Last week marked one year since the Dow Jones experienced its worst 1-day decline in history (a drop of nearly 13%). I remember that week last year and the pit in my stomach as I watched the markets move so quickly in reaction to the news of the spread of Covid-19 and an economic shutdown. Although, I was confident in our long-term investment plan, those fluctuations were difficult to watch. Here we are a year later, and the Dow is reaching all time highs. Thankfully, it has been a quick recovery and the expectations for our economic growth continue to improve. With a bright outlook ahead, it seems like a good time to review what financial lessons have been learned from living through a pandemic.
Events that define generations
I was listening to a podcast recently and the question was asked: “What money habits will the younger people of this generation take away from living through a pandemic?” Over the last 100 years it has been interesting to see how major events have had an impact on the lifestyle and spending characteristics of entire age groups.
The most common generational stereotype when it comes to money is for those we call “The Greatest Generation.” Those who were impressionable during The Great Depression and have been characterized as frugal and good savers throughout their lives.
Another common stereotype is that of the Baby Boomer generation. Although this generation is larger and more diversified in their choices, those of the Baby Boomers who were impressionable during the 80’s experienced a boom in the economy and technology. Because of their environment, the Baby Boomer generation is typically stereotyped as hard-working, independent, competitive, and materialistic.
Of course, these are stereotypes, and they don’t apply to each individual. However, shared experiences can have an affect on our future choices. Here are a few financial lessons that this generation may take away from the last year.
You need an emergency fund
Last year, many people were furloughed or laid off without an answer of when they would be back to work. Others were forced to shut down their business or run at low capacity and may still not be back to where they were. In these situations, being dependent on government stimulus or support is painful. Even for those who did not have their income affected were forced to evaluate what threats they might face. In these situations, we saw that the average amount of savings was typically inadequate.
We often recommend having enough savings to cover 3 – 6 months of our cost of living. However, there are so many things that can get in the way of us maintaining our savings. Big lifestyle expenses come up that tempt us to drain our emergency fund like vacations or buying a house. Or we may be carrying debt and feel like we need to pay that off first before putting some money into savings. Here are some guidelines to follow:
Set a goal to have at least 3 months of living expenses
If your job is more volatile, err on the side of more savings.
Always pay yourself first. Set aside something in savings even if you are paying off debt
Cover your risks
People often put off tough conversations until they are forced to have them. When we are faced with a real threat to our health or our life, we often ask ourselves if everything is in order. A key part of financial planning is risk management. It is essential to have the right insurances to take care of your financial needs if you are not able to. Here are some key areas to evaluate to make sure your risks are covered:
Medical insurance
Disability Income insurance
Life insurance
Estate Planning: Medical directives, Wills and Trusts
How much does it cost to live?
The work from home movement is pushing changes in the housing markets. People are migrating from the cities. Home prices are shooting up around the country and the old rules have to be re-evaluated.
I typically recommend that housing costs should be budgeted to be at or under 35% of net income. This rule of thumb is really about creating a balanced lifestyle budget. If housing is kept to 35% of income, then it is easier to maintain your essential living expenses at about 50% of your income. This leaves the other 50% for savings for the future and lifestyle spending. Lifestyle spending includes entertainment, dining out, travel, shopping, etc.
Ultimately these ratios have to be negotiated for each family’s goals. With housing costs going up, it may be extremely difficult for a family to maintain housing costs at 35% of income. If this is the case, then there has to be a tradeoff in other lifestyle choices. Many of us are seeing that an increase in housing costs is being offset by less spending on going out and travel. It will be interesting to see how this trend extends in the future.
Don’t stop investing
Last year was a great reminder that the markets move quickly and if you are always waiting for the right time to invest, then you can lose valuable time. The chart below shows the effect that being out of the market has on long-term returns and we all know that if we would have pulled out of the market on the news of the pandemic, it would have been a mistake.
There has never been a time with easier access to investing. Investors can often build a diversified portfolio with minimums as low as $25. Most investment platforms now offer $0 trading fees, low-cost funds, and the ability to buy fractional shares of investments. It is always important to follow sound investing principles and consider risk versus return characteristics when choosing investments and the key lesson from last year is to remember that time in the market is important.
Looking ahead
Some say that this generation has been taught that the government will bail you out. With unemployment subsidies and stimulus checks, the financial lessons will be that risk is limited and there is always a safety net. I guess we will have to wait and see.
I tend to think that there are other lessons that have been learned. I think this generation is resilient. In a recent study* by Fidelity 80% of respondents said that they have learned that they can handle more than they previously realized. 77% said that they view life’s challenges with a different perspective, and 66% said they have strengthened connections with family and friends. My hope is that this event brings some positive financial growth. Hopefully more people take an active approach to their financial future and this generation is characterized by overcoming challenges quickly.
*About the Fidelity Investments Moving Forward study: This study presents findings from a nationwide survey of 1,000 U.S. adults ages 18+ who have ever experienced a listed life event. This survey was fielded in August 2020 by Engine Insights, an independent research firm not affiliated with Fidelity Investments. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.