How to Prepare for Financial Crisis After COVID-19
COVID-19 brought many dramatic changes to the economy and people's lives, and those shifts are still ongoing. It's hard to predict what the world will look like when the pandemic is over—or what unforeseen events might happen after that.
Financial planning and goal setting are more difficult under these circumstances, because future scenarios are inherently uncertain. And after such a catastrophic event, there's a great deal of fear about what other calamities might happen sometime down the road. Given this uncertainty, it's helpful to learn how to prepare for financial crisis and find ways to become more resilient.
Pay yourself a salary
One of the key ways to build financial resilience is by living below your means. This allows you to save and invest for the future. If a crisis arises, you have a cushion in your budget that can help you weather the storm.
You may be tempted to spend all the money you bring in, but you can resist this if you reframe your thinking. Instead of viewing all your income as available, consider paying yourself a salary. Pick a percentage of your income—say, 90%—and set up an automatic transfer that will send that money to a designated checking account each pay period. That money is ready to be used for all your daily expenses and needs. The remaining 10% should go to creating an emergency fund if you don't have one yet, or to long-term savings and investments if your emergency fund is already established.
Stick to a budget
There's a widespread perception that little luxuries like that $12 video-streaming subscription will break your budget. But often, it's the big items like housing and transportation that matter the most. If you're way over budget and struggling to get your cash flow under control, downsizing your house or car might be the solution.
Take full advantage of specialized accounts
Do you have tax-advantaged retirement accounts, like a 401(k) or IRA, or other specialized accounts, like a health savings account or college savings plan? These accounts can help you prepare for the future while potentially paying less in taxes. Make sure you've opened all relevant accounts that you're eligible for. If your employer offers matching contributions, try to qualify for the full amount.
In an emergency, insurance can be a lifesaver. Look into life insurance and homeowners insurance as well as medical, dental, long-term disability, and auto insurance. Not everyone will need every form of coverage, but it's a good idea to evaluate what your risks are and how your finances would be affected in different scenarios. Choose the insurance you need now so you'll be protected in case of a catastrophic event.
Make investing effortless
It's hard to remember to invest while coping with uncertain times, but continuing to invest can help grow your nest egg and leave you better prepared to deal with the unexpected. Try to make investing as easy as possible so it doesn't fall by the wayside when life is chaotic. Consider setting up recurring transfers to an investment account. If investing large amounts seems daunting, use an investment app like Acorns that will automatically invest your spare change.
Check your credit report
In a crisis, you may need to borrow money. How much you can borrow and what interest rate you'll be charged will depend on your credit history. Request a free credit report online, and make sure all the information is accurate. If your credit history isn't ideal, plan to work on your credit by paying bills on time and keeping your debt at no more than 30% of the total amount you can borrow. Improving your credit score now can make coping with a crisis a lot easier in the future.
Anticipating a future emergency may be overwhelming, especially if you're coping with a recent job loss, illness or other disruptions to your life and career. But by thinking about how to prepare for financial crisis and taking steps to save for the future, you can confront future challenges confidently. If you're well prepared, uncertainty doesn't have to mean disaster.
A few financial insights for your life
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