Although you probably expected to see an interview with another author here, today's format will be different from the usual one. For the first time, I wanted to try a new format after the COVID-19 pandemic started, so it became clear that the new reality requires new knowledge and actions to take. Since then, I've been feeling like we all need some advice from someone who knows all about making adaptive financial decisions and how to budget effectively to reach your financial goals. Therefore, I decided to talk to a financial author and personal finance expert, Betty McCoach, who will tell us how to rethink your financial situation and improve it.
And, of course, I've decided to start with a common question - how has the COVID-19 pandemic affected our lives?
Betty: Of course, the colossal impact of the pandemic can't be denied. And, as often happens, the pandemic has had its greatest impact on vulnerable populations. According to statistics, most of the job losses were in low-paid jobs. Also, the number of people who turned to food banks in order to bring food to their tables has increased. And despite the measures taken by the government, such as student loan forgiveness or a national eviction moratorium, many people lost their jobs and found themselves in a deplorable financial situation. Obviously, no one was ready for the new reality, but people who had the basic knowledge of financial literacy and applied it in daily life managed to minimize the impact of the pandemic on their economic life.
Int: And what are the rescuing principles that can help us overcome the financial crisis?
Betty: Actually, there's no one-stop solution. What works for one person may be disastrous for another household. Therefore, an individual approach to each specific situation is important when it comes to personal finance. The most general advice I can give is to minimize expenses and bills, rethink the budget, and create a financial cushion in advance. It is important to remember that, as with the pandemic, we usually can't predict when the next crisis will take us by surprise. You can save money even on a low income. Someone cut off optional expenses, tried to avoid impulse purchases, or learned to save money on groceries by making meal plans or using coupons. Experts usually tend to think that your emergency fund should be equal to at least three to six months' worth of expenses. Also, it's recommended to have approximately $500-$1,000 for a rainy day. I may also recommend that you learn more about the 50/30/20 rule, which will help you allocate your cash flows more efficiently.
Int: And are statistics on loans? Are they a good idea?
Betty: Sometimes they may be. However, it is important to understand that the way you use money determines whether the debt is good or bad. Of course, it is also important to understand how acceptable are the conditions offered to you by the lender and make sure you will be able to service your debt over its terms. Sometimes loans can even help you build wealth, but this applies more to large loans, such as mortgages. Small loans basically help people stay afloat during tough times. And in some situations, it can really help people avoid, for example, high late fees or credit score drops. The main rule here is to use loans wisely and always have an idea of what kind of financial product you are taking out.
Int: And what are the pitfalls of loans? When obtaining debt is a bad idea?
Betty: Any form of debt comes with an overpayment, as you're obliged to pay interest on your loan. The higher your interest, the more you will pay in the end. Also, some forms of debt can create a debt cycle if you use them frequently to cover the existing debt to avoid penalties. In addition, it's not recommended to take out a loan for impulse purchases or to maintain a luxurious lifestyle.