The year 2020 caught us all off guard. The coronavirus pandemic and its worldwide economic impact is something none of us could have envisaged this time last year.
The good news is the past 12 months have been a wake up call for many Australians and their personal finances.
We all know the importance of budgeting, building a cash reserve and having more than one income, but how many Aussies actually took managing their personal finances seriously until now?
Here are five valuable lessons that the past 12 months have taught us.
Lesson one: A cash emergency fund is vital
If the past 12 months have taught us one thing, it’s that having a cash buffer is absolutely critical.
Building an emergency fund and managing risk is a critical foundation for any personal finance plan.
An adequate ‘rainy day’ pot of money helps to cover any urgent or unexpected costs such as a job loss, pay cut or major illness or accident. It’s your safety net for when the world takes an unexpected turn (as it did in 2020) exposing you to risk which otherwise wasn’t there.
As a rule of thumb, many experts say an emergency fund should be able to cover an absolute minimum of 3-6 months’ worth of living expenses and should be easily accessible.
Lesson two: It’s important to have a budget
Do you ever get to the end of the month and question what you’ve spent your wage on?
Living to a budget is a lot like being healthy - you’ll have to give up a few things but with the right mindset and plan it’s possible to find a good balance between living within your means and enjoying life.
The bonus is that if you work out how much your monthly bills are, and set an allowance for additional things like food and travel, it’ll allow you to put the rest aside and save up for those extra luxuries you otherwise wouldn’t be able to afford.
It sets you up for financial freedom.
On top of that, when the unexpected happens, you are then able to easily adjust your budget to suit your new income.
Lesson three: A diversified income is a safe one
Australians who solely rely on one source of income are putting themselves at higher risk in the event of an economic downturn and an unstable job market.
The more sources of income you have, the less exposed to risk you are. Which means, if you lost your job or your income was cut, you have another source of income to fall back on before defaulting straight to living off your emergency fund.
Lesson four: We can save more than we think
The government shutdowns we all experienced in response to the coronavirus pandemic forced us to stay at home.
Eating out was banned, the cinema was closed, theatres and concerts were called off and even the local pub was shut down.
Now you realise how much money you saved when restrictions were at their tightest, have the new relaxed rules seen you pickup where you left off? Or has your realisation of how much you spend on socialising made you readjust the way you spend your money?
Lesson five: Don’t make rash financial decisions
The past 12 months have been nail biting.
In times of crisis and volatility, it's difficult to focus on the long term outlook because it’s difficult to visualise how the economy, stock markets and business might pan out.
But it is essential not to make rash financial decisions when things look risky.
Economic uncertainty and global volatility across nearly all markets left investors on the edge of their seats waiting for the final blow that would send global stock markets tumbling downhill, but it never happened.
Imagine how much those investors would have lost if they’d opted out of markets as soon as things started to look tough?