The Wuhan virus, the Chinese coronavirus, COVID19, it has many names. None of that matters in the face of the impact it has had. International travel has stalled. Many people were locked into their homes, while non-essential businesses are shuttered. This is causing millions to be unemployed with no idea of whether or not their jobs will come back. Many small businesses have seen sales decline, though they’re struggling to find viable business models to generate revenue. While everyone is focused on the looming recession caused by the Wuhan coronavirus, let’s take a look at what the coronavirus can teach us about personal finance.
Why You Need an Emergency Fund
Depending on the survey, anywhere from sixty to seventy five percent of the population doesn’t have enough money saved to cover a major repair bill. The stereotypical examples include a major car repair or medical bill. Seventy to eighty percent are living paycheck to paycheck. If they don’t get a paycheck, they struggle to pay the bills. If they don’t get paid for several weeks, they’re at risk of losing their home. And the Chinese coronavirus of 2019/2020 has caused many to see their income fall or stop.
Yet there are many who are only concerned, not panicking. When you have the recommended three to six month emergency fund, you can pay the utility bills and rent when stuck at home. You could take a lower paying job delivering pizza and begin planning your new career. You have financial margin and security, and that’s the point.
Furthermore, the emergency fund provides these same benefits no matter what happens in life. If you lose your job because of a severe injury, you have money to cover expenses while waiting for disability or unemployment, and there is some money to cover the medical bills. You can pay the bills when life seems to be piling on, such as when you lose your job and need emergency dental work in the same week.
Why You Want to Minimize Your Debt Load
Debt always brings risk. When you have a car payment, you risk losing your car if you can’t make the payments. Credit card debt and other unsecured debts aren’t tied to property, but you can be sued by your creditors. They could garnish your bank account or paycheck at the most inconvenient time. And debt collectors always harass you for payment. The solution is to minimize your debt load.
Take control of your spending with a budget. Prioritize what you will do and make choices based on those priorities. Say no to extra activities for the kids. Decide to eat in more to save more money. Scale back your lifestyle today, so that you have the savings to pay for essentials when your income drops.
To borrow a line from Dave Ramsey, act your wage. Don’t waste money trying to live the way you think others expect you to live. Don’t buy a more expensive house or car to impress people, because this actually gets in the way of saving and eventually investing money. Don’t try to live a life based on what Instagram models and social media influencers make it seem like everyone else is doing.
A side benefit of getting on a budget and paying off debt is that it makes your emergency fund last longer, if you’re forced to rely on it. Your savings aren’t consumed by debt payments, and you only have to pay for the “four walls” – housing, food, utilities, clothes and other essentials. And you won’t waste money keeping up habits you couldn’t really afford.
Why You ‘Need Alternative Sources of Capital
An emergency fund will not always cover the expenses that come up. While we recommend against having debt, you should have alternative sources of capital lined up in case it is necessary. For example, have an emergency fund but have a credit card, as well. This allows you to pay for major expenses up front via the credit card such as medical bills or a major car repair bill. Then you can pay off that credit card with savings when it is convenient. In a worst-case scenario, you make monthly payments on the credit card debt while you’re living off unemployment or disability benefits.
Understand your options before an emergency arises. Learn about installment loans for bad credit so that you know where you can go if you need cash but don’t have it. Then you are less likely to make a mistake, choosing the most expensive option or simply the first one that appears. For example, you can’t close on a home equity line of credit or second mortgage quickly. Nor can you sign up for a credit card when your credit score is already low due to missed payments. This is why you’d want to have the backup credit card in your name before disaster strikes.
Why You Want Alternative Income Ideas
We need to be honest. Not everyone can work at home. Plumbers and electricians can’t work remotely. A mechanic can’t fix a broken generator or car motor via an app. And when everyone has been sent home, childcare workers and other service providers aren’t going to get paid, either. This is why you want to have ideas of alternative sources of income before disaster strikes. If you already deliver pizza as a side job to pay off debt, you could ramp up the hours to pay the bills if you lost your day job. Tutoring, driving for a ride-share service and other services could help you earn money when money is tight. Identify these backup business ideas now and have a rough plan regarding your options for landing paying clients. Then you don’t have to try to come up with a quarantine business idea or waste valuable time coming up with a business idea after you lost your job. You’ll already know what you’re good at, what you can do, and how you’ll do it. Even if it is simply posting on the neighborhood bulletin boards that you’ll cut their grass for a low, low fee.