Using COVID as a Motive to Improve Your Finances
By Kevin Gibbons
As we enter our 8th month of dealing with this crisis, many of us have accepted that this is a long-term situation. As such, we can look at how we can make some meaningful changes to improve our long-term personal financial health.
In an article published by DepositAccounts (a division of LendingTree), Sarah Berger writes that 82% of Americans surveyed report that the Coronavirus pandemic has caused them to change their financial priorities in some way. There are a number of interesting conclusions she and her team draw from this survey and I do recommend you take a look at it. I want to focus on three specific reports and how they may help you make changes to your personal financial goals and plans:
36% say paying down debt has become a higher priority
33% say building an emergency fund has become a higher priority
23% say they are focusing more on budgeting and understanding their spending
Those are all important aspects of getting better control of your personal finances. But how do you tackle these areas in a meaningful way without being overwhelmed, especially when considered in light of the additional stress most of us are feeling in the current situation?
The key is to make small changes that will stick.
If you set multiple goals that are too ambitious, you run the risk of failing, becoming disillusioned and accomplishing nothing. Build some momentum with small changes that you can succeed at and then use to make even more progress.
We are going to look at these three areas in reverse order. You’ll see why that makes sense.
Budgeting and understanding your spending
At The Savvy Life, we always say Spending Plan, never Budget. What’s the difference? They both accomplish the same end result – figuring out how much money you have and where you are going to spend it. The difference is entirely psychological. People have come to perceive “budgeting” as a negative experience. You can’t spend money on what you want because you are on a budget. A Spending Plan is your plan on how you will spend your money. It is a positive experience because you are spending with intention on the things that are most important to you. That positive mindset really is critical to helping you stick to the plan.
Understanding your spending – where you are currently spending and where you want to be spending – is a crucial first step in creating your personal finance plan. You cannot determine how to pay down your debt or build your emergency fund until you know how much you need to spend on your essential expenses.
Categorize your expenses in terms of “Essential,” those you have to spend in order to keep a roof over your head, food on the table and “Lifestyle,” those that make life enjoyable but may be trimmed or eliminated for some time if absolutely necessary. Be sure to include both your regular month-to-month expenses and the intermittent “surprise” expenses that only occur once or twice a year (like vehicle registration and insurance, or tax payments). Once you know what all your expenses are, you can look to see if you are spending your money where you want to be spending it. Make sure you are spending on things you want, not just things you have been buying out of habit.
If you have to make cuts to balance your spending with your income, you have a list that you can use to prioritize. Again, look at making small changes that you can stick with, rather than drastic “crash diets” that you may give up on after a few months.
Building an emergency fund
Different people have different opinions on how much money to put into an emergency fund. Some people say 6-months’ salary, some say 6-months’ expenses, some say 3-months’expenses. At the Savvy Life, we usually advise at least 6-months of essential expenses, but every individual and family is different. The most basic rule is having some money in an emergency fund is better than having none.
The thing to remember about an emergency fund is that it is for emergencies. It is not a slush fund to tap because you overspent or forgot about a bill. If you have created your spending plan first, you should not be surprised by intermittent bills or overspending.
How aggressively should you build your emergency fund? Again, small, sustainable and incremental changes are better than drastic ones. Nothing is more demoralizing than socking away large pockets of money for an emergency and then having to “raid” that fund because you were too aggressive and can’t pay your bills.
Figure out how much you can sustainably put into this fund and make it part of your Spending Plan. If you have to use it to pay for a car or home repair, or unexpected medical bill, don’t get discouraged. That is what it is for.
Paying down debt
Many people ask if they should pay down debt or build their emergency fund first. After all, if they pay down that debt, they stop throwing away money on interest, so they get financially healthy quicker, right? Once again, every individual and family has their own set of circumstances that must be considered while making this decision. You need to understand the risks associated with each option.
If you pay down your debt first, but have no emergency fund, and nothing bad happens, then you come out ahead. You have eliminated your debt and those interest payments as quickly as possible. However, if something bad does happen, you may have no choice but to go back into debt to pay for that emergency. Then you are right back where you started, and demoralized.
If you continue to make minimum (or small extra) payments on your debt and start building an emergency fund you have options when something bad happens. You can make the decision to use that emergency fund or the credit card. If nothing bad happens, you will end up paying more in interest but you have that insurance. It’s a risk analysis every person or family need to make consciously.
One final statistic from the survey: 19% of respondents said the pandemic has not caused them to change their financial priorities. Whether you are in that 19% or in the other 81% that have been affected, use this opportunity to look at your personal finances. Make the small, incremental changes that will put you in a stronger position, with good habits aimed at understanding your spending, having an emergency fund and paying down debt. It will serve you well now and in the future.
Kevin Gibbons is a Cash Flow Planning Expert, the Vice President of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past eight years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 625 individuals and families to create Spending Plans.
To learn about how Kevin and Melissa work with clients to create Spending Plans, visit The Savvy Life’s Home Page. If you’d like to learn about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page
