Financial Lessons Learned from the Pandemic

The coronavirus pandemic has been a challenge, affecting how we work, play, and interact. While individual situations surely differ, general financial lessons, which can help you better position and support yourself in the future, have emerged from the pandemic.

Build Up an Emergency Fund

Record numbers of people were laid off or furloughed at the start of the pandemic. Even those with seemingly reliable income streams were not immune from wage disruptions. According to the U.S. Bureau of Labor Statistics, a record number of nurses and healthcare workers have lost jobs during the pandemic as hospitals halted revenue-generating elective surgeries and routine procedures.

Even retirees were not exempt from financial pressures; those who found themselves without adequate cash reserves in the first half of 2020 had some tough decisions to make.

An emergency fund containing several months of spending money (the general rule of thumb is three to six months) can help reduce the impact of shorter-term economic disruptions. Those who had properly prepared for emergencies during good times were better prepared to deal with a sudden loss of income. Having an emergency fund can reduce the need to undertake painful spending cuts or borrow at high interest rates while waiting for unemployment benefits to start.

Maintain Financial Discipline

Financial discipline has been one key to getting through the pandemic. The forced restrictions on life’s pleasures such as travel, going to concerts, and eating in restaurants may have caused people to rethink expenditures on these activities and make a spending plan.

When money is flowing freely, it’s easier to survive financially without a spending plan; when income is reduced, every dollar becomes more important. The pandemic may have caused many to consider a budget for the first time or return to budgeting after time away from the practice.

If you’ve been putting off creating a budget because it seems like it will be too much work, don’t worry. Many tools and apps are now available to help create and maintain your first budget.

Have a look at our Bowen Reports piece on budgets: https://bowenasset.com/time-for-budgeting-101/

Choose Diverse Investments

The pandemic brought drastic changes to the economy. Some industries were shuttered almost immediately, while businesses whose products offered solutions to the challenges saw their stocks soar.

It is hard to predict what lies ahead, so owning a diverse portfolio that isn’t tied to the fate of any one sector or country is more important than ever. A mixture of large and small cap, international, and fixed income investments as well as some cash may also help lessen the overall risk in your portfolio.

Check out our Bowen Reports piece on diversification: https://bowenasset.com/mix-it-up-diversification-in-investing/

Balance Risk and Return

While market fluctuations create value over time, you should make sure that the amount of volatility you are exposed to is aligned with your personal risk tolerance and the timeline you have established for your personal goals.

Try to achieve a balance between the level of return an investment provides and the amount of risk exposure you are willing to accept. At the beginning of 2020, many investors thought they could stomach a 15%-to-20% drop in the markets; but once the stock market plummeted in March, they soon realized they couldn’t.

A steep drop in portfolio value, such as in March 2020 when the S&P 500 dropped 34%, can take some time to recover even when the market quickly rebounds. This slow recovery occurs because recouping market losses requires a disproportionately higher percentage gain to return to a break-even point. For example, suppose an investment lost 20% of $100. The new value would be $80. A subsequent gain of 20% would only bring you back to a value of $96, not the $100 you started with. To get back to $100, you would require a gain of 25% to break even.

Resist the Urge to Time the Market

While all bear markets are inherently different, the common characteristic is that they always end. The tumultuous market in 2020 reinforced the importance of staying invested.

Many investors panicked during the pandemic, sold their stock, and, fearing the worst, went to cash. Since then, the markets have rallied, and anyone who tried to time the market with a more conservative path is probably feeling a bit of regret because the market bounced back up like a rubber ball. Because timing the market is nearly impossible, the best strategy for most of us is not to try to it at all.

Long term, it’s almost always better to invest in stocks—even at the worst time each year—than not to invest at all.

Have “The Conversation”

If you haven’t already done so, now is the time to have the conversation with spouses, loved ones, and/or designated caretakers to set them up for a smooth and successful transition when mental decline, illness, or death call for them to step in.

Listen to their concerns. Make sure they know all the little things are taken care of as well as the big issues. Start keeping lists of all the things that could help if they need to take over your responsibilities. Sit down and record the names and phone numbers of the first people to call and note how they could help. Record the website addresses and login credentials of the sites used for planning and the locations of copies of wills, tax returns, insurance policies, and other important documents. Your caretakers might know about these sites and documents, but could they find and access them?

This kind of scavenger hunt—looking for legal documents, bank accounts, insurance policies, credit cards, online accounts, and the like—is very difficult for a person who is grieving or dealing with a multitude of caregiving issues. You should take the necessary steps now, before the next potential crisis arrives, to get your records together.

Check your beneficiary designations for any updates or changes. A life insurance policy, a 401(k) pension, 403(b) annuity, or IRA is a legal contract, and the money will go to the named beneficiary whether or not you have a will.

The Center of Retirement Research at Boston College found that from 1996 to 2018, there was a 12.5% drop in the percentage of heads of households over 70 years old who also had a will prepared—from 72% to 63%. During the same period, the share of heads of households aged 50 or older fell an even steeper 26 percentage points, from 60% to 44%.

Check out our piece on how to help your helpers: https://bowenasset.com/when-life-goes-sideways-be-prepared-to-help-your-helpers/

Conclusion: Be Prepared

Unexpected events will always be a part of life. By building up our emergency savings, living within our means, knowing our risk profile, and diversifying our income, we can better protect ourselves against whatever curveballs life throws.

Whatever impact the pandemic has had on you personally, it’s wise to reach out to a financial professional regarding your financial future. A financial adviser can help determine your retirement contributions, develop a plan in the event you lose your job, reevaluate your investment strategy, and so much more. Being prepared can make it easier to deal with whatever lies ahead.