In early 2020, the economy was booming, jobless claims were at record lows.
And then came COVID, which ushered in economic uncertainty and volatility that we are still dealing with today.
Although no one could have seen COVID-19 coming, this unprecedented public health crisis has also provided us with many lessons about our personal finances. Here are the top six lessons that COVID-19 has taught us.
We all need access to liquid savings for emergencies: We often talk about "rainy day funds" in the abstract, and think that we'll always have time to pad our emergency fund. But in the age of unexpected shutdowns and furloughs, experts now suggest having as much as 6 months' worth of spending saved in case of emergencies.
Watch your debt-to-income ratio, regardless of how much you earn: Your debt-to-income ratio can affect every major financial aspect of your life, including interest rates on your home and car loans. A good rule of thumb is the 28/36 rule - meaning you should allocate 28% of your income to mortgage payments, and 36% to paying all other debt, including student loans, car payments, credit card payments, and other bills. According to the 28/36 rule, someone who makes $5,000 per month should keep their mortgage below $1,400 per month and all debt payments below $1,800. And if you make $10,000 per month, your maximum mortgage payment should be $2,800 and you should keep your maximum total monthly debt payments below $3,600.
Curb your credit card spending: In addition to increasing your debt-to-income ratio, maxing out your credit cards can also put you in a difficult position if you suddenly find your steady income reduced or curtailed. Credit card companies are typically unforgiving and interest rates can make your debt accumulate too quickly to keep up with, putting you further into a financial hole.
Explore alternate income streams: If you've ever considered starting a freelance business or exploring a "side hustle," COVID-19 has illustrated that the time to do so is now! If you have the ability to create a second stream of income, you may be able to offset financial losses from your primary job. It could also help you more quickly accumulate an emergency fund that can tide you over the next time there is an unexpected disruption to your employment.
Don't rely on lenders: The economic uncertainty brought about by COVID-19 has resulted in stricter lending parameters from banks. If you were counting on a low-interest rate mortgage or a refinance, you may be in for a surprise. Most major banks have upped the minimum credit score requirement and require 20% down.
Get comfortable making a budget: It seems so basic, but many families are living without a budget. A budget is your primary road map and will help you achieve your financial goals while easing financial anxiety.
Eager to make changes to your financial habits? The Robin S. Weingast & Associates team can help. Contact us today and find out how we can help you plan for your future and prepare for whatever comes your way.