An unexpected silver lining to the current lockdowns is the opportunity to prioritise your spending to achieve financial goals.
The Covid-19 lockdowns have caused a great deal of economic mayhem. Many people have lost jobs or are not being paid for the duration; still others have been forced to take salary cuts. The more fortunate have been able to continue working from home and have continued earning their salaries.
In amongst all the anxiety and disruption, though, there is a silver lining: the lockdown has forced all of us to spend much less. The question we should address is what to do with any savings we have been forced to make and, more important still, are there ways to make at least some of those savings permanent?
In the United States, the savings rate reached 33% in April, as compared to 6-8% pre-pandemic.
Although it might be the last thing you feel like doing at the moment, don’t miss this opportunity to analyse what the impact of the lockdown has been on your spending – and how to integrate any savings opportunities into your monthly budget in the future.
Here are three steps you should consider:
1.Analyse what expenses have remained unchanged – and the potential to reduce them. For example, it is likely that your car insurance premiums could be adjusted in light of the fact that it is being used less. Another angle would be to explore whether your landlord would consider reducing rent payments for a period, if you are renting.
2. Analyse the expenses that have declined. These are likely to include fuel or other transport costs, as well as a long list of products and services that have only recently become available again. These include grooming (haircuts, hair colouring, manicures and pedicures), entertainment (including movies, eating out, attending concerts and so on), clothes, furniture, appliances and, of course, alcohol and cigarettes). Your daily coffee/ cappuccino treat would also fall into this category. As we move to a more relaxed level of lockdown, take a hard look at what you really missed during lockdown, what you didn’t – and adjust your habits accordingly. For example, you might rethink how much you need to spend on clothes, especially if you can continue working from home at least some of the time after lockdown ends, or what type of entertainment you choose on a regular basis, and so on. Of course, spending is important towards getting the economy going again, but it would be worthwhile to ensure your spending is aligned with your long-term financial goals.
3. Decide what the best home would be for any extra savings. Once your analysis has been done, it’s to be hoped that you can identify some savings that can be carried into the future. The next step is to decide what to do with the savings you have already accrued during lockdown, and any future savings.
The first target should be to reduce your short-term debt, starting with the most expensive. If you have more than one credit card, once you have paid one off, it might be an idea to cancel it and save on bank charges. By the same token, loyalty schemes should be carefully evaluated to see if they genuinely deliver value for money.
Once your short-term debt is under control, find a sensible place to hoard your savings. It’s a good rule of thumb to have three months’ expenses readily available – the wisdom of that should be apparent now – so make this your goal. An interest-bearing account such as a moneymarket account is the obvious choice, but I always recommend one investigates an income fund, which invests in interest-bearing assets. An income fund should generate higher interest than a moneymarket account, with very little additional risk. And because it’s slightly harder to draw the money out than a moneymarket account, which can be linked to your transactional account, you are forced to think through any withdrawals.
In conclusion, Covid-19 has disrupted out lives, our businesses and our finances in ways we haven’t yet begun to realise. But in this one instance, there is the real chance that it may offer you a chance to change your spending habits for the better, and, by helping you cultivate better savings habits, advance your journey towards financial well-being.
Natasja Hart is the Head of Wealth at GCI Wealth
PERSONAL FINANCE