6 Finance Tips We Can Learn From the COVID-19 Pandemic

With the COVID-19 pandemic locking down billions of people in their homes currently, businesses at every level globally have been disrupted. The economic fallout has also been intense for many countries and individuals, as governments around the world, including Singapore, brace for the worst-ever economic contraction.

On a personal level, you may have first-hand experience or seen family and friends stress over the soundness of their savings, job stability, investments and protection needs. These pressures may also affect an individual’s psychological well-being, adding to already-high stress levels.

Even if you haven’t been affected, no one can predict what the future holds. Thus, it is best to prepare your personal finance plans so that you can endure adverse scenarios, especially given the increasingly uncertain economic future that we face.

Here are six personal finance tips we can learn from the COVID-19 pandemic to bolster our personal finances during this period.

1. Keeping an adequate emergency savings fund

With Singapore’s circuit breaker measures, COVID-19 has already impacted many people’s ability to work and even businesses’ abilities to continue paying their employees.

As the economy heads towards recession, more employees and companies will become affected. This underscores the importance of keeping an adequate emergency savings fund.

If you were to lose your job during this period, you could tap on this reserve to tide over your and your family’s daily living expenses. Similarly, if you get into an accident, are diagnosed with a serious illness or anything else that takes away your ability to earn an income for a period of time, your emergency savings will provide you and your family with a financial cushion.

Even though the current circuit breaker measures may be eased going forward, no one knows how long the economy may take to rebound and for the pandemic to be over. A spike in infections may lead to another round of circuit breaker measures.

Another way you can utilise your emergency savings fund is when large unexpected expenses have to be incurred. Some scenarios may include having to pay for unexpected medical expenses, replacing important household appliances such as your air-conditioner, washing machine or refrigerator. In essence, your emergency savings will help you pay for unpredictable but necessary expenses.

Many financial professionals agree that individuals should have at least between six and 12 months’ worth of expenses in their emergency funds.

2. Diversify your income streams

The circuit breaker measures have already impacted the livelihoods of many people through pay cuts and retrenchments. The ensuing economic fallout will likely lead to more economic hardship, with some economists predicting up to 200,000 retrenchments in 2020.

COVID-19 may have also accelerated what it means to be a modern worker. Having digital skills and constantly upgrading your know-how is essential.

Firstly, this means that you should explore creating multiple income streams as a modern worker. Besides the income from your full-time employment, you should invest your savings to earn a return from the market. You can also consider side hustles during the evenings or weekends, or turn your passions into a coaching opportunity.

Secondly, to stay gainfully employed, employees need to have the right skills and mindset. Those who do not may find their job at risk during an economic recession, such as the current coronavirus-led downturn.

To do this, you may want to consider working in a field you are truly passionate about. Even if you earn less money, your enthusiasm for your work will mean greater output, job security, and fulfilment for yourself. Often these are the attributes of employees who get promoted fastest and may be happy to work past any statutory retirement age.

3. Take on investment risk you can stomach

During a bull market, it’s normal for investors to think that they can bear large swings in their investment portfolio. This could be because they have not experienced a large downward swing during the record 11-year bull-run the markets have enjoyed till 2020.

Within less than a month, COVID-19 plunged benchmark indexes such as the S&P 500 in the US, the Hang Seng Index (HSI) in Hong Kong and Singapore Straits Times Index (STI) in over 30% declines. Many individual stocks endured an even greater decline.

While some of these stocks and benchmark indexes have subsequently covered a part of the initial losses, you need to ask yourself if you can stomach such volatility in your investment portfolio. If the answer is no, you may prefer to avoid having a large part of your portfolio invested in equities.

4. Have a comprehensive insurance protection plan

Being a health pandemic, COVID-19 has also surfaced the question of having adequate insurance protection. Like most other things in life, no one can predict if you or your family members will suffer a health-related emergency.

However, if you do, you want to be adequately protected so that the cost of treatment becomes secondary, and the focus on recovery is the primary concern.

Fortunately, every Singapore citizen and permanent resident enjoys coverage through MediShield Life. Many also choose to extend their health protection with an integrated shield plan, such as AXA Shield.

While these plans cover your hospitalisation needs, you should also consider critical illness plans that provide a lump sum payout for diagnosis of a major illness covered by the policy. The lump sum can be important to pay for medical expenses that may not be covered by your hospitalisation plan or to put towards tiding your family’s daily expenses while you recover.

5. Keep debt manageable

Leverage is a double-edged sword. High leverage can lead to high returns when used correctly.

When the economy is vibrant and doing well, you may not feel the pinch of stretching your finances to buy a bigger home, a car or to magnify your positions in the financial markets.

During an economic downturn, having to fork out large sums of money each month to service the debt can increase stress levels. With so many being affected by short-term salary cuts and retrenchments, individuals may lose their assets if they cannot keep up with payments.

For now, the Singapore government has allowed for principal and interest on mortgage and vehicle loan repayments to be differed until 31 December 2020. While this may provide some short-term reprieve, the economy may not recover until much later.

If you tap on the scheme, note that this short-term respite from having to pay your loans will also increase your total interest payment over time.

6. Ensure your retirement plan can endure economic downturns

It’s easy to see how COVID-19 can unravel a person’s retirement plan as well. For those relying on rental income from a residential or commercial property, rents may not only soften but also disappear as people lose earning power and more businesses become financially pressured.

Similarly, someone relying on a portfolio of stocks investment would see their retirement nest egg shrink by double digits in the span of a few weeks. Dividends from these stocks may also be reduced as companies focus on shoring up their balance sheets to tide through the difficult period.

Having a diversified retirement income stream can be very useful. Singaporeans and permanent residents are also fortunate for CPF LIFE, which provides monthly lifetime payouts from age 65. These payouts are sufficient to cater for a basic lifestyle. For the majority who wish to enjoy more, they will need to supplement this with additional retirement income.

This can come from investments. Investment properties and an equity portfolio are perfectly good retirement nest egg. However, it can be diversified with other income streams from bonds or retirement plans.

Learning the lessons of COVID-19 without bearing the brunt

COVID-19 has the potential to disrupt people’s lives to the point of great uncertainty. Even though individuals face unique personal circumstance, putting in place the right personal financial plans can provide an invaluable safety net for yourself and your loved ones as well as act as a springboard to bounce back stronger from this setback.

Disclaimer:

This article is for general information only and does not take into account the specific investment objectives, financial situation or needs of any particular person. The views expressed herein do not necessarily reflect the views of AXA Insurance Pte Ltd and should not be construed as the provision of advice or making of any recommendation. There is no intention to distribute, or offer to sell, or solicit any offer to purchase any product. We recommend that you seek the advice of a qualified financial advisory professional before making any decision to purchase an insurance or investment product. Whilst we have taken reasonable care to ensure that all information provided was obtained from reliable sources and correct at time of publishing, information may become outdated and opinions may change. We are not liable for any loss that may result from the access or use of the information herein provided.