In my first post for 2021, I will argue why financial health will become even more important this year. Certainly, 2020 has been hijacked by the COVID-19 pandemic on a scale we would have not imagined in our wildest dreams. As we enjoy in the first full week of 2021, the news is still dominated by the overwhelming negativity of the topic. With such a mega-event up in the air, there is the obvious risk of loosing sight of many other topics, financial health and financial education being one of them. As we all have become tired of Corona-news, it’s worthwhile thinking about things that matter beyond the pandemic. I firmly believe that taking care of your personal, financial health should be an immediate priority, for everyone. Why? Watch or read on!
My personal “consumption behavior” of videos online tells me, that I do watch all videos I stumble upon, certainly not till the very end. Therefore, I am also sharing the theses covered in the video in the following text in a more elaborated version. So, those of you who indeed prefer to read, may follow their preference! Those of you who have already watched the video, there are some additional aspects, including links to further materials in the text below, so it’s worth continuing to read.
Since the outbreak of the COVID-19 pandemic about a year ago (initially in China and gradually around the world), we have become more aware and concerned about our physical health. As mankind, we started to worry about an infection with the virus, paid close attention to increased hygiene standards and relentlessly thought of our older relatives who are at much higher risk. We have, however, not cared by far as much about our financial health as much as we cared about the health of our respiratory tract. It might be smart choice to change that!
The pandemic started out as a public health crisis but brought along a nasty side-effect: the largest recession in recent history which by far exceeds the magnitude of the recession following the global financial crisis 2008/09. The World Bank expects the largest economic contraction since World War II, in many countries since 1870. Across the globe, the economy would shrink by 5.2%, while most advanced economies would shrink by 7% or more, while emerging markets and developing economies would contract by 2.5%.
Not thinking of your personal, financial health in such an environment, sounds frivolous – like just stopping physical exercise, skipping your daily multivitamin dose and increasing your daily calory intake by 70% . The impact of the Corona-induced recession is massive and will probably continue to be in 2021. Substantially increased unemployment consequently reduced personal income and certainly more uncertainty about your future income but also about your investments.
The full depth and length of the recession might not be fully visible just yet for everyone. Across many European countries, massive state sponsored schemes have stepped in, essentially buffering away the dire economic realities. Government subsidies, notably short-term work have provided a lifeline to many struggling businesses – leading to the anomaly of e.g., fewer insolvencies in Germany then prior to the crisis. In essence this will lead to a deferral of the true economic effects well into 2021 as the government schemes gradually peter out. A wave of bankruptcies will trigger increased unemployment and massive income losses. The effects on the banking sector will equally be felt as loan losses mount.
Thus, as the economic impact of the pandemic unfolds, there are five reasons why taking care of your financial health is a smart choice:
- Going unprepared, i.e., in questionable financial health, into such an economic environment, seems highly problematic. For me, the most shocking pre-COVID-19 number continues to be that 40% of Americans don’t have $400 in the bank to cover emergencies. This means that wide parts of society are lacking basic reserves are unable to cope with financial adversity. One could hope for the state to step in with emergency programs, but I would not want to count only on this. A good personal finance practice, is to set up an emergency fund, to deal with unexpected financial shocks – read more in one of my recent articles
- Financial health makes you a lot more resilient. Unfortunately, recessions are hardest on those who can least afford it. The Corona-crisis is certainly not different. The impact is felt most by those who are already in problematic financial circumstances. So, it’s time to
move and get your financial health under control. - As the economic headwinds are felt by individuals, it’s high time to build healthy personal finance habits. This could e.g., mean starting to plan your expenses in a budget ahead of time and sticking to this budget or building a saving habit. The budgeting and saving rhythm is indeed the very first step in getting personal finances under control, i.e., spending less than you earn. This is the basis for the funding of the emergency fund or the build-up of first investments. Now is the perfect point in time to get started!
- Investing wisely during the pandemic can have yielded you impressive returns – Having acted upon instinct and e.g., selling out of the market in March / April amidst high levels of uncertainty would have been a costly mistake and would have missed the opportunity of participating in the 2020 year end record highs of the stock market. There were many personal finance bloggers out there, e.g., Fox Monkey who recommended in March to hang in there, not touch your stock investments and continue buying regularly.
- Getting your personal finances in order and aligned with your spouse’s perspective, will also be good for your relationship! This may sound strange to you, but finance issues rank high in the list of common things couples fight about! Rather than fighting about personal finance topics I’d much rather focus on the positive things in live, making a difference for your family, at work and in your community.
I hope these five reasons give you enough food for thought why it might be the perfect moment in time to think about your personal finances. Already, in the past I have taken the New Year as an occasion for a call to action, good to refer back to an article I wrote two years ago (in German).
If I could indeed convince you of the importance of financial health, please follow my blog – either by subscribing via your blog reader (if you use one) or by signing up with your e-mail at the top left of this page. I am also interested to hear back from you via e-mail on myfinancialfreedom.blog@gmail.com or via a comment below. Thank you!
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