4 Tips to Make Your Personal Finances Crisis-Proof
Written by: Anastasia Schmalz and Tomer Arwas
Did you see this coming? It is almost impossible to predict when exactly a financial crisis will hit. Yet, there is one thing for sure, there will always be a next crisis. Just as summer is followed by autumn, and winter is followed by spring, the economy goes through cycles. Sometimes those cycles are mild and other times, they are quite significant. Every crisis is different from the previous one in its causes and effects.
The Dot-com bubble in the late 90’s led to a crisis at the beginning of this century - caused by the rise of the internet. The Subprime mortgage crisis in 2007 triggered to the last financial crisis - which was the result of a new way to give out loans. I bet, you didn't expect the outbreak of a pandemic when making your plans for 2020? The point is that every crisis is caused by something new. This makes all crises have something in common: they are unpredictable. You will probably agree with me on this. As you cannot predict when the next financial crisis will hit and how it will play out, you should always be ready.
Do you want to know how to improve your money matters during this pandemic? Here are 4 tips to make your personal finances crisis proof.
Stash up 3 months worth of salary We cannot anticipate which industries will be hit the most in the next financial crisis. In the current crisis, some industries are flourishing while others are barely keeping their heads above water. This means that you cannot be sure if you will keep your job in the next financial crisis or if your business will survive. I advice my clients to keep 3 months worth of their salary saved up and accessible. That is keeping it in a savings account that is liquid and where it is not invested on your behalf. This is your emergency fund, and it should only be used if absolutely necessary. The goal is that this money will be readily available for you if disaster hits. Your savings will allow you to always have a financial cushion to get through a crisis with the least possible impact on your lifestyle. If saving doesn’t come easily to you, here are some ideas on how to increase your savings. You can set an automated transfer to your savings account right after you receive your salary. Use a service that rounds up your payments, and sends the difference that is rounded up to your savings account.
Know where to cut costs Nobody likes to downgrade, sure. However, when a financial crisis hits, you need to be prepared to eliminate expenses where you feel the least impact on your lifestyle. To evaluate which expenses you can cut without major impact on your quality of life, take a look at your monthly recurring expenses. Note down expenses you could do without. For instance, these may include certain subscriptions or expensive coffees. You could also prioritize items on the list so you know which costs you will cut first. Have this list of cost cutting ideas ready for when a financial crisis hits. This is your Plan B expense plan. Being mentally prepared to reduce costs during a crisis will allow you to take action quicker and will soften the blow. Keep in mind that this is a temporary measure that you will take to get through the crisis until things will brighten up again.
Create multiple sources of income Most people are dependent on one single source of income - their job. While this might seem logic, there is one major problem of having only one income stream. In the current crisis, we see that unemployment is rising tremendously, meaning that you might not be able to rely on your job alone to support you. Instead, aim to create multiple sources of income. Having money making side-hustles that generate income allow you to get through a financial crisis with less impact. Side income streams can be returns from investments in real estate or the stock market, but also from other sources such as a blog or a course. When choosing the best side-hustles for you, the first thing I work on with my clients is to look at their superpowers (skills, knowledge, experiences, and interests) as well as their resources (time and money). The key is to focus on automating your income from those side-hustles. Essentially, you want to be earning your income passively with the least amount of work. Once you have a couple of sources of income that generate you money passively, you are recession proof.
Don’t put all your eggs in one basket You probably heard this phrase a million times before. The reason is because it’s true. To make your personal finances crisis proof, you need to diversify your portfolio. Whether it is investments in the stock market or a side-hustle, it is always better to spread your bets widely across industries. There are losers and winners in every crisis. By diversifying you make an attempt to increase your chances of balancing your losses. In simple worlds, you want to be invested in industries that will be flourishing to avoid any major losses during a financial crisis. As we cannot tell in advance which ones these will be, the best you can do is to spread your time and money investments across multiple industries.
Use the ups to prepare for the lows
Things don’t always go as planned. We have seen that now with Covid-19 more than ever before. To make your personal finances crisis proof, you need to always be prepared for the next crisis. The key is to optimise your savings and spending habits, and diversify your income over multiple sources and industries. Every crisis is preceded by a period of economic growth and overall prosperity. That’s why it often seems unimaginable that a next crisis can be on its way. Following the 4 tips in this article, you can leverage the economical ups to prepare for the next downs. Being prepared is the key to bouncing back up much faster.
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Anastasia Schmalz and Tomer Arwas
Anastasia Schmalz and Tomer Arwas are life design and personal finance strategists, and the creators of the blog GenerationNomads.com. After becoming financially free under 30, they left their cushy jobs to travel the world for 18 months without working or touching their savings. Their 6-Step Freedom Framework is used to teach millennials how to design and reach their dream lifestyle through financial freedom. Sign up for instant access to the FREE 9-5 Escape Plan training.