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23/09/2021

Making Cents: How to best manage our finances post Covid-19 (Part 1)

Making Cents: How to best manage our finances post Covid-19 (Part 1)

The pandemic has been a terrible wakeup call about how our lives can be turned upside down with little or no warning.

I think it’s fair to say, that Covid 19 is an event that will change the way we think and act about money forever. Lockdowns, business closures, working from home, online shopping, pandemic unemployment payments etc. will be difficult, if not impossible to ever forget.

From a personal finance perspective, Covid, I think, has caused a permanent shift in our spending and saving habits, how we manage our money each month, how we deal with debt etc.

And I’ve seen first-hand from my interactions with people how the pandemic has impacted peoples finances very differently. It has been terribly unfair and uneven.

You’re either at that end of the spectrum where your income was unaffected and your savings levels soared, or you’re at the opposite end, where your income reduced significantly, and what savings you had, were or have been wiped out in order to make up for that income shortfall you suffered.

The pandemic has been a terrible wake up call about how our lives can be turned upside down with little or no warning. And this is something we obviously never want to re-live, so how do we move forward with our finances in a world post Covid?

What lessons can we learn? What habits should we maintain? What should we avoid doing?

There are those whose financial situation has unexpectedly benefited from Covid. And if that’s the case, what do they need to do, to best maintain and optimise their finances going forward?

And to those who haven’t been so lucky, and whose finances have suffered, how can they get back that sense of control they had before the pandemic struck?

These are some of the questions I’m hoping to answer in this article with a follow up one next week as well.

And whilst everyone’s situation is very circumstantial, there are some things we all should be reviewing and be cognisant of.

And the first is to:

Re-evaluate our Monthly Budgets

A client of mine was telling me recently how some of his monthly outgoings during Covid were, €0 on transport, €0 on entertainment, €0 on clothes, €1,000 on food and he saved €2,000 each month.

Obviously, this is all going to change but there were items in his outgoings that he knew he can get rid of and won’t miss them. So, I guess reviewing what you spend your money on and where, is an exercise I’d recommend you carry out.

It will identify areas that you won’t need to pay for or miss, when your spending begins to return to normal.

And I don’t like saying return to normal, because it suggests you go back to savings levels pre Covid, along with not paying very much attention to what you were spending your money and not totting up the cost.

Which is why reviewing or creating a budget is so important.

And as boring as it sounds, analysing your spending is a sensible thing to do. Covid only confirmed why it’s important, because when you know what you’re spending your money on and how much, you can easily and quickly isolate what has to stay in your monthly spend, and what you can do without.

If you’re creating a budget for the first time, your first step is to identify what your total monthly income is. It may have fluctuated during the pandemic so it’s important to figure out, what it is right now. Your next step is accounting for all your essential expenses and some expenses are more important than others, so list them in order of priority.

If you’re unsure about the amounts you’ve been spending on different categories, reviewing your bank statements is a good place to start. It will show you what you’ve been able to save and how your spending habits have changed.

And when creating that budget, there are some expenses that you’ll have to re-introduce that you didn’t have to account for in the past year. For example, perhaps you’re mortgage repayment will go back to what it was pre Covid because you’re back working and no longer in receipt of the PUP payment.

Perhaps your time working remotely from the office will come to an end and you’ll have childcare costs, transportation costs, additional food expenses incurred at work etc. that you’ll now have to factor in.

And don’t forget to factor in the increased cost of existing outgoings as well, as a result of inflation.

We’ve seen in recent weeks how this impact has taken hold, particularly in areas like electricity, gas, fuel, alcohol, food, health insurance, broadband etc. where some costs are 20% more than what they were last year. It’s important that you don’t use last years’ numbers when estimating what your monthly outgoings will be this year. I’d recommend you add in a buffer of 10% across your entire outgoings to account for any price increases that have occurred.

During the pandemic we all reduced and or eliminated many expenses, some of which were forced and others not so much. But just think about whether you want to re-introduce them back into your budget or not.

And I don’t mean you’ll never let anyone else cut your hair again, I mean expenses that you haven’t missed or if you have, you found a suitable alternative and it costs less, that’s all.

And if you had to pause saving into your pension fund for example, in order to free up some cash, think about re-introducing this saving, no matter how small, back into your monthly budget, if you can that is.

So, your monthly budget is going to look a whole lot different to what it has been, so it needs work and needs revision and you need to stay on top of it somewhat as your outgoings are likely to change in months ahead, which is why you need to be looking at it and making those tweaks as required.

New Debt

If you find that you have more disposable income than before, that doesn’t necessarily mean it can be used towards taking on new debt. It may be tempting to upgrade the car or carry out work on the house, simply because you have this extra money right now, that could be used to cover any higher or new monthly repayments.

This newfound surplus could create a false sense of what you have available especially when things return to normal. You don’t want to discover that your outgoings are back to where they were pre-Covid and now you’ve gone from carrying a big surplus each month to carrying a big deficit. So, watch out for this happening.

Always remember, debt is the enemy of wealth creation. It prevents you from saving or spending money on other things, which perhaps have more meaning for you. And if doesn’t matter even if you’re borrowing at 0% interest rates, it’s money you still have to pay back, regardless of the %.

In my follow up article next week, I’m going to look at three more areas we need to be mindful of and they are savings, intentional spending and emergency funds.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted by emailing liam@harmonics.ie or via www.harmonics.ie

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