The Covid-19 pandemic has caused disruption to many people’s lives, and to their financial plans. Some have seen their income or the turnover of their businesses decline, while others may have lost their jobs. The result is that some consumers find themselves taking on more debt just to service existing debt.
It’s an unfortunate position to be in, but it is important to acknowledge the new reality and adjust your financial plans accordingly. Some people may need to sell assets to settle debts or provide an income as a result of the disruption. For others, reconsidering their spending and expenses is an important start.
Re-asses your lifestyle
Although it may be tempting to stick to your pre-Covid financial habits, it is important to be objective about whether you can still afford your previous lifestyle. For many people, trying to maintain their old lifestyle on a reduced income could prove disastrous. Take stock of your financial situation and adjust your plans accordingly.
The early weeks of lockdown proved a real eye-opener for many of us, as we discovered how much money we could potentially save if we needed to.
From cutting down on take-aways to better meal planning and less entertainment, it has become clear that saving money may be easier (and more socially acceptable) than many of us thought. Engaging with your family and making them part of the conversation is important though, as is agreeing on the changes you will be implementing.
Be careful with debt
For many of us, the pandemic underscored how fragile our financial positions actually are. The saying “poverty is only one pay check away” highlights that many people take on too much debt and don’t have financial reserves to fall back on in tough times.
The dangers of not having an emergency fund have become patently obvious to many of us, but having too much debt is another danger people tend to ignore in the good times.
Debt can quickly become unaffordable and trigger a downward spiral, with interest continuing to accumulate even when you negotiate a “payment holiday”. Using debt to acquire an asset, like a house, can potentially be classified as good debt, but credit for consumption – on clothing, credit cards or a devaluing asset like a car – should most often be viewed as bad debt and approached with extreme caution.
If you are already in debt, now is not the time to be taking on more, since the economy is likely to remain fragile for some time. If you are still earning an income, use the current low interest rate environment to pay debt down earlier by maintaining your pre-rate cut payment levels.
Adjust your plan
The key to resetting your financial position now is realistically assessing your circumstances, and plotting a new financial plan based on this reality. It is possible to undo the damage the pandemic has wrought on your finances, but only if you consciously decide to do so.
Being realistic and honest – with yourself and your family – is absolutely essential. A qualified financial advisor can help you in reviewing your plan, and weighing the impact of any potential trade-offs on your future financial well-being.
This article first appeared on Moneyweb and was republished with permission.