It’s been a few months since COVID-19 started ravaging the world and unfortunately, the end is not yet in sight. We don’t know when everything will go back to normal. We’re not sure IF things will go back to normal.
Financially speaking, a lot of people are struggling due to loss of income and I think it’s just going to be worse from here on out. Many of us are getting by because we’re prepared for emergencies; more are not as fortunate.
During the past few months I’ve been observing, talking to real people, and participating in online fora, and I’ve come to realize some crucial financial lessons from COVID-19, which I will share with you below.
1. Importance of liquid emergency fund
I will start with the obvious one first – the importance of a liquid emergency fund.
I know many readers will be surprised that there are actually some people who don’t believe in having a liquid emergency fund. But believe me, I’ve encountered many of them online and in real life.
Some people think (even some financial bloggers – a stark lesson about the importance of vetting who you listen to) that they don’t need to have cash or cash equivalent around for emergencies. They think that their credit card is enough. They would rather invest their money in the stock market instead of setting aside 3 to 6 months worth in expenses. These are the people who couldn’t imagine any emergency scenario that will require them to have cash around.
Unfortunately for these people, the world doesn’t care if they lack imagination. Just because they can’t imagine something does not mean it’s not going to happen.
Even if they were able to use their credit cards in the first few months, they still need cash to pay for the debts they accrued. They still need cash.
So to those of us who were able to set aside ample cash for emergency, congratulations.
I have always advocated having a fully funded emergency fund, way before I even started this blog. I have been seen, both personally and through the experience of family and friends, what happens if you don’t have enough money to cover unforeseen events. This epidemic is certainly one of those events.
In the future, when we get out of this entire situation and you have the opportunity to save up again, prioritize a fully-funded emergency fund and put it in a savings account. Don’t rely on credit cards. Don’t invest your emergency fund. Invest only after your emergency fund is complete.
2.Need to reduce debt as fast as we can
I’m pretty sure you’ve noticed that just because the many money-making activities have halted, our bills still keep coming and expenses continue to accrue.
Most of these bills are for utilities (water, electricity, gas, internet) and other essential expenses like food and clothing.
In many areas of the world, some governments grant citizens a reprieve from paying their bills for a few months. Some even distribute allowances for families who meet certain income thresholds.
In the Philippines, the bills were suspended for 3 months, which was a relief for many people. But of course, the bills still need to be paid. We now have to pay for 3 months worth of bills in one go. And the financial assistance does not cover those who can be considered to belong in “higher” income brackets. The word higher is in quotes because we know that in the Philippines, higher is relative (just a few shades from poverty levels).
If you’re lucky, you’re still employed or you have an emergency fund stashed away to cover these essential bills. If you’re one of the unlucky people whose income was reduced, or you lost your job and you don’t have an emergency fund, you’re facing a huge problem.
There are those who defend accruing debts by saying that at least, they’re charged low or even no interest. Although this reasoning is faulty, I can sort of understand why people will take on low-interest debts during normal times.
But then, it’s still debt. You still need to pay it. With the world economy as fragile as it is right now, having minimal debt is one burden off your shoulders, especially if you consider the consequences of non-payment.
Banks and lending institutions are not known for their compassion for the poor. As a matter of fact, they make money off your financial mistakes and bad decisions. The upcoming recession will just make things worse for those who have huge consumer debt, especially now that the Philippines is starting to establish its database of consumer credit information.
Credit card debt
Many of us carry huge credit card balances. A lot of people use credit cards to play catch up with their essential bills and other living expenses. Some use credit cards to finance lifestyles that’s beyond the contents of their pocketbooks. While others use cards to pay for truly life-changing expenses such as school and training fees, and even medical bills.
Whatever your reason for using credit card is, it’s debt that needed to be eliminated. Of course, it would’ve been ideal if your credit card balance is minimal or you never accrued credit card debt in the first place.
If you’re using credit cards to live the lifestyle you’ve been accustomed to pre-COVID, I urge you to stop. If you’re one of the lucky ones whose income remains the same in this financial climate, take this opportunity to cut your debt. Take the Uber or Grab money you saved by working from home and use it to pay your card.
Loans
Too many people I know have car or condo loans that they can barely afford to pay. They were convinced to take out loans by unscrupulous sales people who told these hapless buyers that since they can make the monthly payments, they can now afford hundreds of thousands or even millions of pesos in debt.
Some really bad examples are:
- Vehicle offers for 0% downpayment, followed by monthly payments of more than 50 percent of the buyer’s monthly income; and
- 10,000 pesos monthly payments for the equity portion of pre-selling condominium units, followed by hundreds of thousands in turn-over fees and other bills not disclosed during the sale, not to mention the high mortgage interest rates
These financial gaffes lead to properties being repossessed by the bank due to non-payment, even during normal times. I’m very sure a lot of people are going to lose (if they haven’t yet), their cars and real estate investments due to COVID.
3. Advantages of having a paid-off home
Renting versus owning is one of the long-standing debates in personal finance. I think there are sound reasons for both. For example, I think it’s best to rent if you’re still not sure where you want to work and live, you’re still gauging your options, and you’re still young and you have not yet built a family.
On the other hand, if you’ve settled that you want to live in a particular area and you can make a sizable deposit, I support buying your own home.
In general, I still think along the same lines. But now that we’re in the middle of a pandemic and there’s a huge possibility that some of my income stream may be reduced or lost, I’m glad that I have at least one fully-paid home where I cannot get kicked out of because it’s lien-free.
It’s a huge relief.
I don’t care how close you are with your landlord. I don’t care if you feel like your landlord is like your family and that you feel like you can depend on them. I can guarantee that if you miss paying your rent and your landlord’s creditors come knocking, the years of relationship you built will fly out of the window.
If you’re unable to pay your mortgage for a few months, the bank can repossess your home.
My takeaway from this is that, have your own, fully paid off home. Even if it’s small, as long as it’s in a safe location.
My own, paid-off home is a row house in the outskirts of Metro Manila, which many of you would probably think is cheap. But I don’t care. It’s mine and fully paid off and my parents who are staying there now won’t kicked out of it if ever I lose my income for a few months. Plus, because it’s small and due to its location, property taxes are low.
4. Your job is always vulnerable
Since the start of the epidemic, millions of people worldwide have already lost their jobs. I’m pretty sure more people are going to lose their jobs as the situation continues.
The entire global economy has been affected by COVID-19. Worldwide, nearly half of the workforce risk losing their job, according to the United Nations. In the Philippines, the government estimates that 10 million will lose their jobs due to the pandemic.
I’m not sure yet if that number already includes OFWs or only workers based in the Philippines, but the prospect is horrifying.
Once again, we’re seeing that job security is a myth. Whether you belong to the private or to the public sector, assume your job is vulnerable.
Back-up for employer-provided benefits
Many rely on employee benefits, including health care coverage and group insurance. Some have taken car mortgages through their workplace. What would happen if we suddenly lose these employee perks due to cost-cutting measures? What if our role is eliminated or if our company closes altogether?
These scenarios are no longer far-fetched. There’s a distinct possibility of losing your job because of the pandemic.
Some of the ways you can cover yourself from these scenarios include:
- Make sure that your PhilHealth membership is up-to-date. Make sure that all of your dependents are listed and that premiums have been paid on time (or even in advance if you are a voluntary member).
- Ensure that your employer has remitted and is remitting your SSS premiums on time. In the event that you lose your job, you can apply for unemployment benefits.
- Even if your company provides a group life insurance, you should buy your own insurance policy. Make sure that you buy term insurance instead of a VUL.
- Start shopping for affordable HMO coverage as soon as possible.
5. Need for a creative income stream
Having multiple income streams is more important now than ever. But this pandemic is now calling for us to be more creative than before. Income streams such as businesses, rental properties (such as for airbnb), and even stock trading are not profitable during this time.
I think we should try to develop an income stream that’s either
- At zero expense for the audience/clients; or
- Affordable digital products that don’t require high production costs and can be delivered electronically
The first type include income can come from Youtube or blogging. A lot of people spend their time in Youtube to entertain or educate themselves. Many people also read blogs for the same purposes. Although it’s true that not everyone who has a blog or a Youtube channel can attract and retain a sizable audience, I think these two platforms are worth exploring if you have the perseverance, hard work, and of course, the personality.
(Pssst, in case you’re wondering how to start your blog, head on over to my Resources page to find out what tools and services I use here at Katie Scarlett Needs Money.)
As for the second type of income stream, if you’re like me who’s always on Facebook and who likes subscribing to newsletters, you’ve been bombarded by ads and emails selling digital products of all kinds.
What’s attractive about these products are that they deliver exactly what you’ve been looking for but can’t find anywhere else. Some of the products I’ve found or bought:
- How to start doing yoga handstands
- How to build sustainable coaching business
- Online etiquette school
- How to have your colors analyzed
These products are usually sold at affordable prices (relative to their real-world counterpart), provide a tangible service, and delivered online through instructional videos and similar methods.
Another advantage on top of what I shared above is that producing these products cost relatively little. For instance, the woman who’s selling the hand stand course filmed in her apartment and gym. Selling courses can cost as little as hiring a video editor, copy writer, and subscription to an online platform such as teachable.
There’s no need to buy ingredients and materials, hire a delivery person, etc.
As soon as you have a great digital product, you can buy Facebook ads at relatively low cost. Since your course is based online, you’re not bound by geography. The entire Facebook-using world can buy your products.
Of course the challenge is for you to think about what expertise you have that can be converted into a course and monetized.
6. Bad investment planning and its consequences
The uncertainty surrounding COVID-19 underscores the consequences of not having a sound investment plan. A sound investment plan should incorporate:
- Proper asset allocation based on your goals and timeline;
- Risk diversification
- Risk appetite
Although this guideline is fairly simple, a lot of people still do not bother to make even a rough plan about where to invest their money.
Improper asset allocation
Many people invest any which way, without proper planning and allocation. Many just follow what’s popular. They collect investments, Pokemon-style. If they hear of an investment and if someone they know (in real life or online) will swear by it, they must have it! It does not matter if the said instrument does not fit their risk appetite and goals. As long as it exists, it belongs on their portfolio.
FMETF seems popular on Reddit, they must buy some shares, asap! MP2 has been on the news a lot lately, they need to put some money there. Etoro is being endorsed by popular “financial experts”, they will open an account, despite the fact they only get to invest in derivatives (without realizing they’re investing in derivatives). Crowdfunding for farm products seems in, well, they’re farmers now.
Because their investments are not allocated properly and not diversified, they’re either left with no or very little liquidity because:
- They neglected to ensure that they have a fully-funded emergency fund;
- They forgot to include assets for the short-term and their next holding will mature in 5 years or more;
- Their stock holdings are at new 10-year low and they can’t sell without incurring huge losses
Now, instead of being able to rely on their investment to tide them over during hard times, they either sell at a loss or accrue debt.
OFWs who planned to return to the Philippines for good, thinking that their investments will be enough, are forced to continue working overseas because of improper planning. Their retirement is indefinitely postponed.
Unchecked risk appetite
Since the pandemic started, I’ve been inundated with messages from blog readers and those who follow me on Reddit who thought that they have high-risk appetites and invested their money on high-risk investments, including individual stocks.
Unfortunately, they can’t bear to see their investment portfolio turning red. They started started getting scared and sold their holdings at the first sign of trouble.
Not only did they lose money by buying high and selling low, they derailed long-term plans because they believed some online test which told them that they have an aggressive investing style. Or maybe it’s a macho thing? Men think that being men, they need to be aggressive, even in investing?
Final Thoughts
This situation is definitely one of those hindsight is 20/20 kind of thing. The truth is, for many of us, reversing the mistakes of the past in the middle of the pandemic may be too difficult.
But for others, there’s still time to maneuver and correct course. We can still do little, incremental changes that will eventually improve our financial positions.
Although I hope that this pandemic will be over soon and for it not to happen ever again, the most prudent way forward it to assume that the world will not go back to the way it was and that similar disasters will happen again in the future.
To recall my Girl Scout motto: Be prepared!
What observations and lessons have you learned so far from COVID-19? What do you think we can do to improve our financial position moving forward? Please share your insights in the comment section!
4 Responses
Hi Katie, you for sharing your insights. You nailed it.
Thank you so much for reading!
Excellent points. This pandemic has definitely affected my approach to finances as well, and I agree with a lot of what you said. As a physician working in the US, I have had firsthand experience in dealing with the steep rise in Covid-19 cases. Because of the less than optimal initial responses of governments around the world, I’m pessimistic about the state of the US and world economies in the short to medium term, but in the long term (10+ years) I’m fairly confident there will be a strong recovery, just like there has been in every other major financial and health crisis in the past. Here are a few of my personal takeaways:
1. An emergency fund is priceless. When the pandemic hit, my husband and I had already saved up one year’s worth of expenses in cash, and we were already debt free. This was such a relief and was a major source of our peace of mind, especially in the early days. Prior to the pandemic, I actually thought the standard advice of a 3 to 6 month emergency fund was fine, but now I would rather keep a minimum of a year’s worth of expenses because of the added security it offers. It might delay our path to financial independence a little bit, but it’s well worth it. But I actually went overboard at first and wanted to keep a 2-year emergency fund, which leads me to:
2. Don’t let fear hold you back from investing. I realized my urge to hoard more cash was more of a fear-based reaction. Because of it, I failed to take advantage of the stock market crash in March, and only started buying index funds in June when prices had already somewhat recovered. I think it’s fair to allow yourself to recalibrate your financial plan due to a black swan event like a pandemic, but the most important thing is to try to assess your reasoning as calmly as possible. Begin with your goal in mind. In my case, the plan is to reach financial independence in a 9-year time horizon. Once you have a goal, work your way backwards and find the most efficient path that gets you there. And never make investment decisions based on emotions.
3. It’s important to hedge against possible risks. My husband and I had been putting off getting life insurance policies but the pandemic got us off our butts and we have finally applied for term life insurance that we’re planning to keep until we reach FI. We are a dual income household with no direct dependents, but my husband does send money to family in the Philippines, so life insurance policies still make sense for us. I also applied for disability insurance to protect my income as a physician.
4. When planning for a possible early retirement, it’s important to be extra careful to mitigate sequence of returns risk, which has the potential to decimate your portfolio and could lead to you running out of money before you die. This is especially important for early retirees who hold the majority of their net worth in the stock market and expect to live on their investments for at least 40 to 50 years. If you retire at the worst possible time, right before a major stock market crash, you basically have 2 acceptable options. You can keep a substantial cash cushion to avoid withdrawing from your investments until the markets recover, or you can go back to work. I’m planning to build up at least 3 years of expenses in cash immediately prior to retirement for this purpose. I’m also open to returning to work after retirement if there is an economic downturn. Thankfully, for a young retiree in the health care field this should not be hard to do. Another option I’m considering after reaching FI is transitioning to part-time work that’s enough to cover our living expenses, without necessarily the need or the pressure to continue saving as our investments can continue to grow in the background.
It’s hard to predict what the future holds, but I’m pretty sure the post-pandemic world will be substantially different from before. All we can do is prepare ourselves as best as we can and try to keep our financial houses in order so we can focus on what’s important: the health and well being of our families and communities.
Hi JLT,
Thank you for the very thoughtful comment!