The effects of the pandemic have been a wake-up call for many of us as we ponder over our finances. Questions that we may not have considered in the past became of concern such as whether there were enough funds on hand to meet everyday needs, especially if you were directly affected with the virus, laid off or otherwise. Adding to the list of worries was the market response that may’ve caused your investments to decline in value. Will there be enough to meet your financial goals? Given the impact of the coronavirus on some aspect of your finances, now may be a good time to review your finances and see whether you are still aligned to any financial goals you may have set.
Here are five lessons we’ve learned during the pandemic that may benefit you as you review your finances.
Lesson No. 1: Spread your investments out
The market drop in the wake of the pandemic has shown us the wisdom in diversifying our investments. That means not putting all our eggs into one basket in case that basket gets upset. In recent months, some types of investments performed considerably worse than others. For example, travel-related companies such as airlines were struck harder than gold mining companies. Some types of investments offer different characteristics such as income or dividends and some types can be by their nature less volatile than others, for instance, utilities (low) vs technology (high). By putting a percentage of your funds into different types of investments, as you can through balanced mutual funds, you can minimize the chance that a market downturn will significantly harm all your investments. This can be a good time to take a look at your overall financial picture and consider if your current approach to savings and investing is still aligned to helping you meet your future goals.
Lesson No. 2: Invest for the long term
It may not seem fair to see investments that you may have held for a while lose a good chunk of their value in a couple weeks but the short, sharp drop only emphasizes the long-term nature of successful investing. It takes time, patience — and these days — an abundance of resilience to build up funds for a long-term goal. Investing is a focused business and there are few elements more important than the effect that compounding can have on small but regular investment contributions over the years. To see how compounding works and to learn how your investments could grow over time, check out this compound interest calculator. There will be setbacks, like the one we are now living through but historically we have seen that the markets tend to bounce back over the long term. and go on to greater heights. . Abandoning some investments during a downturn may temporarily ease a sense of panic, but many stocks have the potential to rebound. Those who sold at the bottom of the market would miss the chance to benefit from any potential comebacks that may follow.
Lesson No. 3: Check your risk tolerance
The markets may have also played a role in raising your personal anxiety, so we should also talk about how you, the investor, may have reacted. Your level of worry has to do with how much risk you can handle, both in your investing plan and as a human with your money on the line. Every investment carries some risk although Guaranteed Income Certificates(GIC) carry very little. However, if you are half-way to retirement, returns that you may earn with GICs may not be enough to achieve your investment goals. On the other end of the scale, mutual funds come with varied levels of risk and the potential for higher returns. So, if you were comfortable with your investments during the recent market volatility, you may not need to make any changes to your investments. If you are still biting your finger nails, perhaps it’s time to settle on an investment plan that will make you feel comfortable through good times and bad.
Lesson No. 4: Debt can drag you down
Your personal pocketbook may have been hit hard in the past few months. For many impacted by the recent economic turmoil, living paycheque-to-paycheque may have made things worse. This is especially true if it forces you into racking up high-interest credit card debt to see yourself through. It may be shocking how easily unnecessary spending and lifestyle creep can eat into our finances. The lesson learned is not to get yourself in that vulnerable position in the first place. That could mean it’s time to re-evaluate your budget. One simple way to see if you are in good shape is if you are able to pay off the full balance of your credit cards monthly. If not, you can get back on track by tracking how much money is coming in and out. You can connect a savings and investing plan to some sound goals such as retirement, your kids’ education and even an emergency fund. If you are on track with your goals, you may be in good shape. If you’re not, your spending and saving habits may need work. You can track your spending habits using a banking app, such as TD MySpend.
Lesson No. 5 Reflect on this unique time
There’s no doubt that this has been a sobering experience for Canadians and the whole world. But if you have so far escaped the brunt of the pandemic and its economic consequences, you might think about non-financial lessons that are to be had. Perhaps you are spending more time with family than ever before. Hopefully we’ve all learned how to be efficient and happy while living in close proximity with each other. If you are cooking more and eating out less, you are probably saving more money (and becoming a better cook). You might want to consider making that a permanent lifestyle change along with taking a daily walk and calling your relatives every few days. Everybody’s experience of this time will be unique, and everyone will have a different story to tell. With any luck, this time has reminded us what’s really vital to us at home.