. You can expect people to start building a reserve of emergency cash funds that can last a lot longer.

3. WATCH THE LIFESTYLE CREEP

It’s easy to get caught up in “lifestyle creep,” where people expand their lifestyle and spending alongside their increasing salary or income.  Lifestyle creep popping up during this crisis.  Things such as monthly payments for fancy cars, mortgage payments for our larger-than-necessary homes and lines of credit for inflated personal expenditures are stark reminders of our excessiveness.

While our excessive fixed costs laugh at us, some of our discretionary expenses have ground to a halt while we are isolating at home – restaurants, clothing purchases, vacations and toll-highway driving to name just a few. You quickly realize how much money you can save on these expenses when you have no bills related to them for a month. This is a sobering experience, and we can expect many people will scale back on some of these non-essential expenses from now on.

4. BUDGETING

Most people have a hard time preparing a budget.  However, with your income reduced, evaporated or uncertain, a budget will help you understand what you need to pay for the fixed costs discussed above. Does your current reduced income, government benefits and savings cover you for the next few months, six months or year?  If you have lost your job or now receive a reduced paycheque, how long will you need to defer mortgage or other payments? While long-term planning is uncertain in this environment, you can reduce your fixed costs over time by reviewing the savings available and restricting discretionary spending.

It has never been easier to gather the data for a budget. Pick a 30-day period from when you started self-isolating and summarize all payments on your credit cards and all automatic debits and cheques written on your bank account. This will be the foundation of your budget. You can then layer on one-time expenses not covered in the 30-day period and discretionary expenses. There are several online budgeting tools to assist you. I suggest this process is vital to your financial health and everyone should do it.

5. BUSINESS CONCENTRATION RISK

COVID-19 has hit small business owners very hard. Not only has their short-term income been devastated, but many of the retirement dreams have been delayed or derailed. The crisis has crystallized the risk of having their retirement funding concentrated on one major asset: their business.

Many small-business owners will now have to rebuild their enterprises over the next few years. Some will likely never receive the payday their retirement was premised upon.

6. THE BEST PLANS OFTEN GET CHANGED

COVID-19 has affected many facets of life – from family vacations, to renovation projects, to business plans for expansion and growth, to retirement plans – all have been altered, set back or permanently impaired.

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