THE COVID-19 pandemic is not only a public health emergency but it has also resulted in a very serious economic crisis. In the past two months, the world economy has turned upside down.
The stock market has been extremely volatile over the past month, and many of us have been forced to stay home from work due to the outbreak of COVID-19, also known as the novel coronavirus. It’s increasingly becoming apparent that this outbreak is going to cause an economic slowdown. Global supply chains are being disrupted. The travel industry is taking a nosedive. Conferences and other large events are being cancelled left and right. Even pro and college sporting events are being postponed or called off.
While foul economic winds are blowing, it is time to prepare ourselves now to make better financial decisions and start taking control of expenses.
With that said, we would like to provide some tips on what we think you can take to navigate this environment better:
1. Review & Rationalize your budget.
Ideally, we should have two sets of budgets.
A Baseline Budget. A Budget that is sensible during normal environments. Both spouses have good jobs, growing income. The budget is well aligned with what you wish to achieve today and in the future.
A Very Conservative Budget. A Very Conservative Budget is one where we budget mainly the essential spending that would keep the family operational, with minimal allowance for entertainment to maintain the morale of the family.
In challenging times, a spouse could lose their job (in the worst case both). As a business owner, your revenue and profits might be impacted such that you are forced to take a smaller income, fee, or declared dividend income.
In the event of such a scenario, the first thing that would set in is shock and if you have not considered what is your essential spending and the bare minimum you need to keep the morale going, you will be at a loss for what you should do.
By having a baseline and a very conservative budget, you will know what the areas are to stop spending on when something hits.
For example, in your baseline budget, you allow yourself to bring your family and extended family out for a good meal at a good restaurant every weekend. In your very conservative budget, instead of every weekend, you would bring the extended family out once a quarter, and for your family, you would eat out once a month instead.
For both the family and extended family, you will reduce the grade of the eateries chosen to one where the food is value for money.
Cut on the areas that you value less or are lower in priority. Still spend on the areas that could not be cut or are in higher priority. Consider critically the grade of the goods and services you will spend on.
This would improve the morale and still maintain your mental capacity.
If you already have something like a very conservative budget, consider reducing some of the areas from a standard budget to a point closer to the very conservative one.
2. Have An Emergency Fund.
As a family, having a liquid pool of money in an emergency fund would allow the family to buffer about three months to a year of shock to the annual expenses.
3. Consider Carefully When Deciding To Take A Loan.
Given the climate, taking on loans may reduce the margin of safety on your finances.
Ideally, the annual debt repayment to your after-tax income should be less than 30%. Should one spouse lose the job, your family should be able to service the debt repayment with one income.
4. Enhance Your Earnings Potential To Retain, Adapt And Grow.
For many accumulators, or those of you who have not amassed an appropriate net wealth, your family’s income is the most important. It allows you to pay for your current expenses and provides the free cash flow for you to increase debt repayment, build your children’s education fund and your financial independence.
Take advantage of the SkillsFuture credit to find complementary training to enhance your earnings potential. If you feel strongly about switching to a different industry or domain, consider going for some training to start building side competencies.
Make yourself indispensable at your job by being focused and adding value at work. Take on the things your peers may shun.
Most of all, to do all this and function well, you must be healthy and fit. Ensure that you eat right, de-clutter your mental thoughts and focus on the important areas, and exercise frequently.
5. Invest For The Long Term.
History and Experience have taught us that there will always be challenging times. The important thing for all of us is to emerge from tough times like this unscathed, if not stronger.
If you have committed to long-term goals such as your financial independence and children’s education, continue to fund them.
For our client’s portfolios, they are diversified across 7,000 businesses around the world, across 180 high-credit rating bonds. This diversification allows them to reduce the impact of weakness in certain regions in the world and be able to capture the regions where there would be relatively better growth, reducing single-country risks.
There will be a lot of noise along the way that confuse us and increase our anxiety levels. They serve to throw us off our wealth accumulation journey towards our goals, so that we cannot amass enough wealth for our financial independence and children’s education.
The government has committed to match every dollar of cash top-up made to CPF Retirement Account (RA) under a new Matched Retirement Savings Scheme.
You can consider taking advantage of this by topping-up your CPF RA account if you are between the ages 55 to 70 and have not hit your CPF BRS.
As a family, this is a time to evaluate your resilience.
Be aware of the government incentives and measures so that you can take advantage of them. We have also provided some different ways in which you can shape your personal finances to provide your family with greater resilience. If you wish to review your personal situation, you can contact us for a complimentary discovery session at https://www.providend.com/service-enquiry/
Alternately, you can also find out how well you are managing your finances right now amidst a market downturn with this short 3 minute assessment.
Experience tells us that all these challenges shall eventually pass. If our finances are in order, it allows us to emerge from these challenging times stronger.
This is an original article written by Kyith Ng, Senior Solutions Specialist at Providend, Singapore’s first Fee-only Retirement Financial Adviser.
We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.