Op-ed: The Financial Lessons That 2020 Taught Us
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After experiencing a year that I am sure we would all love to forget, there are definitely some financial lessons from 2020 that we should use in our daily lives.
The most important thing about statistically very rare events like a pandemic, a quarantine, and an economic recession, all of which happen at the same time, is that we learn how bad things can really get and how to adjust to never being there again.
One financial lesson from 2020 is not to be dependent on just one income. Unfortunately, although a job gives you financial stability, having just one source of income is very unstable in today’s world. Whether you’ve been in this job for a very long time or not, having an income is too close to having no income.
During recessions and economic downturns, it is normal and the unemployment rate is expected to rise. In April 2020, the unemployment rate rose to a high of 14.7% from 3.5% in 2019.
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The wisdom of creating a side hustle, e-business, or even securing a second job is a great financial lesson from 2020. Having a second stream of income to cover expenses or ideally to build your emergency reserves is great. It is also a source of income that you control.
Another lesson we can learn from 2020 is to make sure we always have at least three to six months of living expenses as an emergency reserve.
While the size of your emergency fund will vary based on your lifestyle, monthly expenses, income, and dependents, the rule of thumb is to put away expenses worth at least three to six months. Spend at least three months’ worth should be available for bills or unexpected expenses without relying on credit cards or high-interest loans.
Research has shown that the average time it takes to find work is around nine weeks and, of course, during difficult economic times it can take much longer to find work.
For this reason, it is a must to have sufficient funds in your emergency account to support your family. This gives you flexibility to pay bills when looking for a job.
Another lesson is to always be an investor, not a trader.
What exactly does that mean? Many people assume that once they invest their money in a stock, bond, or mutual fund, everything falls under the same roof that couldn’t be further from the truth.
Most investors usually create a financial portfolio based on their life goals, age, risk tolerance, time horizon, etc. First, they take stock of who they are and what they ultimately want to achieve through investments
Then they create a financial strategy that will help them decide where, when and how to invest. Investors usually buy financial instruments over the long term, while traders buy very short term.
Traders typically buy and sell stocks based on news, headlines, and technical analysis. On the other hand, investors typically buy and sell stocks based on their financial plan and fundamental analysis. Often this is not determined by the type of short-term volatility in the stock markets that we saw so much of in 2020.
In 2020, the financial markets fluctuated dramatically from positive to negative returns and vice versa. Unfortunately, too many people often have no strategy when they invest their money in the stock market. As a result, when downturns occur, as is inevitable, the masses often panic and lose money.
The S&P 500 closed 2020 up 16.26% after hitting a -12% low in March. During this low point, many people decided to try day trading. Instead of acting like investors, they sold their assets during the low and lost money because there was no financial plan.
Live according to your possibilities
Another important lesson from 2020 is living within your means. Indeed, last year was a tremendous opportunity for people to have their discretionary expenses like eating out and attending events as they were quarantined during the pandemic. However, living within your means goes deeper. Basically, what it means is that you are spending less on your lifestyle than you deserve.
The first thing you have to do is keep track of what is coming in and what is going out. For example, when you shop, you need to know the difference between a need and a need.
This lesson can change your life. It may hurt at first, but learn to make daily decisions to turn down unnecessary purchases. To quote Warren Buffett, “If you buy things you don’t need, soon you will have to sell things you need.”
Another important financial lesson we need to understand is budgeting. Budgeting is a key to financial success.
It’s hardly a new concept, but a lot of people just don’t have a budget. However, it is central to gaining and maintaining financial freedom.
By creating and sticking to a budget, you can avoid over-spending and impulse buying. There is a frequent need to check how much money you are in and out of each month.
This is a great way to see how much money is left after paying the fixed costs. With that excess cash, you leave the continuous paycheck-to-paycheck cycle. This is how you can start building wealth.
Hopefully 2020 has taught us more than just a few financial lessons. We all need to be better prepared for the next unforeseen event.
– By Jordan Awoye, Managing Partner at Awoye Capital