The Covid-19 outbreak has greatly devastated careers and finances, what with the unprecedented number of people having lost their jobs, and businesses, forced to shut.
And while these unnerving times might have made you reconsider your financial stability, how do you actually tell if you’re financially stable? More importantly, what can you learn from this pandemic to ensure that you’re always ready for a rainy day? Elsa Lim from Money Fit Coach weighs in.
You’re safe if your debt doesn’t exceed this percentage of your income
To find out if you’re financially solvent, Elsa recommends totalling up your monthly debts (these include personal loans, credit card bills or student loans) and dividing them by your monthly income.
“Make sure that your loans don’t exceed 30 percent of your monthly income. If it does, you will fall into a miserable and vicious cycle of working just to pay off your debts. You will have no buffer to protect yourself especially when your job and income could be at risk.”
She adds that it’s crucial that you build an emergency fund, and that you set aside 10 to 20 percent on your income for a savings plan every month.
“A cash buffer equivalent to three months of your monthly salary is advisable. But in a prolonged recession, it’s safer to raise this buffer to six months’ worth.”
Money lessons to take away from this pandemic
There are a couple of things to learn from this recession about saving. Elsa says that, for one, if you didn’t previously bother to build a cash buffer, you should do so immediately.
Secondly, you ought to live below your means in your everyday life — doing so will make you more resilient in a crisis. So even if you can afford it now, you should refrain from checking out another eye shadow palette or pair of yoga leggings.
It’s also crucial that you don’t put all your eggs in one basket.
“Investing all your savings in, say, property will put you at greater risk of a cash crunch when you lose your job or get a pay cut.
"Property is not a liquid asset and cannot be easily converted into cash. It’s far more prudent to spread your savings across various asset classes like bonds, stocks, precious metals, and savings accounts.”
She also advises that you take the downtime from this circuit breaker to think about your life goals, and how you can meet them.
“If your goals for financial health are not met, ask yourself why. What are the gaps that you have the power to fill? For example, you can take up courses to improve your financial literacy and learn to manage your spending habits and investments better.
"And if you’re unhappy with your lack of job security or income, perhaps it’s time to upgrade your skills so that you can take advantage of new career opportunities in a post-Covid world.”
Every recession demonstrates that it’s always best to be safe than sorry, so if you haven’t been putting together that nest egg, you probably should start stat.
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