Right about now, most of us are likely to be just about finishing up filing our taxes for 2020. In doing so, you may well be shutting the door on one of the toughest years to date. 2020 threw many challenges at lots of us, with health and financial worries topping the list.
Many people lost their jobs, or had to wind up their businesses. Others had to combine working with childcare and homeschooling, drastically reducing our capacity to work and earn money. The stock markets had a pretty wild ride of it too.
I suppose there were some positive points. We were far less likely to overspend on dream vacations during 2020 or to make big purchases. Consequently, some of our hard-earned cash has stayed put in our bank accounts for a little longer. In fact, In April 2020, the personal savings rate was higher than it had ever been.
But with small business revenue down 20% and the amount of the labor force unemployed at four times the normal rate, there’s no doubt about it. When it comes to finances, 2020 was a difficult year for many of us. So what can you do now to help your finances recover?
Time and Time Again…
Economic crashes and recessions are nothing new. In fact, this article from 2019 details how a recession has happened every decade since the Civil War – except, of course, the 2010s. (Just, please, no-one tell them what was about to happen…)
Let’s take some positives from 2020 then, and use it as a learning point. When it happens again – which it inevitably will – we will feel confident that our finances can bounce back.
Help Your Finances Recover
Tip #1: Review and Re-Budget
One of the most important things to do right now is to take stock of where you are. Take some time to review all of your finances. This is something that is worth doing on an annual basis anyway, but after a tough time it’s especially necessary.
Every year, small details will change. A little pay raise can make a big difference, as can an increase in the cost of your bills or monthly subscriptions, or a slight change in your benefits package. And after a year like the last one, some of those changes might be much more significant than normal.
Your investment portfolio may be somewhat devalued, changing any dividend payments or expected profits. Covid-19 has also wreaked havoc on many people’s insurance plans as well, so it’s definitely worth reviewing this now too. Have you ended up with medical bills to pay, or has your insurance increased? Make a point of checking in now, to avoid any nasty surprises later.
So start from scratch to create your recovery budget, taking all those changes into account. Thoroughly examine your income against your expenses. Has your income changed, but your expenses haven’t? Or have expenses crept up, while your income plateaued or even decreased?
While you’re reviewing your budget and making changes, don’t forget your financial goals. You can work towards rectifying any trouble that 2020 caused you as long as you keep both your goals and your current circumstances in focus. Making small adjustments to your budget and your plan can keep those goals in reach.
Tip #2: Review Your Investments
Investments are meant to be a source of security – they shouldn’t be a source of worry and panic. That’s why the best thing to do when dealing with investments, especially during the bumpy ride of a recession, is stay calm. One of the wisest investment strategies is to stay in the market rather than bail out when things get rough, and it never pays to act on emotion rather than rational thinking.
With any luck, you know that already from when you started investing and developed your investment plan. You may have already been through a market crash and seen your portfolio thrive after a major downturn. If you can afford to remain invested, do so.
This is when it might be wise to reconsider your asset allocation. If you normally allocate 20% of your savings to cash, for example, you could consider reducing this by 5%, and investing that 5% in stocks this year. You may also choose to diversify your investments in different ways too, depending on the strengths and weaknesses of the market. You can always review all of this when you come to rebalance.
And just as with your budget, when you’re reviewing your investments, don’t forget to keep your financial goals front and center. You can let your financial goals lead the way, in a sense. Adjust your plan and your investment strategy, by factoring in any change to your risk tolerance, to keep on track to meet all your goals.
Tip #3: Use Any Surplus Wisely
If you were lucky enough to not see a reduction in your income over 2020, thanks to the sharp curtailing of consumer spending you may just have ended up with a bit of surplus money. You may have received a stimulus check, or taken out a loan against your IRA under the CARES Act.
Use that surplus wisely. And if you’ve created a surplus by adjusting your monthly budget, use that even more wisely. To help your finances recover, you may have taken some big decisions and cut some luxuries out of your budget. Make that difficult decision worthwhile and put those savings to use.
Pay off expensive debts first. Clear any credit cards that you may have overspent on while trudging through the crisis, overspending on luxury homeware and those extra bottles of wine for all those long evenings in.
You may want to consider refinancing your debts to lower monthly payments. You may be able to find loans at a lower interest rate, swapping a fixed rate for variable. But this may not pay off long term – seek financial advice so you can fully assess the impact and implications of any big decisions like this.
Be Proactive with Your Finances
Instead of being reactive and having to sort out your finances when the markets become volatile, be proactive. While you can’t completely protect your finances during a market downturn, you can definitely go some way towards building your financial security today. Here are three things you can do now:
- Create an emergency fund: The next time you hit financial turbulence, you have a bit of a buffer.
- Live within your means: Only spend what you can afford to spend so that you aren’t burdened with huge debts the next time things get difficult. You don’t want to have to think about big monthly repayments when you’re living on reduced income.
- Increase your investment portfolio’s resilience: Diversify your investments, regularly reviewing your risk tolerance against market strengths as well as your own financial goals, and remove emotion from your investment decisions.
Stay Calm, and Seek Clarification on Your Unique Circumstances
I’ve just been on a whirlwind tour through your finances, covering everything from monthly budgets to health insurance to asset allocation to refinancing. You will be completely forgiven if it all feels a little daunting and intimidating. But remember – you don’t have to navigate through this on your own. It’s not always easy to help your finances recover when they’ve taken a bit of a hit, but by following my tips you can set about it in a calm, methodical way.
If we’re already working together and you feel as though you could do with an extra consultation to review your circumstances, please get in touch and we’ll get something on the books. If we haven’t met yet, but you think you might benefit from some help with getting your finances back on track, just reach out. I’ll look forward to hearing from you.