A look at personal finance during COVID-19 and beyond

Over the last few years, I had the chance to discuss with some friends about personal finance, and one of the interesting takeaways from these various chats was that everyone has a rather different perspective on saving and handling their own money. With all that’s going on nowadays in this global pandemic which is starting to take a huge toll on the world’s economy, I can imagine people of all backgrounds might have a few worries around the subject.

As we navigate through what is a rather difficult period, possibly stretching for a significant amount of time, I’ll try and share some of my understanding of the personal finance world and which order of priorities you should use to look at your financial situation in times of uncertainty. Namely:

• Establishing a mindset of scarcity
• Conquering budgeting as a tool to get (back) in the driver’s seat
• Setting up an emergency fund
• Tackling debt
• Investing in the stock market

This list does not cover every single aspect of personal finance, though it’s a good start to set your foundations right and help you make your first steps in the right direction.

Before we start, please note that I am not an economist nor a professional expert in any of the topics I’m talking about in this post. This post contains my opinions based on my current view of the world when it comes down to personal finance, which is likely to be incomplete and might even be inaccurate. Money is a delicate topic and you should always make your own, independent, and well-informed decisions after researching and deeply understanding the consequences of your actions.

A little background

Growing up, I was lucky my family taught me the importance of not wasting money. Later on in my teenage years, the toughness of a few seasonal work experiences sealed the deal on me not wanting to ever be in financial distress, as well as keeping on the right track when it came to push in the direction of my “ideal” job.

The long story short: I worked hard and I saved as much money as I could, within reason. I definitely spent (and, at times, over spent) money on pleasurable things and experiences: traveling, concerts, musical instruments and gear, food and drinks, entertainment with friends, and so on. Nonetheless, I don’t think I’ve ever spent in a month more that I would make, so I was essentially always adding up to the savings account.

As I entered my thirties, I found myself with some money in the bank and no idea of what to do with it. Is saving all you are supposed to do about it? Is there a smarter way to use your money, besides keeping a little aside for the unknown times? What do I not know about the topic of personal finance?

So I started reading about the subject. As it turns out, there was so much I didn’t know. A few years later there is still a lot I do not know, though through practice over time I did manage to get a good grip on my situation and, to some extent, wrapped my head around the main concepts of this interesting discipline I keep on studying.

A mindset of scarcity

Let’s start with the basics: when times are tough, the first thing to do is to cut on waste. Here’s a few thing you can do:

• Make sure you budget for the essentials (groceries, bills, rent/mortgage) and avoid spending (too much) money on extras (entertainment, food deliveries, impulsive purchases out of boredom). If it seems that there is nothing you can do without, chances are that you are truly at rock bottom or you are lying to yourself.
• In many places in the world, the lockdown will impact your ability to go out for a meal; if that’s not the case, you should still stay home as much as possible and cook. Cooking your own meals is definitely cheaper, often healthier, and occasionally tastier than most takeaway food.
• If you care about helping out your local restaurants and it doesn’t break the bank, once in a while you can order food that has a great value for its price (e.g. every now and then we order a nice Indonesian rice table from a nearby place, which we know can easily feed the two of us for 2 meals). You can also buy a voucher from your hairdresser or trusted local shop for a service to redeem in the future and help them with cashflow today.
• Use the extra time to talk to family and friends, exercise, look around the house for things to do, consider finishing that book you bought and never opened. Prioritize this over buying more online services to keep you busy or out of boredom. Small purchases accumulate and over the long term hurt your bottomline.
• As a general rule: try your best to be frugal. Cut away the inessential and keep what you truly enjoy. Be ware, being frugal doesn’t mean being cheap. You can (and should) pay enough money for higher quality, and you can still be generous with the ones you love (especially in times of need). Just don’t let your money go towards non-essential things that don’t help you or your beloved ones having a better life.

Budgeting

Having a budget is a great way to be on top of your finances, especially for expenses (at least to begin with).

If you never did it before, it can be tricky to come up with a budgeting system and be on top of it. There are plenty of apps nowadays that connect to your online banking and extrapolate the data for you (Mint, YNAB, Spendee, to name a few I fiddled with).

In my case, I haven’t found one that does as great a job as I’d like, so I had to come up with a more manual approach. Here’s the gist of it:

• Create a simple spreadsheet with categories as rows and months as columns (to get started, you can find a very simple example for you to copy here).
• Create as many categories as you see fit, though start small and add new categories only when it gets harder to define a realistic budget for a mixed group of expenses. My advise is to make sure you separate fixed costs (rent/mortgage, bills, subscriptions) from variable ones (groceries, gas, food and drinks out). Also, try and keep aside necessities from extras (e.g. groceries vs dinner at restaurant).
• Log into your online banking account, look at the expenses for the last 3 months, and add up every single movement of money outwards in the related category. It’s critical that you track every expense, so you can see where you money actually goes versus where you think it goes (ahem, we’ll talk about my coffee addiction in a different post).
• Calculate the average of each category for the last 3 months, then take that amount and adjust it as you see reasonable. Don’t set absurdly low budgets, instead try and be honest with yourself and gradually cut away where you feel you can.

Now that you have a budget, you want to repeat step #3 to each week. This will give you a sense of where your money is going and shorten the feedback loop between your spending and your budget review. Figuring out after a week or two that you are eating your budget away faster than you thought, is much more actionable than when the month is over already.

At the end of each month, repeat step #4: re-calculate the average of the last 3 months and set the budget for the upcoming one (e.g. when April 2020 ends, calculate the average for the Feb-Apr 2020 period and set the budget for May 2020).

A small gotcha: while you can keep track of all your cash movements as well with some extra effort, I recommend you to go for digital purchases every time you can. You are going to be less likely to forget tracking where some of your money goes and feel much more in control. Alternatively, you can withdraw a fixed amount of cash per month (say, 100 euros) and add it as a row in the budget spreadsheet.

The emergency fund

Now that you are on top of your budget and you can see where you money really goes, you can hopefully manage to save up a little bit. That’s great, even if it’s just a little bit, and that small pot of money has already a label on it. Nope, it’s not “the next fabulous holiday when the world goes back to normal”, it’s called the “emergency fund”.

The recent history has shown us that emergencies can appear from out of nowhere. In more normal circumstances, emergencies would be like unexpected health issue or dental work, a car repair, a family member (or a close friend) in need.

Many people have been currently caught unprepared as they live pay-check to pay-check, which is unfortunate.

So, unless you already have at least 3 months (better, 6 or 12) of expenses set aside, you should consider putting that money away in a separate savings account. Little by little. It can take some time and it’s ok. Your budgeting sheet will tell you how much you need on average to cover for a month on expenses, as well when you are ready to move on to the next target.

Tackling debt

This is a section I am not super comfortable speaking about. Luckily enough, I don’t have any sort of debt, student loans, credit card, or similar. My only debt (and liability) is the house I bought, which is a conscious choice I made and I’m happy with it (we can talk about it in another post).

If you have debt, the general guideline seems to be that you try and pay it off once you are done with your emergency fund. There are many strategies to pay it off (e.g. optimizing towards faster progress vs tackling the highest interest rates first). Do your research and, with a bit of luck, you will find out what works best for you.

Investing in the stock market

Let’s assume you have all the fundamentals in place: you are reasonably frugal, have an emergency fund, and no debt. Great! Now, what to do with the extra money you are saving for the barely existent interest your bank is giving you?

If you have some tolerance for risk, this might be a good time to start investing in the stock market.

You may ask: “In these uncertain times, why?”.

Fair question, here are a couple reasons:

• The stock market has gone down significantly since the global outbreak of COVID-19, which means that you can get most shares at a cheaper price than before (at the time I’m publishing this post, it has recovered for a good portion of the loss, though it’s still significantly cheaper than a few months ago; this shouldn’t matter, anyway, I’ll tell you why in a little bit).
• Historically, a bear market (stocks going down 20% or more from their recent highest value) is followed by a bull market (stocks going up 20% or more from their recent lowest value), which tends to go higher than it was before.
• In a nutshell, unless the entire economic system breaks down to its fundamental pieces, the stock market always grows towards new heights.

Remember a moment ago when I told you that it shouldn’t matter when you buy stock? Well, one of the greatest lesson you will learn sooner or later (and I hope you trust my word and the ones of many others before me, instead of losing money trying to be smart) is that “time in the market always beats timing the market”.

Please let this sink within you for a moment: “Time in the market always beats timing the market”.

As humans, we are emotional creatures with great, misplaced confidence in our ability to predict the future. Even people with decades of experience in the field can hardly build reliable models or get any closer to accurately sense what will happen in the stock market (we remember a few people’s guess being correct mostly due to survivorship bias).

This means that, more often than not, our guesses will be wrong and our emotions will take over, selling when we should be holding on to our stock and buying when the hype has already built up.

Because it’s hard to be rational when it comes to money, and especially our own, the wisest among the investors out there will discourage you to play the game and instead will encourage you to do the few things I can also recommend and do (once again, don’t blindly follow my advice, do your own research and decide for yourself):

• Invest for the long term. Unless you are part of the elderly or really close to retirement, your time frame for investment should be 20 years or longer. It’s never too late to start, though the sooner the better, all because of compound interest; for it to work though, you need to stay invested for a long time.
• This means that what happens on a weekly, monthly, and even yearly basis shouldn’t matter much to you. Invest a little something periodically and forget about it. Whether the market is up or down. Automate the deposit if possible and only check how things are going for the sake of your own bookkeeping (say once every 3–6 months).
• Don’t pick individual stocks. It takes a lot of time and deep knowledge of the company’s health (operationally, financially, culturally, industry wise, etc) to make a sound decision on whether a good investment is such. Save time and money, literally, by buying index funds maintained by a reliable company that charges low expenses (my choice is Vanguard’s Global Stock Index Fund).
• If you really want to pick individual stocks, choose solid companies which makes products or deliver services you understand and value as a customer. Companies that have been (and likely will be) around for a long time and that, ideally, pay dividends consistently and often. Don’t buy it cause it’s a cool brand or because everyone is talking about it. If you wouldn’t enthusiastically recommend a company’s product/service to a friend regardless of its hype, why buy a piece of it?

This topic deserves a much more detailed article to properly cover all the specific nuances. As a starting point, consider checking out the most known platforms out there which change rather low commissions, like DeGiro, Interactive Brokers, or RobinHood (depending on where you live and pay taxes, there might be better options for you).

Wrapping it all up

These are my 2 cents (pun intended) on the topic of personal finance. There is a lot of ground we haven’t covered (e.g. taxes, different kind of investments like rental properties, etc), for most people though these are the basics that you need to understand to create some order out of chaos and uncertainty.

If you feel like there isn’t much related to COVID-19, you are probably right. The way I see it, taking care of your finances should be a solid, long-term thinking process that keeps you afloat during bad times and pushes you forward during good times. The economy works in cycles that repeat every 10–15 years and, while each crisis is going to be very different from the previous one, you can see them coming rather regularly so it’s best to be prepared.

Surely enough, the current situation has put many people in distress, for no fault of their own. This is a global pandemic which was impossible to predict in time and so far it disrupted the way we live very radically.

However, some of these distressed folks could have possibly avoided or at least mitigated their own situation if they had tackled the topic of personal finance earlier or more soundly. I don’t want to sound overly cynical, in fact I recognize that life can be exceptionally difficult and not everyone can have the luxury of dealing with the champagne problem of “where do I put my extra money?” when working hard to make ends meet.

Whichever stage you are at today, a critical look at your finances can dramatically increase the quality of your life in the long term.

As the old saying goes:

“The best time for planting a tree was 20 years ago. The second best time is today”.

Plant the tree of your finances today.