The COVID-19 pandemic has had an unprecedented impact on everyone’s lives. We are seeing an extended period of economic and social uncertainty, and further disruption is likely to come.

COVID-19 is different to anything we have seen before, however the concept of an unforeseen crisis affecting our lives is not new. The reality is that over the course of our lives we will all experience multiple events that will test us personally and financially. From a financial point of view, COVID-19 has served to remind us why correctly managing our relationship with money is essential if we are to be able to endure moments such as these.

Here are 5 lessons we can all learn from COVID-19 to become more financially confident:

1. Having a financial plan is crucial

Successfully managing your money requires intention, commitment and discipline. Much like good physical health, financial health is obtained through consistent good decision-making and striking the right balance between enjoyment and excess.

It is essential to have a plan in place to grow and protect your wealth, thus allowing you peace of mind, freedom and choices both now and in the future. Early anticipation of future events and costs, such as the education of your children or your own retirement enables you to arrive to those moments fully prepared.

Planning also includes ensuring that your finances are resistant to any unforeseen challenges that may arise. This could be ill health, loss of employment or even the death of a loved one. The COVID-19 pandemic has unfortunately highlighted exactly why this type of contingency planning is an essential part of your financial planning.

Ask yourself questions such as:

What happens if I lose my job?
What do I do if my expenses go up?
What if I become seriously ill?

…and come up with clear answers and responsive actions. Contingency plans give you peace of mind and help you to be prepared when a crisis hits.

2. An emergency fund is essential

COVID-19 has clearly highlighted why an emergency fund is a fundamental part of your financial planning.

An emergency fund is the money you set aside to cover urgent costs or loss of income due to unexpected events like loss of employment or serious illness. It is your safety net, so you don’t need to borrow money or sell assets if something happens to you or your family.

As a general rule, your emergency fund should be the equivalent of 3 to 6 months’ of your living expenses. This includes rent or mortgage, bills, debt payments, school fees, health insurance premiums and everyday essential spending.

An adequate emergency fund will ensure that you can withstand unexpected moments of crisis and that you come out the other side with your finances intact.

As COVID-19 has taught us, it is impossible to predict what the next crisis will look like. It could be a global pandemic that affects everybody or it could be an event very personal to you. In either case, an emergency savings buffer is essential to ensure that your finances will be able to absorb whatever may come.

3. Your investments must be diversified

The COVID-19 pandemic has rippled through investment markets across the globe. The key indices have made a partial recovery from the initial sharp decline, though it is likely we will see more volatility before we truly get past the economic effects of the pandemic.

If we look beneath the surface, we see that some industries such as airlines and oil have been devastated, whilst other sectors such as E-commerce and healthcare have benefited greatly. This goes to show why it is essential to diversify your investment portfolio by spreading your investments globally across various sectors and asset classes.

With a diversified portfolio you can have the confidence that any dip is temporary and that in time your investments will always recover and continue on to grow in value.

Remember, investing should always be for the long term. Fluctuations and downturns are completely normal and should be expected. As long as you diversify appropriately and you resist making changes or reacting during market downturns, you will have a positive long-term outcome.

4. Now you know how much you could save

The COVID-19 pandemic has affected each of us to varying degrees. Some have lost their jobs or had their salary/income reduced, whilst others may have been fortunate enough to continue as normal or even benefitted financially.

What is true for almost all of us is that we have spent a prolonged period of time at home in relative, if not complete, lockdown. Our access to the leisure activities we usually spend our money on, such as eating in restaurants, travel, shopping etc, has been taken away from us.

There are clear negatives to this and I for one hope we return to normal in as short a time as possible. However, there are also some practical positives that we can take from the experience. Lockdown has served to make it clear just how much we spend on non-essential items and activities, some of which really don’t add much value to our lives.

I’m not saying we should not return to these activities once normality resumes, but rather that we should be more conscious about just how much we spend on them. Lockdown has shown that we can live on less than we did before. Now is an opportunity to reset our spending patterns and set a reasonable spending plan for non-essentials so that more money can be saved to finance the things that truly matter to us both now and in the future.

5. Debt must be treated with caution

Debt needs to be considered and managed extremely carefully. Debt, such as the mortgage on your own home is normal and acceptable as long as you keep repayments below a reasonable percentage of your normal income.

However, personal loans or a mortgage on a second property need to be thought through very carefully. During good times, it is easy to fall into the trap of thinking you will always have an income and your rental property will always be occupied.

The truth is that recessions tend to hit in multiple areas. There is the risk that you could lose your job or that your rental property may be empty for an extended period. It is also possible that both happen simultaneously.

At the same time, your debt repayments do not stop. Failure to maintain debt repayments can lead to big problems that may have a catastrophic impact on your financial situation. Before taking on any type of debt, it is essential to think through the worse-case scenarios before you proceed.

The COVID-19 pandemic has been, and still is, a very difficult period for many of us. The true total impact is still unknown but will become clear as events unfold over the next few months and years.

The important thing is that we all learn from these experiences and apply those learnings to our future. Choosing to follow these 5 financial lessons will help you put your finances on a solid footing to ensure you are better prepared for next time a crisis hits.