With the Covid-19 crisis upon us yet again, there are many different aspects of your life that are getting affected. Understandably this can cause panic - but this also presents you with the opportunity to examine some of your financial habits and look at ways to make better decisions.
As we are in the middle of a pandemic, there are lesser things to do and therefore fewer things to spend on. So it’s a good time to spend some time and differentiate between your needs and wants.
One way to look at this is through the 50/20/30 budgeting rule.
What is the 50/20/30 Budgeting Rule?
According to this rule, you need to split your income into 3 buckets -
50% of your income goes towards your needs - for example expenses like groceries, rent, transport, etc.
30% of your income is dedicated towards your wants - for example, things like shopping, dining out, hobbies, etc.
20% of your income is put away towards your savings - Devote this chunk of your income to paying down existing debt and creating a comfortable financial cushion to avoid taking on future debt.
Now, this rule provides a broad guideline towards managing a budget - however, what one may consider a need, another may consider a want and therefore this rule needs to be applied in accordance with your income level and lifestyle.
How to Differentiate Between Needs and Wants?
Needs are basically those expenses which you need to incur in order to live and work. On the other hand, wants are those expenses which allow to live more comfortably and fulfil a certain desire. With all of us in lockdown, it’s a good time to list your needs and wants down on a piece of paper and examine whether you are overspending in a particular category or identify things you can cut out and instead put the money into your savings. There are some easy ways you can form better saving habits right now.
1. Examine Your Non-Essential Expenses Closely
Look at the past 3 months of expenses and categorise them into the various buckets - for example clothing, dining out, gadgets, etc.. When you start listing this down, you can analyse the spikes and look at the categories that you tend to overspend on. Maybe, now it’s a good time to unsubscribe from certain brand emails, and identify some of the triggers that make you shop impulsively. If you see that online shopping is your vice, then you can delete apps from your phone and even block certain shopping websites.
2. Start Saving a Small Amount Everyday
One of the key pillars of building good financial habits is learning how to save efficiently. With the current situation, we are naturally not spending as much money. So it’s an opportunity to diligently put money aside every day, week, month (whatever works for you) towards an emergency fund. With the current job market, it’s a good idea to have 3-6 months of your living expenses covered.
3. Build Multiple Streams of Income
It’s a great time to identify some of your key skills and make a list of companies/people that could use your expertise at this time. Harness those skills and build a portfolio which you can present to the right audience. It’s now more important than ever to build other sources of income so that you never rely on one job to earn your monthly income.
4. Be Grateful for What You Have
This time has shown us to not take the simple things in life for granted - our personal relationships, our cozy home, having food everyday, and the value of time. If we take these lessons forward, our mindset towards our finances can change. Truly being thankful for what you already own, allows you to be more mindful of your consumption habits.
While times are tough, it also presents us with lessons we can take forward in our life. This time is a reminder of how important it is to continually build good financial habits and remain prepared for any unexpected circumstances that may come our way.
Stay safe!
