Four Pandemic Lessons for Your Personal Finances
These healthy financial habits can make the difference between struggling and surviving in any money emergency.
Digital Exclusive - 2020
As the COVID-19 pandemic and the subsequent economic fallout continue to impact our daily lives, now is the time to take stock of your financial situation and establish healthy habits that will put you on a stronger financial footing once the pandemic ends and the economy recovers—or for when the next emergency hits. The Illinois CPA Society offers these tips to help you better manage your personal finances now and in the future.
Set a Budget
Start by taking stock of your pre- and post-COVID-19 spending to identify areas of savings and expenses that will return, and then use that information to build a realistic budget that you can stick to. Consider ways to cut back spending where you can, but don’t be too spartan—your budget should allow room for wants as well as needs. For example, if you like stopping for a cup of coffee each morning, budget for it—but limit the budget by purchasing a gift card each month. Once the gift card runs out, stop buying coffee until next month. This allows you to indulge while still sticking to your budget.
Don’t let budgeting fall by the wayside after the economy improves, either. Following the 2008 recession, many Americans focused on budgeting and spending, but as time passed, those habits faded. A 2018 AICPA survey found that only 39 percent of respondents were following a budget, down from 58 percent in 2015—showing that many of the good habits learned from tough economic times tend to disappear when things bounce back. It’s best to revisit your budget quarterly or annually and adjust as needed.
There are many tools to help you build and stick to a budget, from simple spreadsheets to apps like Mint or You Need a Budget. The AICPA’s 360 Degrees of Financial Literacy website also offers a free calculator
to help you create and maintain a budget. If you want deeper insight or an expert’s help, a certified financial advisor or personal financial planner can help you create a long-term plan.
Build an Emergency Fund
The pandemic’s sudden onset, unexpected job losses, and investment declines have all highlighted the importance of having liquid savings to cover necessary expenses in an emergency. Tapping retirement savings or using a credit card to cover basic expenses when times are tough seem like quick fixes but resorting to this can damage your long-term financial health. Instead, focus on building a cash emergency fund that can cover your budget for three months to a year. Once the fund is established—preferably in an interest-earning savings account—redirect excess cash flow to paying off debt or saving for retirement.
With interest rates trending lower, now is a great time to put any extra cash toward refinancing and paying down high interest credit card debt, mortgages, and other loans. And if interest or payments on any loans have been deferred temporarily—as with federal student loans—keep up your regular payments if you can to use this as an opportunity to get ahead. Making payments now reduces the total amount you will pay in interest as well as the time it will take to repay the loan.
If you have trouble sticking to a financial plan or often find yourself going over budget, find an accountability buddy, such as your CPA, spouse, family member, or friend, to keep you in check. The COVID-19 pandemic is the third major financial calamity to hit the country in the past 20 years—recall the dot-com bubble bursting in 2001 and the global recession of 2008—and you will likely see another major economic downturn in your lifetime. Implementing and maintaining good financial habits will better position you to weather this, as well as any future storms.