Various countries had handled the coronavirus situation with varying degrees of success (or failure).
As we see many countries easing out of their lockdown, let us look at a few examples and draw parallel lessons in personal finance, after all, I am here to talk about finance, not on infectious diseases nor government policy responses.
Learning From What Went Well
#1 Accurate Assessment Of Your Financial Situation
With 15,000 tests conducted a day, all of it given free of charge, South Korea’s testing program was the reason for its successful response to the coronavirus situation.
The mass testing allowed South Korea to identify a large cluster from the Shincheonji Church of Jesus as the source of infections which had caused a massive spike in cases reported.
This insight allowed them to target quarantine and disinfection efforts and send medical resources to the affected areas. The focused efforts paid off, and South Korea was able to reduce its cases drastically.
To improve our financial situation, we should conduct an assessment as the very first step to gain awareness of our financial condition, similar to what South Korea did with their testing program.
Insights from that assessment can be used to identify areas of concerns which can be addressed with targeted actions.
Here are some key areas to evaluate:
- What is your net worth? Your net worth is just a tally of the total value of the assets you own minus the liabilities you owe. Has your net worth been trending upwards or downwards?
- How much debt are you holding? A quick ratio of debt-to-income will tell you whether your debt is sustainable. Generally, your income should be much higher to pay off your debts.
- How much are you spending? How much of your income is saved?
- Is your investment plan aligned with your financial goals? Do you even have one?
You could start by listing down all the assets and liabilities to get a picture of your net worth:
Assets
- Cash
- Investments
- Properties
- Retirement accounts
- Surrender Value of Insurance Policies
Liabilities
- Mortgage
- Student Loans
- Car loans
- Credit card debt
- Personal loans
Once we have assessed our situation, we could start creating specific plans to tackle the areas of concerns and improve our financial situation.
It starts with awareness.
#2 Trace Your Expenses – Account For Each Dollar Spent
Singapore’s early success in handling the pandemic was owed to its nationwide contact tracing program.
Once a new case was identified, the contact tracing program will immediately re-trace where the person had been and whom he or she had contact with. The people who were in recent contact with the infected person were quickly identified and quarantined.
Contact tracing prevented the disease from further spreading to the public.
Many other countries followed suit and modelled their coronavirus responses after Singapore.
Have you been in situations where, at the end of the month, you had nothing left from your paycheck, wondering where did all the money go?
Just like contact tracing, sometimes we need scrutinize our monthly expenses, accounting for every dollar spent to gain insights on our spending behaviour.
When we look at recurring expenses, the main goal is to identify leaky areas and plug holes to stop money from flowing out.
What do I mean by that? Here are some examples:
- Are we still paying for services which are no longer used? Are we making the most of our monthly subscriptions?
- Have we forgotten to cancel the renewals for the monthly subscriptions? Many companies offer free trial periods because most of the time, users signed up and forgot to cancel (I have personally guilty of this, who doesn’t love freebies?)
- Are we paying more for convenience rather than necessity? Are we paying for overnight delivery when there is no urgency? Are you paying for ATM fees?
- Are you paying more for bundle subscriptions when you only need one service or channel? Sometimes you could call the provider and negotiate cheaper plans.
Next, we look at the categories which we spent the bulk of our paycheck.
How much went into discretionary expenses? What can we cut from them? How much went into necessities? Are there most cost-efficient alternatives?
Once you had a clear picture of your expenses, you can start monitoring your spending on specific categories and put limits on those.
Put on your detective hat and start digging.
#3 Locking Down Bad Debts
Social distancing, restriction of movements, countrywide lockdowns are drastic measures which countries had taken to control the spread of COVID-19.
Taiwan was very fast in its response to coronavirus. It began screening flights from Wuhan in December (even before this outbreak was discovered publicly) and suspended flights from China by the end of January.
New Zealand imposed a strict lockdown early on when the number of cases was still relatively low. As a result, it managed to contain the spread and reopen its economy sooner by the end of April.
The common responses among countries that did well are those that implemented strict border controls and also imposed lockdowns early on. Sure, the economy of those countries did take a hit temporarily, but as a result, they managed to recover faster and did better in the long run.
Learning from this, we can take two measures to control debt:
- Border control approach: Close your borders to new debt. Do not take on more debt than you could sustain.
- Lockdown approach: Until your debts are paid off, reduce your expenses and focus on paying off existing debts
First, make sure you always keep an eye on your debt levels. The debt-to-income ratio will give you an idea of the sustainability of your debts. Your income should be able to pay your debts and interests.
Hence, always make sure you will be able to sustain new debts comfortably before taking them on. Also, it would be helpful if you had savings in case your income got affected.
However, once your debt goes out of control or when your income drops, you might need to take more drastic measures to bite the bullet and start reducing your debts, which is similar to a lockdown.
You could either use a debt snowball or debt avalanche approach in reducing your debts. I briefly mentioned this in my previous post: What is your recession plan?
Learning From What Went Wrong
#4 Not Treating It Seriously – Lack Of Preparation
That was the case with the US.
The Trump administration was downplaying the whole health crisis. While their Asian neighbours were ramping up testing, implementing movement restrictions and other controls, the US was caught flat-footed when the virus hit its shores which they should have been prepared.
A series of uncoordinated responses from various states, lack of adequate and accurate testing and lack of ventilators made the situation much worse for the US. As a result, it holds the highest number of cases and deaths from the pandemic.
The UK, on the other hand, also did not think that the situation was severe. Boris Johnson even suggested developing herd immunity to COVID rather than practice social isolation and contain the spread.
Well, the UK not surprisingly had the highest number of deaths in Europe.
Similarly, in personal finance, especially if you are wealthy or have a considerable income, personal finance might not be on top of your mind. Some of the high-income earnings might be spending most of their paycheck with little or no savings.
For those of us who are less wealthy, with much smaller coffers, we will need to prepare for two main risks.
The first risk is a loss or reduction in your income, which can be due to many reasons: company layoffs, personal issues, accidents or a black swan event like countrywide shutdown due to coronavirus.
The second risk is a sudden increase in expenses. It could be due to an illness, an accident or some unexpected issue that urgently needs cash.
To prepare for both risks, we should have the following:
- Emergency savings
- Insurance – health, accident, life etc etc…
Should anything unexpected happen, and if you need cash urgently, you could always dip into your emergency savings instead of selling your investments affecting your other financial plans.
Insurance will also help cover unexpected health costs or accidents because those can be quite costly.
Having emergency savings and insurance will ensure that our long term financial goals are minimally affected by these unforeseen circumstances.
#5 Investing Too Late – Taking Action Too Slow
The situation in Italy was grim.
Quarantine measures and lockdown were implemented a bit too late. It took three whole weeks from the first case reported before the government took severe action of locking down the affected regions.
The number of cases grew too quickly such that the hospitals and medical resources were not adequate to support all patients. Doctors were forced to choose who should be given a ventilator and who will be left on their own – to die.
Fortunately, the worst seemed over for them, and currently, the US and the UK are the only ones that were faring worse than Italy.
Similarly, when it comes to investing, we should always start early.
The earlier you start and take action, the more time you have for your money to compound and the more options you may have further down the road.
It is also possible to start late, but by starting late, your contributions have to be much more significant compare to when you started early.
The chart shows that even though Susan (grey) only invest $50,000, her total investments compounded to $602,070 at age 65. Whereas Bill (green) invested $150,000 from age 35 to 65 for 30 years, only managed to accumulate $540,741 compared to Susan, who started at age 25.
#6 Neglecting Small Unseen Costs
A portion of Singapore’s population was neglected during the outbreak – the immigrant workforce. They, unfortunately, were more susceptible as they live close to each other.
Unfortunately, the situation was not adequately addressed until it became too late.
Similarly, there might be areas in our life that appear to be small or inconsequential. But sometimes, it might be insidious.
A small issue can balloon into a huge problem further down the road.
Here are some things that cost little but over time can amount to something substantial due to compounding:
- Interest payments on debts. Over long periods, interests add up.
- Expense ratios, fund management fees – Funds or ETFs with high expense ratios cost a lot over time.
- Transaction costs – commission fees with frequent trading.
Conclusion
The Coronavirus pandemic is a complex issue. Different countries have different circumstances and different sets of problems.
There can never be one solution that solves all problems. Some models work effectively in some countries which might never work well in other countries.
The same goes for personal finances which have so many different variables to consider. People have different circumstances.
So when applying those valuable pieces of advice on personal finances, be flexible and agile. Always adapt plans or strategies to what works for you.
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