Thanks to the coronavirus, it seems like the world has gone upside down. And it’s not clear how long this will last.
If this seems like uncharted territory, that’s because it is. This generation simply hasn’t faced a pandemic like this and its wide-ranging effects on our finances. So what do we do?
Luckily, most of the good, basic personal finance guidance that we should be following in ‘normal times’ (whatever those are), is the same that we should be following today. Yes, the nature of this episode is new and different. But from a personal finance perspective, what we’d do during any bout of economic uncertainty can apply well.
Let’s take a look at a few specific things to keep in mind.
Panic can take many forms at a time like this.
From a personal finance perspective, panic might involve indiscriminately selling investments. Or indiscriminately buying investments. Or rashly spending gobs of money to ‘stock up’ on home goods. Or it might mean simply ignoring finances altogether and hoping it all works out.
Panic, though, rarely works out well as a strategy. Whether that strategy is intentional, or unintentional. We can relate — these are challenging times. But before you make any big money moves, be sure to step back, take a few deep breaths and make sure you’re not making them in panic mode.
Good personal financial hygiene would have us all have some cash at the ready. Ideally, we’d have a full ’emergency fund’ that provides enough cash for a few months of living expenses.
Whether or not you have a full emergency fund at the ready, now is the time to figure out just what you have available, and where that money lives. The hope is still that you won’t need it. But businesses of all types are reducing hours, reducing services, or closing altogether. So it’s important to know exactly what you have available and where you have your available funds in case the need does arise.
It’s always a good time to check in on your budget and reduce unnecessary costs. But right now, it could be particularly prudent to do this.
As we don’t know how long or how deep the crisis around the pandemic will last, by reducing expenses where we can, we can make sure that available funds stretch. It’s even better if reducing costs, means we can set aside some extra funds.
Be assured that this doesn’t mean switching every meal to canned beans and rice. Remember what we said about panicking. But if you have an extra streaming movie service that you rarely use, for example, this might be a good time to cancel.
Being smart about budgeting and spending can hopefully help avoid the need to take on debt during this time. And perhaps the government will have programmes to provide additional support. Because just as normal, avoiding taking on debt, especially high-interest debt, is a good idea.
At the same time, if you worry that borrowing may be necessary, it could be wise to think through your options early. This could avoid realizing at the last minute that you need money and end up with high-interest credit-card debt or payday loans.
For those with good credit who are concerned that short-term borrowing may be necessary, one possibility is to consider a 0% purchases credit card. These cards can provide a year or two of interest-free spending, and since they typically don’t have an annual fee, you can take one out ‘just in case’ and not be penalised for not using it. Bear in mind though, that this is truly a ‘just in case’ option, and not a good reason to take on debt. After all, 0% interest or not, the money has to be paid back.
You can also review the credit cards you already have and other current borrowing options, so you know what’s available to you. For your current credit cards, check the APR on the card. In most cases, borrowing on a credit card that doesn’t have a 0% promotional period isn’t a great idea. But some cards do have especially low rates that could be ok for very-short-term borrowing. Alternatively, you could explore where you might be able to turn for a personal loan or to take a home equity loan.
Again, this is advanced planning to be prepared. Your best option is to make prudent use of your current resources and not take on new debt.
When financial markets get panicked, there is often overreaction. That can create an opportunity for investors who are focused on the long term.
Here we want to be sure that any money considered for investments is money that is not needed right now — or in the near future. Markets are going down now, and may continue to for some time. There are no guarantees in financial markets.
But if history serves, with the FTSE 100 index down more than 30% from its 2020 high point, this could be a good time to invest.
What to invest in will certainly mean different things to different people. For many readers, investing in a simple, low-cost index fund — that is, a fund that tracks a major stock-market index like the FTSE 100 — may be the right idea. For others, looking for especially good share bargains could be savvy. Finding these sorts of bargains is exactly what our sister site The Motley Fool focuses on.
Furthermore, with the 2020 deadline for ISAs rapidly approaching, it could be doubly smart to take advantage of the share market declines and the tax advantages of a stocks and shares ISA at the same time.