The coronavirus pandemic continues to take its toll on people’s lives, health, mental health, and finances. Managing personal finances is rarely simple in the best of times. With COVID-19, people have seen their spending habits change, savings goals increase, and in many cases have had to adapt to decreased income, too.
All this fluctuation creates financial anxiety and pressure, which is compounded by other stresses caused by COVID-19, like having to move education into the home at the same time that many adults are working at home (or trying to).
With so much going on, there’s a great need for realistic and rational advice about the best way to manage personal finances. If you’re lucky enough to still have money coming in, you need to have a plan for what to do with it, but it also needs to realistic and flexible…especially during these extremely stressful times.
1. Make Time to Talk Finance
Aditi Shekar is the founder and CEO of AskZeta.com, which makes Zeta, an app that helps couples manage their money. She says people react to financial shocks differently, with two extremes. “There’s a group of us who have a tendency to stick our head in the sand and say, ‘Please don’t tell me about it. It creates a lot of stress and anxiety for me,'” she says, “and there’s another group who become almost like super accountants and think about every cent going in and out of their household. Each of those groups need different advice.”
For the first group, Shekar says, “It’s never valuable to ignore your finances because it’s a foundation for all the things that we want to accomplish.” If you’ve never created a budget before or thought about your spending, now is always the right time to start.
For the group who becomes hyper-vigilant, Shekar recommends dedicating a time once a week or every other week to look over finances, rather than checking your bank accounts every few hours. Setting a specific time to manage money can reduce stress and anxiety over watching every cent going in and out, she says.
2. Figure Out Your Net Worth
People who have never created a budget or looked at their finances before may feel overwhelmed at the thought of it. Getting started, however, doesn’t have to be a big deal. Shekar says figuring out your net worth—meaning the total of you have minus what you owe—should be among the first steps. You need to know what you have before you can create a budget of how you want to spend, she says. It doesn’t matter if you do the math to find your net worth with an app, a spreadsheet, or a pen and paper.
Apps certainly do make the process easier. Mint, for example, is a personal finance app and website that lets you connect to all your financial accounts to get one centralized picture of how much money you have and how much you owe. It does the math for you. Varun Krishna is senior vice president and general manager of Intuit’s Consumer Finance Division, which owns Mint. “Products like Mint and others—and there are plenty of other products out there—they take something that seems difficult and make it simple,” Krishna says.
3. Give Your Money Intention
Once you know how much money you have, the next step is giving your money intention, according to Shekar.
“Very rarely do we give money intention,” she says. “Money tends to give us intention.” Shekar believes that it’s better to think about budgeting and personal finance by thinking first about what’s important to you. What do you want money to do for you? When you answer that question, then you can connect it to your net worth and make good decisions about your month-to-month or day-to-day spending, Shekar says.
Again, apps make the process easier and quicker. “Setting a goal or setting a budget is a two- or three-second decision that you can make using technology. It’s a lot easier than you think,” Krishna says.
Shekar encourages people to start with the must-haves of their budget, including rent or mortgage, minimum payments toward debts, medical expenses, utilities, and anything else that is truly essential. Be careful not to let things you want to spend money on infiltrate this list. “Wants” are definitionally more flexible than “must-haves.”
Jill Gonzalez, an analyst at WalletHub, says during the COVID-19 pandemic US consumers have actually increased some of their “want” spending. “When the pandemic started, there was a surge in the purchase of essential items. Shortly after, people began spending money on nonessential items, to take the edge off. Most comfort purchases were alcohol, entertainment, and clothing,” she says. These nonessential items don’t need to be eliminated from your budget, but they do need to be appropriately prioritized.
The time to think about “want” spending is after you allocate the appropriate amount of income to must-haves and have given your money some intention. For example, let’s say you intend to buy a home. You might set a goal to save some amount of money over a few years for a down payment. With those specifics in hand, you can look at your monthly income, subtract your must-have spending, and see how much flexible spending money you have left over. How much of that can go toward saving for a down payment? Based on what you find, you can always tweak the numbers: push your goal to add a few more years to the plan or aim for a slightly lower down payment.
Your spending intention doesn’t need to be a big one-time purchase, like a home. Shekar says, “It can be something as simple as saying, ‘Look, we’ve realized that having some support in our home is really important to us because we’re parents who are also trying to work during covid and therefore, we’re going to create space for X, Y, Z things to help us during this time.'”
4. Don’t Expect to Be Perfect
Getting started with personal finance by figuring out your net worth, calculating your monthly income versus expenses, and giving your money intention are important first steps. And they may be the only steps you take for a while, which is fine. Mastering personal finance takes time, but taking the first few steps is key.
“If you don’t stick to your budget, it’s OK,” says Krishna. “It’s not that you have to be successful on your first day. It’s one of those things, like building muscle: it takes time to start to show progress, but it starts with very small and simple steps, and it’s a lot easier than most people think.”
He adds that simply creating a little bit of a mindset around personal finances can reduce the stress and anxiety that many people feel over money. “I set a goal, I’m just checking my credit score, I’m using the right kind of product. It’s amazing how much that alleviates the stress that people are feeling, and that gives them a chance to take the next step, and the next step, and the next,” Krishna says.
5. Save More for Emergencies
Both Gonzalez and Shekar agree that the effects of COVID-19 will be long-term. “One of the big changes for us as households is we need to think about our emergency planning on a longer-term basis,” Shekar says. “In the past, most financial experts would say have three to six months of money saved up. But now I’m actually encouraging folks to have more, up to 12 months’ of emergency funds saved up because we just don’t know what’s going to happen and a lot of things are really in flux.”
For many, having enough money in the bank to cover a year’s worth of expenses seems both impossible and scary. Shekar says not to panic. “If you don’t have savings, just think about how you can get there. What’s a number you can start with?” Shekar asks. She says it’s fine to pick a number, such as $5,000, to make a mental shortcut for yourself. That way, you have a target and can get started, rather than stalling because the figure seems impossible to reach.
According to Gonzalez, many Americans have already begun saving money that they would have otherwise spent before the pandemic. “Part of the reason is the fact that people have stopped traveling or going out to eat or see a movie,” she says. In some cases, she adds, that spending has shifted to online shopping for non-essential items as a way to relieve stress. That kind of spending, however, can often be converted to savings or whatever intention you have set for your money.
6. Contribute More Than Just Money
Another effect of the pandemic has been job loss and income changes for millions of people. Layoffs, furloughs, reduced hours, and other changes to employment can seriously strain not just a household’s finances, but also personal relationships.
“One of the things that is hard about money in relationships,” says Shekar, “is we tend to equate it to our contribution to the relationship. And any couple knows that is not true. It’s not about what each of us earns, but how each of us contributes to that relationship outside of money as well.”
Above all else, she stresses the need for communication. She also recommends that couples broaden their scope of finances beyond earning and spending to include what needs to get done for a household. That way, you give value to each person’s non-financial contributions, too. These contributions include care responsibilities, grocery shopping, household maintenance, and even kin work—that is, maintaining relationships with family, friends, and communities.
Shekar says that some couples can turn a loss or reduction of work into an opportunity of time. One couple she worked with who experienced job loss was able to start an art business on the side, which had always been a passion of theirs.
Still, with a loss of income, money can get tight and you may not be able to meet all your must-have expenses. According to Gonzalez, “With so many people out of a job, debt management has become a serious problem. Banks and financial institutions have given their clients the possibility to ask for things like skipping a payment, having their rates temporarily lowered, or having their fees waived.” If you’re in a bind, talk to your banks, lenders, landlords, and so forth. Often, help is available, but you have to ask for it.
7. Consider Your Credit Score
During a moment of economic shock, it’s easy to focus on immediate financial needs while setting aside some aspects of personal finance that are longer-term, like worrying about your credit scores.
Krishna and Shekar have slightly different views on how people should address their credit scores during the COVID-19 pandemic.
“Credit scores are valuable, but I don’t think it’s the most top-of-mind thing right now,” Shekar says. “You could argue that if you want to refinance your mortgage or you want to refinance some of your debt, it’s not a bad thing to worry about. But I promise you that if you start to [create good] personal finance foundations, you’ll find that it does improve your credit score. Paying your bills off consistently, paying more than your minimum balances, all these things will start to make your credit more robust.”
Krishna, however, sees personal finance as being divided into three general categories, and all three are equally important. The first has to do with day-to-day behaviors that create spending and saving patterns. The second relates to moving and managing money effectively, such as having the right kind of financial accounts and the right kind of debt. The third, he calls “re-engineering of major structural changes you can make to improve your financial situation that don’t happen often,” and this is the area that most directly relates to having a good credit score.
A good credit score influences the interest rate you can get for not only a mortgage or car loan, but also a personal loan to pay off other debts. “Anyone can consolidate their credit card debt at any point in time. Anyone can make on-time payments and improve their credit utilization, improve their score, and qualify for a lower interest loan,” Krishna says. With a lower interest rate of even one point, people in debt can often save thousands or hundreds of thousands of dollars over several years. “Most people just don’t realize it,” he says. “They think in shorter time increments, and they don’t realize that these long-term decisions have major consequences on their overall financial standing.”
Several banks and personal finance apps give you rich insight into your credit score, including WalletHub, CreditKarma, and Mint. They also explain what factors affect your credit and by how much, plus what you can do to increase your score or prevent it from dropping. WalletHub also has a simulator tool; if you’re thinking about opening a new credit card account, for example, it can show you how doing so will affect your credit score, helping you make smarter decisions.
8. Ask Yourself: Does Your Spending Make You Happy?
One final question to ask when managing your personal finances is whether how you spend your money leads to happiness. As Elizabeth Dunn’s book Happy Money explains, certain kinds of spending leaves people happier than others. For example, donating money, buying experiences rather than tangible goods, and outsourcing joyless tasks are among the top ways to spend money for greater happiness.
In the process of budgeting and setting financial goals, don’t forget to think about the value that your spending gives you, including in happiness.
The money-management app Mint has been testing a new feature that asks users to reflect on their spending habits and ask whether it made them happy. “It’s called the Joy Experience,” Krishna says. The app compiles spending at a retailer or within similar categories, so for example, you’ll see all the purchases you made in the last few days at a coffee shop. “Then we ask you very simply, did this expense bring you joy? Swipe left. Did it bring you a negative feeling, or did it reduce your joy? Swipe right.” Krishna says the response has been positive so far, with testers saying they had never thought about their spending habits in relation to happiness before.
“It’s one thing to set a budget and say, ‘OK, I’m going to buy two fewer lattes a week,'” says Krishna, but sticking to it is much harder. When you reflect on your purchases, however, it could much be easier to give up those extra lattes if they aren’t bringing you much joy to begin with.
The Best Time to Start Is Now
There’s no getting around the fact that times are tough, and that no amount of budgeting can change the funds you have to work with, nor the conditions under which you have to manage them. That said, it’s also undeniable that not having a plan—even a loose, forgiving one, such as we’ve described above—can make a bad situation far, far worse. If you’re not happy with the way you’re handling your money, walk through our eight steps. We’re confident that just starting to work on a plan will help you feel a little bit better. And if you stick with it, you might be pleasantly surprised at how much it can help.