COVID-19 and bad weather brought a lot of havoc in the year 2020. Many are hopeful that the adverse effects on health and the economy will finally have solutions.
As progress is being made toward the development of a vaccine for Covid-19, many are hopeful that the year 2021 will bring back a semblance of normalcy. As we welcome the new year, it is important that we take with us key financial lessons from 2020 so we shall be able to determine what to continue doing, what to stop doing and what to start doing.
The first lesson is that having multiple streams of income can significantly help augment primary income during tough times. As businesses closed and unemployment levels increased, the ability to pivot was demonstrated by those that were able to survive and even thrive. For individuals, knowing one’s talents and knowing one’s tools helped determine the type of trade to pursue. For the businesses, tapping new channels like online channels allowed many to continuously serve existing customers and new customers.
The second lesson is that our priorities matter.
Since income is hampered, needs should have glaring importance over wants. Needs will be those related to food, shelter and clothing. In the context of the New Normal, we can add to the list health and connectivity. Meanwhile, wants and luxuries should be studied in terms of what can be reduced and what can be totally eliminated. Having a budget will allow individuals to strategically allocate scarce resources. Of course, a budget is only as good as its execution.
The third lesson is that savings are important.
In budgeting, the first step therefore is to regularly save a certain portion before expenses happen. Savings help support current consumption through liquidity. Savings help support future consumption too. We cannot spend what we do not have. Hence, having an emergency fund is recommended. The emergency fund can be worth the average family monthly lifestyle expenses multiplied by 6 months or 12 months. The emergency fund should be placed in liquid assets.
The fourth lesson is that risk management is key in addressing the volatility, uncertainty, complexity and ambiguity present in the “New Normal.”
The year 2020 reminded everyone that mankind is vulnerable to fortuitous events. Just like an umbrella, it is best to get insurance during sunny days so we are prepared when rainy days happen. We need to protect our lives through life insurance. We need to protect our health through health insurance. We also need to protect our valuable assets through non-life insurance.
The fifth lesson is that the investment portfolio must be responsive to the times.
Financial goals should be constant but the investment strategies and investment tactics should be flexible. In 2020, interest rates on fixed instruments like savings accounts and Treasury bills decreased. As a consequence, to keep up with the inflation rate, investments in variable instruments like funds and stocks should be considered. Due diligence in choosing funds and stocks must be done. Past performance and future plans matter.
The sixth lesson is that knowing the political, economic, social, technological, environmental and legal landscape would help lead to the right decisions.
Consciousness should be complemented by action. In trying times, a certain part of finances and efforts must be devoted to service especially for those who are sick and for those who are poor. No Filipino should be left behind in the economy. Building our nation is everybody’s business. The government should collaborate well with the private sector to ensure recovery.
Every problem can either remain to be a problem or can serve as a catalyst for greater things. Learning the lessons of the past will equip us with the right attitude in managing future opportunities and threats. Money management is vital. More financially-free Filipinos will lead to an economically-strong Philippines.
Gemmy Lontoc is a registered financial planner of the RFP Philippines. To learn more about personal financial planning, attend the 87th RFP program this January 2021. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-6248110.