When COVID-19 hit hard in Slovakia, myriad information about the huge threats associated with this virus came streaming at us from every corner of the World. Every day we read news about how was Slovakia and the neighbouring states affected by the virus, the number of masks we have in Slovakia, the number of infected people and so on.

Fortunately, the vast majority of us just read about the virus in the media or follow the situation from the couch in the living room. While in the first weeks I focused all my attention on articles about the spread of the disease, government sanitary measures, and the healthcare situation, my interest has shifted in the last couple of days.

As a result of normal life suspension, the number of people, either laid-off employees or self-employed without income, is increasing. Only now can we finally see the number of people that have been neglecting having a fallback - they spend all their income, don’t create emergency funds or savings, and they don’t build financial assets.

It makes me want to cry when I see the number of people living from paycheck to paycheck, having little to none financial literacy, and holding onto the idea that the state will take care of them or that they will somehow manage when it comes to the worst scenario.

Let’s face it. We’ve been quarantined for three weeks now. We are still only at the beginning of the crisis and the situation will take (at least) several months to gradually improve and relax.

If you are the one holding the purse strings in the family, you should get prepared for the upcoming period responsibly. It will put your family budget to the test - both on the revenue and the expenditure side.

Moralizing is not going to help

Nowadays, more than ever, we can see how important the continuous and long-term emergency fund building for people really is. Last June we held a webinar on the topic of “Setting priorities for your financial goals“ in Finax and we put the financial reserve in the first place among the investment goals.

It’s a goal you should pursue as a priority, because a good financial reserve is the basis for building additional wealth for retirement, helping your children or building property in other ways.

Ever since the beginning of Finax existence, we have been recommending that the emergency fund be equal to at least 6 months of the net income of the breadwinner, or that it be enough to cover your household expenses over the same period. A fund of this amount would probably help you overcome even the situation nowadays.

But that’s enough of pointless educating, we will delve deeper into this subject when COVID-19 is over and there is room for creating the financial reserve again. Moralizing about what you should have done before will no longer help anyone.

The struggle for economic survival begins with income security

First of all, you should ask yourself whether your income is secure. If you are a self-employed person, whether you have enough orders (if any), if you are an employee then how has the crisis affected your employer and whether you are threatened to be fired or to what extent will your salary be cut.

But don’t panic needlessly and consider the current measures of our government. All countries, including Slovakia, have shown clear will to help the business community and their citizens indefinitely. Majority of the affected companies will have their survival and payment of liabilities, including employee wages, covered from the most part by the state’s treasury, in order to minimize the number of bankruptcies.

Look at it from the family point of view as well. If you are a two-income family, consider options for both of you. Try to estimate whether you will receive a full wage, only a part of it, or whether there is a possibility you may lose your job within a month or two.

If you have lost your job or the risk of losing it is high and your household is in danger of financial collapse, you need to act quickly. Unemployment in Slovakia will soon rise. It will almost certainly be one of the most abrupt increases in the post-war history.

If you have lost your job, remember that you will be receiving unemployment benefits for the next six months. It will help you overcome the current unfavorable situation. Self-employed persons who were paying minimum contributions have a bigger problem. Unfortunately, the state will not take care of them and they will be forced to quickly find another job.

Exercise 1: Calculate your expected income for the upcoming six months. Include: net salary, meal vouchers, business/rental income, public benefits (nursing benefits, quarantine incapacity for work, child benefits, pension). Try to assess whether you are able to earn some extra income from a part-time job, garden work or food delivery.

How much money will I need in the upcoming six months?

Evaluating your income for the next six months was the easy part. Now comes the hard one. You need to focus on expenses and estimate how much money you will need in the upcoming 6 months.

You can determine the “standard of living during an emergency” yourself. It is up to you to what extent you need to give up, say, the not-so-essential expenses.

You can divide your expenses into three categories. Necessary - put expenses that can’t be completely excluded - mainly food and housing costs.

The following group is “nice to have” (it would be nice to keep them). This category includes services such as the Internet (unless you need it to work from home), phone, food delivery, a car (if you don’t use it for work), or other things you have gotten used to in recent years. A month ago, you couldn’t have imagined your life without them, but when push comes to shove, you can grit your teeth and give them up.

The last group are luxury items, which you can forget about, either because you simply don’t have the money or they are unavailable at the moment anyways. This group includes purchases of any luxury goods (electronics, new furnishings), vacation, various services as restaurants and so on.

Exercise 2: Get a complete overview of your family’s spending. Here is how to do it. If you live up-to-date with today’s digital age and pay most of your expenses by card or using online banking, it will be a little easier. You can download an overview of your transactions from 2019, for example as an Excel file. If you are a self-employed person or have a single-member LLC, include car and phone costs, or other items in your expenditures.

If you spend a lot of cash, this exercise will be more challenging. Try to estimate all your annual spending in cash. Don’t forget to include expenses such as meal vouchers or things that you pay for differently.

I have a handy categorization software in mBank where I can sort my expenses and keep track of them. However, with mBank, there is the problem that expenses can’t be exported with their respective categories. So I had to make it work and do everything manually. It took some effort but the result was worth it.

If you don’t know how to use Excel, a calculator and paper can also help. It almost seems like going back to school.

In order to help you, we demonstrate how to sort your expenses and income and what categories to use in this Excel file. At the same time you can divide the expenses into 1) necessary, 2) nice to have and 3) luxury. Just copy the payments in the desired format to the “Items” tab and sort them there. Then, use the “Income” and “Expenses” tabs to sum the items. The Excel file is filled in as an example, please delete the data before using it.

Also, don’t forget to take into account that your spending has decreased due to the ongoing quarantine. You haven’t been spending as much on transport, entertainment, culture, and various services such as restaurants, sports facilities, cafes, hairdressers, etc..

Aim of the exercise: You will learn about the structure of your expenses over the past year and you will also set priorities for spending. Most of you have been at home for three weeks now and you have a general idea of how your habits have changed compared to a regular month. Estimate your way of spending for the upcoming period accordingly.

The crushing reality

Reality tends to be crushing for many. If you have done a good job in the exercises and estimated your income and expenses for the upcoming 6 months, you know what you can afford. If your earnings are higher than necessary + “nice to have” expenses, you have won. Invest the positive monthly difference because the market offers an opportunity and in the long run, your deposits will be well appreciated. You can find more here.

If this is not the case, you need to address the situation immediately. First, you should convene a family meeting. Each member of the household, including children, has to be aware of the situation and look for ways to save money. If you include children in the discussion, it will be easier for them to accept the financial constraints and, possibly, they will even help you find ways to save more.

First of all, you need to cut expenses from the category “nice to have”. Identify them and adapt your lifestyle to the exceptional situation for a few months.

If that’s not enough, more radical measures are in order. In such a case, we have four options to choose from: 1) tap into the financial reserve, 2) dispose of financial assets, 3) cut back even on some essential expenses and/or 4) sell non-financial assets.

How to spend the emergency fund and how to tap into investments?

I’m sorry if I mention things that seem totally clear to some of you but I know a lot of people who would benefit most from a step-by-step manual. For example, personally, I would spend the emergency fund in the following order:

1. First we spend the money in our bank account, if there is anything left. However, keep an emergency reserve covering at least 14 days, if possible.
2. Consider whether you own any financial products that are disadvantageous to you in the long term. These are, in particular, investment life insurance policies which are extremely expensive and disadvantageous. Similar problem may arise in case of building savings account, which nowadays gets almost no support from the state.
3. Then focus on monetizing the financial products you have created with this purpose. These are monetary market instruments (savings accounts and fixed-term deposits).
4. Mutual funds should be next in line. Even if you profit from them a little, they are expensive, less profitable, and subject to unnecessary revenue tax.
5. First, dispose of conservative investments that have not experienced a decline in value or, conversely, have increased, such as bonds and bond funds. Then mixed and real estate funds.
6. Third Pillar (pension) – find out what kind of contract you have signed. Some contracts offer the possibility to withdraw part of the funds once every 10 years. These are funds you (not your employer) have been putting aside. Third Pillar has high fees and above all earns too little.
7. Riskier investments in equities and ETFs – such as Finax.

Beware, steps 4 through 7 may come with certain long-term disadvantages, that’s why I would consider prioritizing some of the other measures when cutting necessary expenses or selling non-financial assets.

Nowadays, I certainly recommend cutting luxury and some “nice to have” expenses rather than unnecessarily disposing of your long-term financial assets. You will thank me for this advice later on, when you emerge from the current crisis on the side of wealthy people, ready for the next unexpected events.

Keep in mind that you can monetize it at any time, as a last resort. Critical situations really accentuate the real importance of assets liquidity.

Not all necessary expenses are really necessary

In Exercise 2, you were able to determine which expenses were necessary for you. I assume that these will mainly include costs of housing and food. Let‘s, yet again, focus on the items that cost you the most money.

1. Mortgage repayment is probably the biggest item for most households. Call your bank and arrange to reduce interest according to current interest rates. You can do it by phone. By reducing interes rate from 1.29 to, say, 0.69, you can save thousands in the long run.
2. If the first step isn’t enough, ask to postpone the installments. The state has come to an agreement with banks on the possibility to postpone installments for up to 9 months. If you need to take the strain off your family budget, do so. In the next couple of days, banks should announce how to simply apply for this postponement without visiting the branch.
3. The same applies to consumer credit, leases or other forms of loans that have been agreed to be postponed. Postponement doesn’t hurt and can help significantly. Stay alert, postponement of payments doesn’t happen automatically, you have to request it!
4. If you are renting a house or a flat, consider moving in with your family for a short time and terminating the tenancy. Or try contacting the landlord to agree to temporarily reduce the rent. If you always pay on time, the owner will probably try to oblige. Nowadays, they would find it very difficult to find a replacement. The short-term rental market (including AirBnB) has completely plummeted and hundreds of cheap apartments are currently available for rent. Take the opportunity to lower your rent.
5. Take every opportunity to eat cheaper. Focus on cheap ingredients – rice, pasta, legumes, etc. Bake your own sourdough bread. This represents a big item on the expenses list. But I’m not going to get into details, surely every handy housewife can work it out for herself.
6. Reevaluate all your remaining regular fees – instead of your monthly phone plan switch to paying for only the time spent actually calling (if the provider allows it without a fine), switch your bank if you pay high fees, switch or cancel your TV and Internet packages, or various subscription services such as Spotify, Netflix and so on. This way you can save more than 50 euros per month. If you have been putting it off for years, now is the right time to do it.
7. If you need to buy things other than food and housing, buy second-hand items or ask your friends to sell or lend them to you.

As to your expenses, I would like to ask you for one thing. If you spend money, spend them at your local stores, on Slovak products, and services provided by Slovak companies. If you want the Slovak economy to emerge from the crisis as soon as possible, be a patriot.

Your wealth hidden in non-financial assets

I have come across a very interesting exercise in the book I am currently reading (Your Money or Your Life). It consists in trying to calculate the total value of your entire property.

We should count everything we own at home towards the total amount, including things like furniture or sports equipment. Try to appraise them at their current value to see what your total wealth actually is.

Now is the time to stop and think whether you really need all these things. Over the weekend, I posted four ads on the Facebook Marketplace – of items that I no longer needed, and I sold two of them within two days. Many stores are closed, so people can’t get the goods they would have probably bought as new. This allows you to sell your goods much faster.

1. Start with smaller items you don’t need. You will probably sell them faster and it won’t hurt as much.
2. The next in line are more expensive items that you don’t need, but they will be harder to sell because the crisis has affected everyone equally. There won’t be many people who have enough cash to just give it away.
3. As a last resort, I would consider selling a car, real estate, or other luxury items. It will be a long and difficult process and you will probably end up underselling them anyways. However, you may be lucky enough to sell the property of your grandparents to someone who has been eyeing it for a long time now.

Let’s find courage and nerves of steel during this financial test

Man can overcome everything. Our ability to adapt is extraordinary. As society has overcome all critical events of the past, we will overcome them in the present. Down the road, we will look at coronavirus only as an unpleasant experience and a slump in stock index charts.

However, extreme crises require extreme solutions. I hope you will find a way to succeed in this difficult test as well. I believe that we will all learn from the current situation and the next time, you won’t forget about creating your financial reserve.

I would like to ask for one last thing. Do everything possible to avoid borrowing more money, whether from a bank or from various non-bank institutions. It’s a journy to financial hell. Use all possible and impossible means to avoid it.

If you haven’t found answers to all your questions in our article, be sure to contact us. In the coming months, we will focus on financial issues currently bothering you, to help you pull through this crisis in good financial health.