Now that we are beyond the most difficult days of Covid, we have returned to a level of living that looks more like the days before Covid than the past two years. At that time, I was recommending that people handle money management by having an Emergency Fund, tracking Income and Expenses to see how to live in a way that leaves some money left over at the end of the month, and encouraging Investment for long-term growth of wealth.
Then Covid Arrived
This may have resulted in a period of job loss, a period of changes in expenses as we all stayed at home, and other changes in lifestyle (along with a couple of money payments from the government).
From a money management perspective, those years caused significant changes to households. It might have wiped out the emergency fund. Credit card balances that were in-control may have ballooned with the need for a way to pay for necessary items. There may have been a need to tap into investments. It was a very different personal economic environment for most people. What learnings can we take away from this period in terms of personal money management?
This fund became a “now I know why I’ve been saving here” moment. That fund may have become a lifeline for paying expenses during a period of lockdown. Having that cushion made the difference between comfortably handling the expenses and stressing over how to find the money to pay bills.
Hopefully, that lesson is learned and replenishing or making sure the emergency fund is fully funded becomes a priority. While any amount is a laudable goal, this might be the time to decide to fund it fully at six months or even twelve months of expenses. It becomes that lifeline to use when a source of income comes to a sudden end.
However, it is not necessary to panic if it isn’t possible to start funding that right away. Credit cards, that used to be paid off each month, may have a balance on them month to month. It may be a priority to pay those off first, particularly with the increase in interest rates lately which are coming through as higher APR interest rates for credit card balances as well.
The key learning is that this fund is a comfort cushion that can really lower stress when a stressful situation come along like Covid.
Tracking Income And Expenses
Prior to Covid, many people didn’t keep track of income and expenses as long as the income lasted until the end of the month. If the money was there, it was spent. With Covid and changes in both income and expenses, having the ability to know where the money went and how much was coming in became critical knowledge. This became the time to really look at those expenses and where to cut back if necessary.
As the money management situation returns to a more stable situation again, take a lesson to continue to monitor the income and expenses and make some conscious decisions about how much to spend on different areas.
The key learning is that knowing personal income and expenses is important to being able to shift as conditions change. If expenses in a category go up or go down, it is possible to easily see how that will affect the overall picture. Likewise, if a raise has occurred or a new job started and the income changes, spending or savings can be easily adjusted to take into account the new amount.
Investing and Investments
Rather than seeing if there is money left at the end of the month and spending it, identify an amount to allocate to savings or investing and transfer that money when income is received so that it is paid first before other expenses are paid. This will allow shifts so that if income increases due to a bonus, a raise, or a new job, more money can be shifted into investments for the long-term.
When it comes to the investments themselves, the past few years has shown us that the market does not always continue to go up year-after-year. We’ve seen levels of volatility (quick rises and falls) that we have not see since 2008-2009. 2022 is turning out to be a year with a significant reduction in value from the peak of last summer.
The key learning here is that investments will go up and will go down, but it is important to maintain the plan you or your financial advisor set up originally. This may be a good time to revisit the plan and tweak it for any changes, but otherwise continue as-is. This can be very difficult when a balance that has been going up for years is now going down instead.
Tools Can Be Helpful
In order to implement some of these areas discussed, it can be very useful to have some tools available to help. One website with a number of calculators is called pigly.com. By using the debt calculator you can see how long it will take to pay off a credit card or other debt. By adjusting the amount paid each month, it is easy to see how much more quickly the debt will be paid off.
Under the Savings menu category is a budgeting calculator that can help understand where the money goes and how much you might want to allocate to each category. That can also be useful to help determine where you can find money to shift into an emergency fund or investments.
These tools, and ones found at other websites, can be very helpful in helping to plan for the future.