The COVID-19 pandemic quickly turned many households upside down financially speaking. The inability to clearly see what was coming next combined with unpreparedness for disaster left millions of people feeling lost and insecure about their financial lives. Some experienced a sudden halt in income seemingly overnight as businesses shut their doors, some temporarily and some for good. Others experienced a drastic decline in their savings and investments as these resources were either impacted by a downturn in the market or had to be used to make ends meet.
While not every household faced the same trials and tribulations during the global pandemic, living through the experience has opened the eyes of most. Preparing financially for the next catastrophic disaster should be high on the priority list as we move further from the COVID-19 pandemic. Here’s where to start.
Know Where you Stand Financially
One of the smartest steps to take to prepare for the unknown is to take inventory of your financial house, now. Whether you are single, have a spouse or children, or have grandchildren to consider, knowing where you stand financially speaking helps set the stage for preparedness well into the future.
This begins with evaluating your current cash flow – that is, money in versus money out. Add up your income sources from employment, side gigs, pension or retirement funds, and other cash inflows. Then, add up living expenses like rent or mortgage, debt payments, food, utilities, and extras such as travel and hobbies. Subtract those expenses from your income to see if you have a positive or a negative at the end of the month.
If you have a surplus, you may feel like you are done with this step. That is not necessarily the case. Be sure to allocate that extra toward your building savings, paying down debt, or setting aside for other goals like retirement. If you have a deficit in cash flow, meaning your expenses exceed your income, think about where you can cut back on spending each month or how to increase your income over time. Understanding your cash flow helps illuminate any issues in income compared to spending before an issue like a global pandemic strikes in the future.
Prepare for Future Emergencies
Many financial experts suggest having emergency savings as part of any financial plan. Emergency savings better equip a household to cover unexpected expenses, like a job loss, a large medical bill, or a costly home or vehicle repair. Without emergency savings, debt is the likely alternative.
If you don’t have emergency savings currently, aim to set aside a small amount each month or pay period to help fund this goal. Ideally, you want between three and six months of living expenses as an emergency fund, in an account that is easily accessible. If you already have an emergency fund set aside, consider what you can do to prepare the other members of your family. Setting up a savings account for a child or other loved one can make a world of difference in their lives, as can establishing a savings foundation for older parents or other relatives.
Pay Down Debts
Before the next pandemic strikes, focusing some attention on debts may be beneficial to get your financial house in better shape. Debts, like credit cards, auto loans, personal loans, student loans, or mortgages, represent a significant portion of monthly living expenses for many households. These monthly obligations can become a serious financial burden when disaster hits, particularly when income stops or slows drastically.
Take stock of what you have in terms of debts, including balances, interest rates, and required monthly payments, and consider what you have available each month to put toward amounts owed. If you want to get some momentum building for debt repayment, start with the smallest balance and put extra funds here. If you want to save on the total cost of debt, start by paying extra toward the highest interest debt, like a credit card. Be sure to cover your minimum payments for all debts even when you’re putting extra toward the others and be mindful of your ability to also build up an emergency fund at the same time.
Organize Your Financial Life
Another smart way to prepare for the unknown is to get more organized in your financial life. Put together a list of accounts or assets and the various financial institutions they are held in, and do the same for debts and amounts owed. Writing down final wishes or instructions, insurance policy details, or estate plans is also part of the organization process.
Although this may seem like a daunting and somewhat depressing task, taking the time to go through this organizational process helps others when the time comes. Knowing what accounts exist and where to find them can eliminate financial stress for your loved ones should something happen to you.
Know Where to Turn for Help
Finally, make a shortlist of resources that you or your family members may use in the event of a pandemic in the future. Government agencies came to the aid of millions of families throughout the COVID-19 crisis, but the assistance was not altogether beneficial for those who did not know where to look.
Compile information on government agencies or other local resources in your area, including food banks, unemployment offices, nonprofit organizations, and community health organizations nearby. If you aren’t sure where to start, a quick online search for local COVID-19 assistance may yield helpful and surprising results. Keep the list in an easily accessible place and periodically update it to ensure it is still relevant.
These steps may seem unnecessary as we start to see the light at the end of the current pandemic’s tunnel. However, being financially prepared for the next requires understanding your cash flow, boosting savings, decreasing debts, and organizing your financial house now.
