1. We all need an emergency fund
Seeing people around me lose their income suddenly really drove home the message about the importance of an emergency fund that covers your essential costs for a few months, ideally at least three.
If I had lost my income this year without warning I don’t know how I would have coped. I have a cellphone contract, a clothing account, a vehicle that costs money to run, and various insurances. When I think of the costs my emergency fund would need to cover I realise that I must pay a lot more attention to it.
We don’t know when, or who, or how hard the next crisis will hit. Many of the people who lost their jobs, or part of their income, in the last few months could not have seen it coming.
2. Stay in the market through good times and bad
Another basic personal finance lesson that has resonated with me during this time is to continue with regular investment contributions even when the market is in turmoil.
As the market was going down, I continued contributing to my pension and tax-free savings account. I ignored the news about the market crash and even made an additional contribution when I could. When things started turning around, those accounts quickly recovered to their pre-Covid state and then kept moving steadily upwards with the recovery compounding my contributions and vice versa.
Essentially, I was able to buy more units at lower prices. When the market was down, my regular contribution bought more than it normally would, and that really showed when the market rebounded.
3. Trust the combined intelligence of the market ie track the index
In addition to my retirement savings, which are all in index-tracking funds, I have an account where I try my hand at stock-picking. When the markets hit the skids the index fund didn’t fall nearly as much as the individual stocks. Also, when it came to the recovery the index-tracking funds recovered faster than the individual stocks.
The lesson for me was to accept that I can’t count on my ability to choose the winners of the future. I am so much better off in an index fund. If I want to play the market I must do it only with money that I am prepared to lose.
4. High fees hurt on the way down and on the way up
Talking to clients, I realised how bad the impact of high fees is. When markets were going down, high fees turned a 5% loss into an 8% decline. When the markets were recovering a 10% recovery translated into just a 7% gain.
5. I was wasting a lot of cash without noticing
I thought I was living quite frugally and saving what I could into my emergency fund. When I started working from home I put the money I would usually have spent on petrol for my commute to the office into my savings.
But then some more cash was freed up and then some more, and I started to realise how much I was saving because I could no longer go out for a meal or a movie after work, or even a beer with a friend. The rands I would normally have spent on lunch a few times a week because I was too lazy to make something in the morning began to add up too. I also haven’t been tempted to update my winter work wardrobe or buy the new motorcycle gloves I thought I needed (because they looked so good in the window).
All these small savings have allowed me to pay down some short-term debt and boost my emergency fund. Most importantly, I have realised that I was frittering my money away on so many joyless little expenses that I hardly noticed.
These have been strange and testing times for all of us. If I could go back in time, there are certain changes I would make to my personal finances. We can’t go back and we don’t know what the ‘new normal’ will look like after this pandemic ends, but I will definitely be implementing some changes right away. I want to be sure that when another crisis hits – big or small, local or global – I will be adequately and financially prepared for it.