/ PERSONAL FINANCE, DEBT, ECONOMY

What does the new normal mean for my personal finances?

With reports of the global economy contracting into a recession due to the pandemic, alongside wide-reaching governments programs such as furloughs and business loans, what will our personal finances look like in the near future?

“The need for emergency savings to face economic uncertainty”

Financial advisors typically recommend that three to six months of monthly expenses are saved in the case of an emergency, such as the current global pandemic, or an unexpected job loss, both of which are far more likely to occur given the current economic instability. Finance expert Professor Pat Obi recently suggested to Millennial Financial Freedom that individuals saveup to nine months of total household expenses, to be on the safe side of things”. Unfortunately, most do not have adequate “rainy day” savings to help during this crisis, with recent statistics stating 12.8 million households in the UK have “either no, or less than £1,500, in savings” [1] and US household similar with “nearly three in 10 (28 percent) U.S. adults have no emergency savings” [2].

“I recommend that emergency savings be sufficient to pay for up to nine months of total household expenses, to be on the safe side of things” - Professor Pat Obi (Purdue University)

How do I create an emergency fund!?

Firstly, it is highly advisable to speak to a financial planner as soon as possible if you are in a complex financial situation. They will be able to work with you through what is the best course of action to create an emergency fund.

Secondly, for those who are able to put away some money each month by virtue of a strong income or by cutting inessential expenses, let’s look at the numbers.

Simply put, if your monthly expenses are £1000 per month, then you will need £3000 put away for a rainy day. However, if you are able to, a £6000 emergency savings fund would enable you to live for six months even if all household income has been affected by an emergency.

Increase in income tax?

The pandemic is showing us how fickle household finances has been. As discussed in the statistics earlier, many are incredibly fragile if income is reduced or an emergency occurs which has an affect on one’s finances. With this in mind, governments could possibly to mitigate against this by raising the tax rate of higher earners, in order to increase government spending on social welfare programs.

Putting sociopolitical loyalties aside, such an increase could further squeeze the budgets of higher earners whilst providing a larger safety net for those most affected by the pandemic. Whether this will actually work is a debate that is highly likely to affect the next political elections in the US and throughout the world.

Reducing debt and spending

Although it is tempting to look for short-terms solutions in this crisis, taking on debt is likely to cause long-term consequences, especially with the ability to repay loans without an emergency fund being uncertain due to the job market. Now would be a fantastic time to cut up those credit cards reduce spending to essentials and generally make wiser financial decisions.

Whatever the case, it is almost certain according to experts that the effects of the pandemic with be catastrophic for the long term, therefore being in the best financial position is the wisest thing to do.

References:

  1. https://themoneycharity.org.uk/money-statistics/
  2. https://www.bankrate.com/banking/savings/financial-security-june-2019/