There is no doubt that COVID-19 will be remembered as a lifetime event that changed the world forever. This unprecedented pandemic continues to destroy many families with the death toll rising daily, and crippling the global economy at large. Just like any other crisis that has come and gone, there are lessons we can all take away from it.
The purpose of my blog today is to talk about money and what COVID-19 can teach us. I am not suggesting (for one minute) that money is more important than a human life, as I think we’re all smart enough to know that’s not the case. I am merely commenting on my area of expertise.
The stats relating to COVID-19 at time of writing (14th May 2020) are as follows:
- 4.34 million confirmed cases globally (6,984 relating to Australia)
- 1.54 million recovered globally (6,271 relating to Australia)
- 296k deaths globally (98 relating to Australia)
The global economic impact is beyond words, with the cost of COVID-19 restrictions costing the Australian economy ~$4 billion per week – as recently announced by the Treasurer of Australia (Josh Frydenberg).
In life there will always be events – some good, some bad, and some ugly. When a crisis occurs there are lessons we can all learn, particularly when it comes to our own finances and money. Some will argue that money isn’t everything, but isn’t interesting how everything needs money?
COVID-19 comes with some very valuable lessons in my opinion. In my daily work, I have seen some interesting observations I want to share with you, which may help you when it comes to your own money and finances.
Here are 7 key lessons we can all learn from COVID-19 which may help you when planning your financial future:
1. Become a master at managing your money
I have been around the finance game long enough to see what works and what doesn’t when it comes to managing money.
I have seen (first hand) lots of people that have created amazing businesses, amazing investment portfolios, and amazing high paying careers, but somehow these people seem to be always chasing their tail looking for more cash, and feeling like a hostage to debt and ongoing commitments.
Being diligent with managing your money is the key here. Knowing all your cash inflows and outflows (intimately) is a key step – as you can’t manage what you don’t know.
Plan ahead by projecting both your inflows and outflows, but more importantly you should be tracking your cash flows (in and out) on a regular basis – ideally monthly.
2.Cash flow is the lifeblood of any business, your household should be no different
In business if you run out of cash, it’s game over. Your household is no different.
A key priority when managing your money should be to ensure you remain liquid, at all times. This is of utmost importance.
Being liquid doesn’t necessarily mean just having cash in savings. Liquidity comes in all forms and includes borrowings against your home or investment properties (e.g. redraw or cash in offset), passive income from your investment portfolio, and working income whether that’s from your own business or a salaried job.
3.Never borrow more than you can afford to pay back
Borrowing money to buy a home or investment property is smart, and necessary in many cases, however you should only take on debt you can afford and which doesn’t create financial stress in your life.
Whilst lenders have a responsibility to (only) lend money to those that can demonstrate their capacity to pay it back, only ‘you’ are in control of your financial future and you should consider your future plans when applying to borrow money.
Loan deferrals may be an option right now during COVID-19 (which I wrote in a blog recently), however the debt remains and will continue to accumulate. There are no short cuts, you are responsible to pay back what you borrow – with interest.
4.Always maintain a ‘safe’ financial buffer for life’s unknowns
Maintaining a financial buffer is one of the most important financial lessons many will take from the COVID-19 pandemic – I believe.
There will always be an X factor in life, and one key lesson you should take from the current pandemic is the importance of maintaining a financial buffer – particularly as you take on (more) debt and commitments.
Financial buffers (reserves) are critical for sound money management as it ensures you are able to financially survive when life throws a curveball – like now with COVID-19.
The size of your financial buffer will differ from the person next to you, however a good guide (I think) is to ensure you have at least 6 months loan repayments stashed away in an offset account or in redraw.
Equity in your home or investment property is not the same as having the cash readily available. If you have borrowing equity in your home and/or investment property, and you don’t have a financial buffer (or your buffer is inadequate), then I suggest you seriously consider releasing some of this borrowing equity and park it in offset or in redraw. You may qualify to release equity today, but who knows what’s around the corner that will change lenders’ appetite for equity release. If you want help with this, please feel free to contact us as we can help.
5.It’s easy to be flush with cash when things are booming, but when the tide turns you will get caught out
A Warren Buffet quote I absolutely love is this… “only when the tide goes out do you discover who’s been swimming naked”.
6.Borrowing to invest is smart, as it enables you to build an asset base with a passive income
Another favourite quote of mine from Warren Buffet is this… “be fearful when others are greedy and be greedy when others are fearful”.
If you think about it – that time may be now. If you consider the residential property market right now, there is fear among many buyers and sellers.
Unlike the share market, property is a human necessity and therefore less volatile, making it a sound investment strategy.
Borrowing to buy quality assets is smart, particularly when opportunity knocks. Buying below fair value usually only appears when there’s fear around – like now during COVID-19.
Ask yourself, would you rather buy at auction competing against 6 other strong bidders (as we saw in the latter part of 2019), or would you rather buy with less or no competition where the vendor has to sell and will accept any reasonable offer?
7.Not all income is the same
Not all income is the same and to achieve true financial freedom, the secret is to invest in assets that generate passive income.
Working income can stop just like that – as COVID-19 has shown us. On the other hand, passive income continues to flow as it relates to your investment and doesn’t rely on your working hours.
Residential property is a good example of an investment asset that generates passive income. Your investment property generates cash (on auto-pilot) as your tenant pays you money in order to live in your property.
During your working years is the ideal time to invest in assets such as residential property, as you will need working income to borrow the money to invest. The goal may be that one day you replace working income (totally) with passive income, or you may choose to work less with passive income supplementing your working income.
The key message from the above lessons is that cash is king. Money isn’t everything, but everything needs money – rightly or wrongly.
Many Australians have been hit hard (financially) as a result of this pandemic, at no fault of their own. Many businesses won’t come back from this, and those that do come back may look very different. This is very sad indeed and no doubt our economy will be bruised for quite some time.
There is always a silver lining in every crisis. I hear many people say that they can’t wait for things to return to normal, but what if “normal” didn’t work for you in the past when it comes to your money and finances? Isn’t this a golden opportunity to take stock and learn some new financial strategies that will set you up for a stronger financial future? Food for thought perhaps.
I hope the above helps you in some way, particularly when it comes to planning and managing your money and finances, and when it comes to setting financial goals to achieve a more secure financial future.
Disclaimer: The Information is general in nature and does not take into account your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the information without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.