Advice on managing cash flow during Covid-19 crisis
The COVID-19 pandemic has forced us all to act and behave in a manner that will hopefully stop the virus from spreading, keeping ourselves and everyone else safe and healthy.
These are unprecedented times. Circumstances have changed so quickly. At the beginning of the year, we had record employment, everyone’s pension funds were performing great, then bang! Within a very short period of time, everything it seems has changed.
Covid-19 has created so much uncertainty. It feels like we were blindsided by how quickly it spread, and the impact it’s had on literally everything. Some are saying that Covid-19 is going to be a game changer, and it’s hard at this stage to disagree with them.
The lockdown and the impact it will have on businesses and their ability to pay employees will only add to already high stress levels. People aren’t only worried about their health, they’re also worried about their finances, and the impact it will have on them
The numbers affected with reductions in their income, I suspect, will be big, and the measures introduced to help by Government, while welcome, won’t alleviate the cash flow problems people are bound to encounter
With that in mind, I want to look at what you can do to cope, if you are faced with a loss of income, and how best you can manage your household budget in the weeks and months ahead.
Most people are on autopilot when it comes to managing their finances each month. There isn’t a need to constantly monitor and review what they spend their money on each month. But then something happens, a trigger if you like, that forces them to look much more closely; now is one of those times.
You’ll probably know if you’ve read my articles over the years, that I’m a big advocate of setting up and following a monthly budget. It’s critical to getting your finances under control and in the times we find ourselves in, from a financial perspective, I’d liken it to washing your hands, it’s that important.
Anyone who has ever been faced with a reduction in their income, has always said it was the creation of a monthly budget that got them through those tough days and weeks. So don’t second guess this, it works.
And it’s nothing more than listing what your monthly income and spending is.
I’ve created a really good and simple excel document that I use with clients, which lists every category you could ever think of, and I’m happy to help and share it with anyone who wants it. Just email me and I’ll send it to you. You’ll have a ready-made monthly spending planner and all you have to do is populate it. It will give you a great starting point to face what you are up against, and what deficit could exist. It will also identify the areas you’ll need to focus on if you need to bridge that gap.
Your income may not be impacted right now but running a simulation of what would happen if it was, would be a very worthwhile exercise. Don’t wait until it happens and then panic and start making rash, emotional decisions. You need to be calm and knowing what you could be up against before it happens, will help you make rational, well thought out decisions. You’re not going to fall into that trap of making it up as you go along.
Whether you use the back of an envelope, an excel doc or some on-line budgeting tool, it doesn’t really matter, knowing what you are up against does, so create that monthly spending plan for yourself.
Start by looking at your operating account and what you’ve spent in different areas over the past six months. If you don’t have access to this, take a best guess. It doesn’t matter if you’re plus or minus €500. They key is getting the numbers down and then reviewing them to see if they feel right. And you and your partner must do this together. Both of you must understand where you spend your money each month.
Be honest with yourself when writing down the amounts you spend. Don’t fool yourself by underestimating the amount you spend on certain categories because you’re shocked or embarrassed by the amounts. This exercise is for you and you need to know what you are dealing with and up against, and if you need to engage with a bank or other creditors to reduce or suspend payments for a period of time, they’ll want to know your numbers as well. So have it in place in the event you need to reach out for help, it will help fast track your request and get you approved much quicker.
Okay, now that you’ve put down your numbers on paper or in your PC, and you know how much you’re spending, it’s easy to calculate the shortfall based on what your new reduced income is. It’s simply your income minus your outgoings.
Carrying out this exercise will also show you how long your savings will last for should you need to use them to bridge any shortfall. If your deficit, for example, is €650 per month and you have €15,000 in savings, you know you have 23 months of savings in place before you run out of money. It can be very reassuring to know how long that buffer you have in place will last for. It could also bring reality to your situation because if you have a very small buffer or none at all, it will force you into taking action now, because your numbers won’t lie.
Once you know what you are initially up against, you need to take this one step further and see how you can reduce that shortfall if one exists; you do this by separating your outgoings into two different categories i.e. essential and non-essential spending.
The outcome of separating your expenditure this way, is to end up with a list of everything you spend money on, because as we know, not all expenses are created equal. Some need to be paid before others, so you’re going to put them in order of priority, from the most important to those you’re getting rid of altogether.
What should be on the essential side of your page are things like food, utility bills, transport, mortgage/rent, insurance. On the non-essential side are lunches, hobbies, savings, new clothes.
When it comes to non-essential expenditure, you need to be ruthless. Even the small items you buy each day can mount up, so make a list and start cutting them right away. And remember, you’re only getting rid of them for a short period of time.
If your deficit is big and cutting back on lunches and the amount you spend on food for example isn’t enough, you may need to focus on those areas that account for the biggest percentage of your income, which typically are mortgage or rent payments.
You may need to either reduce the amount you pay towards them, or not make any payments at all for a period of time.
The good news is that banks have indicated their willingness to work with people, so don’t worry about contacting them. If we take them at their word, and we should, they will offer interest-only payments and/or moratoriums (no payments) for a period, which will help ease cash flow worries.
The same applies to credit card providers and credit unions. They will also work with you and offer solutions like lowering interest rates or temporarily suspending payments.
Utility providers aren’t going to turn the lights or heating off on you either. Reach out to them and they will make payments affordable to you during these turbulent times.
But the key is contacting them ASAP.
If you’re worried right now or you think you’ll be under pressure soon, contact your creditors now and look to adjust the payments you’re going to make. Explain your situation, and it won’t be one they haven’t heard from thousands of others, and they’ll offer you new repayment options.
And when that moment comes, and you realise, you’ll need to make changes to how you live your life and manage your finances, you can either bury your head in the sand and ignore what is happening or you can be proactive and do something about it. I would advise you to choose the later.
Don’t procrastinate. Focus on the problem at hand. If that’s a cash flow problem, you need to work through the crisis, and figure out a way of solving it, step by step. You will have to make some difficult choices, and you won’t be able to do all the things you did before your income was reduced. But stay focused and know that this is going to be a temporary problem and things will get better.
But, let me repeat, it’s absolutely crucial you understand what you are up against, and the key to surviving this setback is creating a plan and taking action based on your new found situation, and knowing what your monthly expenditure is, is your starting point, and the key to getting through this.
Finally, one of the best things any household can do to protect their finances during a crisis like this or any unforeseen emergency, is to build up their savings, which can be called upon in the event they suffer an income shock.
Let’s get over this crisis first, and when we do, I would urge people to rebuild their savings and create that emergency fund for themselves.
Having money set aside to meet any cashflow deficits will avoid them having to resort to borrowing money from family or friends, and or miss mortgage repayments.
From a non-financial perspective, it will reduce stress levels and take that weight off your shoulders.
And knowing what your monthly expenses are and having that back up plan in place to pay for them, will mean you’ll be in a much better place to cope, whenever the next stressful situation occurs.