The recent COVID-19 crisis should be a reminder that sh…t happens and the importance of stress testing your personal finances. The shape of the recovery is best described by the letter K with the upward sloping arm of the K indicative of those investors and businesses who came through the crisis stronger than before and the downward sloping arm for those who have suffered badly with some permanent scarring. If you are in the unfortunate group to have suffered financially through COVID-19 in the words of Winston Churchill “don’t let a good crisis go to waste”; now is the time to critically review your financial planning. This starts with an honest assessment of your personal finances, which you should review as you would for a business by drawing up a personal balance sheet and income statement.
The balance sheet should reflect all your current assets and liabilities as well as any planned future expenses i.e. education cost / vehicle replacement and how these are to be funded. The balance sheet will highlight risks iro excessive debt to assets and future funding shortfalls. A balance sheet will come in handy if you have to approach your bank for temporary relief on debt servicing and / or debt consolidation to address cashflow stress or in the worst case scenario if you are considering debt counselling. The balance sheet will also expose the affordability of your current lifestyle. Be honest in answering the question if you were a business would you invest in this business.
A personal income statement is really a cashflow statement consisting of an itemised breakdown of actual income & expenses incurred, this is best taken from your bank statement. Every expense will need to be critically evaluated and classified as either an essential or non-essential expense with a focus on eliminating non-essential expenses and reducing essential expenses i.e. review short-term insurance premium or extra maths lessons.
The cashflow statement should include monthly and any expected ad hoc or annual payments, which are of a recurring nature. The importance of having a contingency fund and / or access to an emergency source of funds during a crisis cannot be understated. Be sure to stress test this source i.e. is your access bond accessible or can the bank decline the request for an advance.
The first step in fixing a financial crisis is to have clear picture of the situation, which a balance sheet and cashflow statement will provide and then take action. This will undoubtedly require sacrifices from the entire family so involve everyone, even the kids, as this will provide them with an invaluable lesson for their financial futures. Do not be embarrassed or dwell on the past, take personal responsibility and do what is necessary to survive the crisis. A good financial adviser preferably a certified financial planner can help shoulder the load.
Mcomm, CFP®, HdipTax
T. 021-205 1133