by Sherry Hao, Controller, U.S. Money Reserve
If it’s been said once, it’s been said a million times: The pandemic has changed how we think about our lives as a whole. More than that, though, it’s forced us to reframe how we think about our homes, our retirement, and our personal finances in particular. After nearly a year of staying home and staying safe, here are six financial lessons we have learned from the pandemic.An Emergency Fund Is Crucial
Every financial advisor worth their salt will tell you just how important an emergency fund is, to ensure the financial security of you and your family when and if things go wrong.
If 2020 and the advent of COVID-19 have taught us anything, it’s that the constant harping of financial advisors is the right advice. When the pandemic first hit, more than 22 million people lost their jobs. As of the most recent tally, there are 10 million fewer jobs now than there were before the pandemic began. As of February 5, 2021, the U.S.’s unemployment rate, reported by the U.S. Bureau of Labor Statistics, hovered around 6.3%, but many economists and the Fed believe that the real unemployment rate is closer to 10%. Add to that the fact that the average debt load for most Americans has risen since the advent of the pandemic, according to data from The Motley Fool. The average household debt in November of 2020 was $145,000, while the average revolving debt load was around $6,271 (for 2019, the most recent numbers). Most economists expect all of those figures to have increased as we’ve all sheltered at home. The upshot of this data is that 10 million Americans are out of work, and even more have stopped looking for a new job and racked up more debt.
An emergency fund is absolutely vital to survive times like this, when job losses are rampant, and the economy is contracting. Most experts recommend that you have anywhere from two to six months of expenses stashed to cover any gaps that you might have in employment thanks to illness, job loss, or other issues that can and do arise.
If you don’t have an emergency fund, start one right away. Even though the vaccines are slowly rolling out across the country and around the world, it doesn’t mean that the economy will recover quickly or completely. In some cases, jobs that existed before the pandemic may not come back at all as employers figure out how to do more with fewer full-time employees and rely more heavily on remote workers. It pays to have a cushion, and the pandemic has reinforced just how fragile our economy and our jobs are.We Can Make Do with Less and Save Our Pennies
Since the advent of the pandemic, we have traveled less, Zoomed more, and spent less on dining out and entertainment. While we all miss these activities dearly, and many of us can’t wait for things to get back to some semblance of normalcy, the truth is, the pandemic has driven home what we can do with less.
Maybe we’re getting more creative and taking virtual trips or planning farther ahead for our next eventual vacation. Perhaps we’ve decided that the best place to create a retreat is at home. Maybe we’ve even invested in making our home spaces a bit more comfortable and conducive to working and playing in our own safe spaces. Whatever the case, many people have stashed excess cash at an astonishing rate. According to the Kansas City Fed, the savings rate in the U.S. went from just 7.2% in December 2019 to more than 33% by May 2020. That’s a considerable increase, showing that people decided it was better to keep their cash close at hand.We Reevaluated the Things That Matter the Most
The economy is based on consumerism, yet the pandemic put a significant crimp on our ability to consume. Social distancing and the rapid and aggressive spread of the coronavirus have significantly impacted everything from how we work to how we educate our kids. COVID has also created a massive boom in things like the delivery of goods and services and put a value on finding ways to connect in a safe environment, whether that means doing a meeting over Zoom or connecting with friends in a socially distanced way at a park.
Over the last year, most of us have worked in our PJs, shared our dinner table or office with our kids while they learn, and connected with friends and family over digital platforms. As these relationships have evolved under the current restrictions, our spending priorities have changed. For example, more people are investing in their home spaces, both indoor and outdoor, to make these both more comfortable and relaxing. Human connection has become paramount in these days of social distancing and finding safe ways that we can still maintain our contacts has become crucial. Thus, our spending goes toward things like better internet connections, more streaming services, and better technology to help us connect.
We’ve also started putting money towards at-home workouts and gym equipment since we can’t get to the gym anymore. Companies like Peloton have seen incredible booms in their business as a result, and we’re all figuring out how to spend money on ourselves to support our own personal wellness needs, too.Managing your Finances Is About More Than Just Getting Rich
Where your attention goes, your energy flows, right? The same goes for your personal finances. During these pandemic days, our focus has shifted to finding ways to make our smaller universes work. Whether we’re working in our pandemic pods or figuring out how to maximize our virtual connections and experiences, the pandemic has helped us all get focused on how our finances can support our core beliefs and goals.
Goals have shifted, and that means we are more focused on making do with what we have. These goals range from keeping our family safe and healthy to finding ways to unwind after a day of working in the home office. The crisis has refocused our priorities on things that are perhaps less visual, less status-oriented, and less public-facing and made us narrow our core purpose and goals. Successfully managing your personal finances during the pandemic has become less about flash and more about quality of life and what matters most as we move through this strange time.We Are Rethinking Retirement
In some cases, people have had to dip into their retirement savings to make ends meet during the pandemic. In others, people are putting retirement off or taking early retirement in order to reap the most benefits. Regardless of which boat you may fall into, stress levels around retirement are at an all-time high and it’s clear that collectively we need to rethink retirement as less of a set point in time with specific expectations.
One thing is for certain: We need to each think about what our priorities are in retirement and how much it will take to get there. The pandemic has upended all sorts of plans and expectations, and we need to be both gentle and flexible with ourselves, but we also should start working toward our revised goals as soon as possible. As a society, we also need to rethink how to accommodate older workers since the pandemic has impacted many people’s timelines for retirement. According to a recent poll by Age Wave, a think tank in San Francisco, and A. G. Edwards, more than 68 million Americans are rethinking their retirement strategies because of the pandemic, which includes everything from working longer to reducing retirement contributions to offset job losses thanks to COVID-19.Staying Out of Debt Is Crucial
Uncertainty tends to make us much more cautious with our finances, and the pandemic has definitely underscored just how uncertain the future can be. With that in mind, even more people have gotten themselves out of debt, according to the Fed. According to the Federal Reserve, at the beginning of 2020, Americans owed an all-time high of $1.09 trillion in credit card debt. By July, Americans owed less than $1 trillion for the first time since September 2017. Most people used their stimulus money to pay down existing debt, even though, according to Money Magazine, they also relied more heavily on credit cards during the pandemic than they had in the past—partially because of the state of the economy, but also because credit cards offer contactless payments that make it easy to pay for things like food and goods without having to be in physical proximity to a stranger.
All of this has underlined just how important it is to manage debt and keep it within your budget, and it all ties back into just how important emergency savings have become. The more cash you have on hand when things go sideways, the better off you are. Credit cards are a tool to be used when they are needed, but they need to be managed responsibly.The Bottom Line
COVID-19 has been a worldwide traumatic event. It has changed the way we relate to each other, how we work, how we travel, and how we teach our kids. Most of all, however, it’s impacted how we manage and think about our personal finances. It remains to be seen what new saving habits might evolve as we continue to move through this period, but one thing is for sure: COVID-19 has reordered our spending, saving, and retirement priorities, and the effects will be felt for years to come.