How to Minimize Risk and Protect Your Money During Times of Crisis
Free Book Preview Entrepreneur Kids: All About Money
The government has stepped in with a stimulus package to help businesses weather the storm, but the pandemic has illustrated the importance of financial preparation for households and businesses of all sizes. Consider the following ideas on how you can prepare to minimize your financial risk during an emergency or crisis in the future.
Reduce and eliminate debt
Debt in the form of credit cards, personal and business loans, and medical debt can represent a significant amount of your monthly budget. The debt you carry incurs interest which eats up a portion of your monthly debt repayment allocation. A percentage of each monthly payment you make goes toward interest, essentially slowing down your goal of paying off the debt in full.
Reducing and eliminating debt can free up a portion of your business or household budget so the funds can be redirected into more important goals such as growing a savings account or investing.
Review your business and personal recurring debts to identify which ones are costing you the most. When you identify the highest-interest ones, pay them off first. A couple of ways you may be able to pay off the debt faster include the following:
Consolidate your debt
A debt consolidation loan is meant to combine your existing debts into a single payment. The loan should come with better terms than your existing debt and with a lower interest rate. Consolidating all higher-interest debt into a single, lower-interest loan simplifies your repayment schedule and saves you money on interest so you can chisel away at the principal portion of your debt faster.
Find passive income or start a side hustle
Boosting your current income to allocate the money towards repaying your debt may be one of the fastest ways to pay down your responsibilities. Consider starting a side business you can run on weekends or evenings to supplement your earnings, or branch out your existing business. Brainstorm business and side hustle ideas, do your market research to find what people need right now, put together a business plan, and get started.
Have a savings fund
When it comes to financial advice, most agree that an emergency savings fund that covers unforeseen expenses is a good idea. The pandemic is the perfect example of why the concept works. Individuals and entrepreneurs that have savings contingency plans are likely to fare better in a crisis.
The thought behind the concept is simple. Businesses and households that can cover at least three to six months of expenses can continue to operate and pay their bills for the short term. They’re better positioned to navigate a downturn or unexpected event and come out unscathed.
Others who didn’t save are all too aware of the impact of a sudden change to their finances such as a job loss, medical illness, or nationwide shutdown. Their income may have changed or stopped, but the bills are still due. Many turn to loans and credit cards to fill the gap, leaving them with heavy debt that could take years to pay off.
All businesses and individuals should actively add money to their savings or investment accounts. Aim for an amount that would provide a cushion of at least six months for business operating expenses or for your personal budget. Save aggressively until you reach your goal, and then set up an automatic savings plan to get yourself in the habit of consistently putting away money for the future.
Diversify your investments
Keeping six month’s worth of savings in a money market or high-yield savings account may be acceptable but not ideal. The interest earned is minimal, but you have access to the cash quickly in an emergency. Larger amounts of money should be allocated towards an investment portfolio. The crux: the market can be volatile, especially during a crisis. With the uncertainty in the air, investors get nervous.
To mitigate some of the volatility, review your investment portfolio regularly to ensure you have a good ratio of stocks and bonds. Diversification is essential. Consider adding asset allocation funds, which take the guesswork out of diversifying your investments. Depending on your comfort level with risk, you can choose a 70/30 allocation fund, which maintains 70% of your investment in stocks and 30% in bonds. Also consider adding an index fund to your mutual fund holdings.
Remember the Boy Scout motto: “Be prepared.” If the pandemic has taught the world anything, it’s that it’s nearly impossible to predict how a crisis or emergency will affect you. Entrepreneurs are already comfortable with some level of risk. You can’t completely eliminate risk, but you can be financially prepared to overcome it.