Enoch Ofori Kwarteng’s thoughts … 7 financial lessons from COVID-19 crisis

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Six months into the year and it already feels like eternity. The world has been severely battered by the novel Coronavirus: a kind that many have never experienced. Since the beginning of the year and especially the beginning of March, governments all over the world have taken drastic measures to protect lives and their respective economies.

There have been mass border closures, businesses and schools have been asked to close and human contact limited through the now-famous ‘social distancing’ guidelines. Although measures have been varied across nations, a theme that runs through is the untold hardship on individuals and businesses alike. People who hitherto lived comfortably have desperately found themselves in financial despair. It is not far-fetched to say everyone has had their fair share of financial hardship.

That being said, there are valuable personal finance lessons that can be gleaned from this pandemic. As governments begin easing restrictions, it is anticipated that economic activity will improve, creating employment opportunities and increased income levels, albeit slowly. Below are 7 financial lessons that are worth noting.

You need an emergency fund – more urgently than you thought

The loss of employment and business disruption have made us, arguably, more dependent on a financial buffer than ever. Unexpected job losses, collapsed businesses, stay-at-home orders and the rapid change the pandemic has brought in its wave have highlighted the need to keep an emergency fund.

An emergency fund, like the name suggests, is to provide financial ‘life support’ in emergency situations. It is generally accepted that your emergency fund should have between three (3) and six (6) months’ worth of your living expenses. The bigger your emergency fund is, the better. You can start by putting money aside aggressively and slowing down when you have a considerable amount. ‘Windfalls’ and unexpected gains, such as cash gifts, bonuses, tips and salary increments can help you grow your emergency fund more rapidly.

Find an alternative source of income

Alternative sources of income provide a cushion when your regular income source (employment, primary business) is affected and cannot guarantee enough returns to meet your expenditure. These can include investing in an income-generating asset (e.g. a rentable apartment), a business (running one actively or passively through shareholding) or securities (T-Bills, Bonds, etc). Your alternate source of income should be stable and not very volatile or unpredictable.

Reduce loans. if possible, avoid them

There exist arguments both for and against taking bank loans. While loans are generally good and provide considerable leverage for businesses and individuals alike, a lack of careful assessment prior to taking one can land you in a financial crisis. Although the government announced interventions such as reduced interest rates on loans, you may enjoy very little or no concession on your existing loan.

In simple terms, our general attitude (or lack of) with record keeping and general system lapses may make it difficult to stake a successful claim for concession on your loan. Many of the individual loans that are contracted are used to fund lifestyle (fashion, furniture, electronic items, etc), creating an albatross in such a situation as this. With little or no income, you may have a huge loan repayment to honor. Unless absolutely necessary, stay low on commercial loans.

Your earnings are not guaranteed

I am quite certain we all have learnt this lesson by now. You cannot get too comfortable even if you have a ‘stable’ income. Natural occurrences like the current one can render you jobless and without any income. This should prompt you to consider alternate sources of income.

You can survive on a smaller budget

Some things were unthinkable before the current pandemic became severe; however, these things are now plausible. Whatever your story is, you may have already made adjustments to how you spend. Lesson learnt is that a smaller budget doesn’t kill. If you survived on a fraction of your earnings before the pandemic, you can do so now, with some easing.

Don’t put all your eggs in one basket

While the general sentiment with Coronavirus is negative, some persons and businesses have actually seen significant growth in revenues and its general worth. Many companies and industries in the health, food and technology sectors were winners as the panic wore on. It is worth noting that individuals who have stakes, like shares, in these businesses are also likely to have their fortunes head north. When putting money away in investment, an age-old principle is to diversify. Diversification is a means to spread risk and ensure that in crisis, losses on some investments could be offset by gains in others. When planning your investment, do well to spread your risk.

Every ounce counts

Do not discount little amounts when saving. A consistent habit of putting money away is what matters most. While business activity picks up and income levels grow, it will be important to note that every amount that can be saved must be. It may come in handy someday.

While you may be forgiven for being caught unprepared during the COVID-19 crisis, same cannot be said if you are caught in another. There are valuable lessons that can be put into practice so as to make you financially sound. Take advantage of the power of compounding and be consistent in building genuine wealth out of very little. It is important to be financially disciplined, cutting down on most discretionary expenditure and excesses, at least until you have built enough buffer. Below are some statistics that would be interesting to note:

  • At age 20, if you put away GHS50 consistently each month, you would be worth over GHS 1,500,000* at retirement
  • Should you start at age 25, you would need GHS105.66* each month, more than double what you could have started with just 5 years earlier, to amass the same wealth at age 60

The best time to start saving and investing is now!

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