Budgeting and Risk Profile Management in COVID-19

Business and Finance

Photograph: Gabriel Poon

Since the outbreak of COVID-19, millions worldwide have become afraid and uncertain of what the future holds and thus, have been hesitant to spend their incomes. With the global pandemic severely impacting everyone’s lives, many have struggled to handle their money amidst the financial crisis. Therefore, this article will suggest potential budgeting and risk profile management strategies in order to ensure better financial adaptation to the recession which was engendered by the pandemic.

The first step towards managing one’s budget is to adapt when significant financial changes are imminent. As the world economy undergoes a severe recession, it is strongly advised that the majority of one’s disposable income is spent on daily necessities for themselves and their loved ones. In Elizabeth Warren’s book “All Your Worth: The Ultimate Lifetime Money Plan”, the 50-30-20 rule was popularised. This financial management strategy expounds that 50% of our income is spent on needs, 30% is spent on wants and 20% allocated to savings. However, due to the virus, everyone should adapt and reassess budget allocations, which include spending drastically more money on needs and savings and less on luxurious items. Furthermore, there should also be contingencies for irregular income. It is likely that one’s income has changed numerous times over the last couple of years, including additional one-time incomes or tax refunds. It is strongly advised that one plans ahead and determines how much of that income has to be committed to necessary costs or miscellaneous bills while the rest is saved. With the suffering world economy, now would be a suitable time to start investing as market prices have decreased quite substantially, which means that one is more likely to obtain more returns on their buck! However, it is important to note that investments still hold a certain amount of risk, so reckless investment is strongly advised against.

Similar to budgeting, risk profile management also requires serious adaptability amidst covid-19. One’s risk profile usually consists of the threat level, the likelihood of unfavourable events occurring, the costs of each risk, and the methods in handling the risks. As money becomes increasingly valuable in this pandemic with deflation, the risk tolerance when investing also inevitably decreases. Thus, risk tolerance should be split into three sections - aggressive, moderate, and conservative. As long as one has the experience and sufficient research, aggressive investment in small companies and speculative stocks should still be the way to go as such companies could still warrant hefty returns. However, one has to be conservative in investing in high-rated and government corporate bonds as those stocks are the ones that are most likely to depreciate during this pandemic. Avoid spending substantially and taking any risks when investing in those sectors as it is highly unlikely that the government and other private companies would spend additional money during a recession.

If there is one big takeaway from this pandemic, it is to expect the unexpected. Thus, everyone should financially prepare themselves in the best way possible. Although social and transportation costs may have been reduced, the costs of other goods and services such as groceries and online services have mostly proliferated. Therefore, everyone should adjust to the current situation by lowering budgets and effectively managing risk profiles to minimise losses and ensure that one’s standards of living are not severely affected.