As we come up on 18 months from the start of the pandemic, there is a lot of evaluation that needs to be done on the financial impact of COVID-19. And although it has been 18 months that many people want to forget, there are several financial lessons that can be learned from this difficult time and should be understood and carried into the future.
Expect the Unexpected
One thing the pandemic has made clear is that even those with seemingly reliable income streams—including some of the most essential workers during a health crisis—were not immune from income disruptions. These income disruptions, whether from job loss, furlough, or reduced hours, may have left you struggling to pay your bills or meet your essential needs. Along with that, many retirees with adequate cash reserves had to make difficult decisions about whether they should pull money out of the market or try to get by on Social Security alone. These decisions cause stress, anxiety, and a financial nightmare people do not want to endure.
While the pandemic has provided a dramatic example of why emergency savings are important, keep in mind that unexpected events, including job losses and medical emergencies, can happen even in the best of times. To combat the fear of having this happen to you, the general rule of thumb for emergency savings is to set aside three to six months’ worth of living expenses. The amount will vary from person to person, but the concept remains stable. Save enough in an emergency fund that if something unexpected were to occur, you would not be reaching for money that you did not want to reach for.
The market drop in the wake of the pandemic has shown us the wisdom in diversifying investments.That means not putting all our eggs into one basket in case that basket gets upset. By putting a percentage of your funds into different types of investments you minimize the chance that one economic event will harm all your investments at the same time. The key to diversification is to find the right balance between risk and stability, which allows you to reach your goals while also worrying less. In an economic crisis such as the pandemic, we believe your ability to handle current market volatility partially depends on diversification.
Minimize Debt Load
It is often said that debt is the killer of financial dreams. While this may be drastic in some measures, it does create a financial burden that you are always carrying on your back. Because of income disruptions during the pandemic, people struggled to make ends meet, sometimes due to the debt payments that took up so much of their income.
To take control of debt load, start by tackling your unsecured debt (credit cards or personal loans) and focus on paying it off as quickly as possible. Then, establish funds to save for future expenses you know are coming and any purchases you intend to make rather than using loans or credit. Most financial experts recommend that consumers follow the 28/36 rule. This rule says that a household should avoid allocating more than 28% of their monthly income towards mortgage payments and no more than 36% of their income towards all debt (including car loans, student loans, credit card debt, etc). For example, according to this rule, someone who makes $5,000 per month should keep their mortgage below $1,400 per month and all debt payments below $1,800. And if you make $10,000 per month, your maximum mortgage payment should be $2,800 and you should keep your maximum total monthly debt payments below $3,600. By following this rule and relieving yourself of your lingering debt, you may begin to feel a sense of financial freedom and security.
Closely Evaluate Money Habits
The pandemic also offered a unique time to evaluate your money habits. This means considering your budget, including your saving and spending patterns. Some consumers were saving at a high rate during the pandemic, but continuing those habits will be key to preparing for future unexpected disruptions. Along with that, when income is cut back, every dollar suddenly feels very important. That’s why many people pulled out their budgets for the first time in a long time during the COVID-19 crisis. Suddenly, you’re actively thinking about how much you’re spending at the grocery store or on all those monthly subscriptions (many of which you may not even use). You begin to evaluate your needs vs. wants, and within a month or two of following a spending plan, many of us are able to create an extra $500 to $1,000 per month of cash flow by simply reducing and prioritizing our expenses. As you begin to see income increase again and activities such as travel, entertainment, and going out to eat increase, a budget will play a crucial role in ensuring you stay on the right financial track.
Protect Loved Ones
While you may not be in a high-risk category for COVID-19, you’ve likely seen stories about healthy people of all ages who have become seriously ill or lost their lives from complications of the virus. Although it’s a difficult topic to discuss, it’s time to take action if you’ve put off financially protecting the ones you love. Financial protection comes through 2 main areas: insurance and estate planning. Life insurance can provide financial security in case of the unthinkable. It can help pay off your mortgage and other debts, pay for burial expenses, and fund your children’s college education. Having the right policy in place can also help your family maintain their current standard of living. Estate planning is a process that ensures you have a will, POA, health care proxy, and trust that are all up to date and correct. These legal documents help make decisions for you and easily transfer your assets to those around you after you pass away. If you delay estate planning, no matter your age or current health status, you could risk burdening your loved ones – financially and emotionally – if something happens to you. Estate planning is an essential step in managing your finances and caring for those you love and the pandemic was a great reminder of the importance of both insurance and estate planning.
Establish a Plan and Review it Regularly
Finally, the pandemic reminded all of us that it is important to have long-term goals and a plan to achieve those goals. As people began to wonder what the future might look like, more and more people felt stressed, uncertain, and worried. A financial planner will help you avoid these feelings by reviewing your long-term plan and goals regularly and ensuring that the money you are saving will last through an economic crisis such as the pandemic which hopefully brings you security and peace throughout potential future circumstances. If you would like to meet with one of our advisors to begin this process, you can fill out the form here.
The pandemic was a time that forced people to hit the reset button on their current “normal”. It changed levels of social interaction, job environment, family dynamics, and financial circumstances. However, within each of these areas of changes, there are lessons to be learned. We encourage you to consider these financial lessons and see if there are any areas within your finances that you need to re-evaluate. We would love to walk alongside you and answer any questions you have as you navigate new financial habits as a part of your new “normal”.