61.3 F
Los Angeles

HomeEditorials3 Personal Finance Lessons You Can Learn From the Pandemic

3 Personal Finance Lessons You Can Learn From the Pandemic

The COVID-19 pandemic seems to have led to a downturn in American household debt. In fact, CNBC reports that prior to the pandemic, the percentage of active cardholders that had balances to pay month-to-month was at 58%. That number went down to 53%, showing that during the pandemic, more people became serious about settling debts.

The cautious financial habits Americans developed do not have to be reserved for times of crisis. When you incorporate good financial habits into your daily life, you keep yourself protected should another unexpected event hit. Below, we’ve listed a few personal finance lessons people can learn from the pandemic, and how they can apply it to their everyday lives.

Keep 3-6 months’ worth of expenses in an emergency fund

According to the Bureau of Labor Statistics, unemployment rates during the start of the pandemic reached a peak 14.8%. The income deficiency unemployment leaves people with can limit their ability to pay for necessities. The debts they take on to cover these costs only grow their future expenses. To avoid digging yourself into a bigger financial hole, you need to set aside a fund for unexpected events.

Dedicate a specific amount of money for emergency spending. This is a topic covered by finance website Ask Money. In an article written by Sara Palmer, she recommends saving up three to six months’ worth of living expenses, depending on your circumstances. For instance, if you have loans to pay or if you’re in poor health and are anticipating medical expenses, you might need to save up more. Starting a personal relief fund ensures that you aren’t financially crippled in an unexpected event, and helps you avoid a toxic cycle of debt.

Debt repayment and saving strategies must go hand-in-hand

Jumping off the above point, the temptation to pay off all debts without leaving room for savings could push you further into the debt cycle. For example, say you poured all of your income into paying off your car loan. You manage to complete your payment, but you lose your job during the pandemic. Just as you settle that debt, your newfound lack of income forces you to use your credit card to pay for necessities.

You need to find the right balance between saving and settling debts. A good approach to follow is the 50/30/20 rule. Here, you allocate 50% of your income on necessities like food and utilities, 30% on wants like entertainment and travel, and 20% on financial goals like settling debt and saving. You can adjust these categories based on your cash flow and level of debt. For example, mortgages and car loans can fall under needs since they also count as utilities. Adjust your spending to make room for paying down your debt rather than letting it eat away at your savings.

Start a diversified investment portfolio

With the current unemployment rates threatening steady finances, individuals who only have a single income stream might find that their lifestyles are at risk. Lillian Appleby previously recommended seeking additional income sources in a diversified investment portfolio. To reduce investment risks, spread your funds across multiple types of assets. Since different investment classes show different rates of risk and return, assets that are high performing at a given time can compensate for assets generating low returns or losses.

For example, you can invest in both stocks and mutual funds. In case your stock goes down, the mutual fund can hedge your losses. The more diverse your investments, the safer your overall portfolio will be.

If you want to get your finances in order, don’t wait for another crisis to happen. Instead, protect yourself from the unexpected by finding financial habits that suit your circumstances. You can check our posts at NoHo Arts District for more financial advice.

nohoarts
Author: nohoarts