Each time we left our homes during the coronavirus pandemic, we were intensely aware of the health risks at stake. But when it comes to money, we’ve been taking calculated risks all along.
The last year forced many to reconsider how they approach risk taking, respond in times of unpredictability and protect themselves and their loved ones. These wide-ranging effects of the pandemic put a spotlight on the personal finances of individuals and families, as those with thoughtfully balanced portfolios, strong saving habits and high-demand careers fared best.
As the nation begins to recover, this period of transition presents an opportunity for families to reflect on the ways their financial plans succeeded and fell short when tested by an economic shock wave.
Review Your Financial Plan and Evaluate Risks
To prepare for future economic ups and downs, first understand how your existing financial plan weathered the storm this past year. For those without a clear financial plan, it’s time to create one for the future.
“Part of having a plan is understanding things do inevitably go wrong. It’s not a plan if you don’t have buffers built into it already,” says Brian O’Leary, wealth advisor and senior analyst at ALINE Wealth in Long Island. “Step one is understanding where you are and how you survived this pandemic, reviewing what tools you leaned on.”
This process might include reflecting on how your personal savings held up over the last year, O’Leary says, and if your existing emergency fund wasn’t enough to cover expenses, setting a new target savings rate going forward.
On the other hand, those with financial and career situations that served them well during the pandemic shouldn’t fall into a trap of overconfidence.
“People experienced the pandemic in very different ways. Many had severe income disruptions while some benefited financially throughout the course of the pandemic and didn’t have that disruption,” O’Leary says. “For those that didn’t experience a disruption, if they could simulate what it would have been like if they actually did, that will go a long way for testing your preparedness for the next time there is a disruption to the markets.”
Prepare an Emergency Fund
The suddenness of the pandemic’s hit in 2020 should be a lesson in the importance of saving. Creating an emergency fund should be the first step for those aiming to build a secure foundation.
“Because of the financial strains due to COVID-19, it can feel overwhelming to try to put away money now, but it will provide peace of mind in the future,” Anne Marie Ferdinando, member outreach manager at Navy Federal Credit Union, wrote in an email. To get started, she says, “Open a new savings account designated as an emergency fund. It’ll be separate, so you don’t have to think about touching it unless absolutely necessary. Part of your budget should include setting money aside into that emergency fund. As little as $10 per month could be helpful as you look to plan for the future.”
Manage Personal Cash Flow
Some consumers were saving at a high rate during the pandemic, but continuing those habits will be key to preparing for future unexpected disruptions.
“We’re excited to get back out and enjoy the things we haven’t been able to enjoy: hospitality, going out and dining, leisure activities, travel. But how does that impact your debt level as a consumer?” says Elisabeth Job Kozack, managing director and co-head of consumer lending at Goldman Sachs. “Set budgets for yourself and plan for what you spend such that you don’t get into a position that you’ve worked hard over the last year to avoid.”
To save effectively, Kozack says consumers are gravitating toward alternative ways to save, such as high-yield savings accounts and CDs over traditional banks. Individuals and families can also work to keep fixed expenses as low as possible, O’Leary says, to save more and allow for more flexibility during a future disruption.
Thoughtfully Consider Investment Diversification
During the pandemic, some of those risks may have paid off and created a false sense of confidence in one’s investing prowess, O’Leary says, while other thoughtful and promising risks may have failed without warning.
“Risk has to be considered, considered again, and reconsidered as our lives evolve and as the markets evolve. It is so personal. It’s not just determined by one’s age, it’s not just determined by one’s personal nature. It’s also relative to the time horizon on their individual goals,” he says. But ultimately, “the greatest risk we can take is not investing over the long term because of the impact inflation can have on our assets.”
And while it’s certainly a good time to reflect and create financial safeguards, O’Leary says it’s also OK to go at your own pace.
“Show some compassion to yourself if you are in a tough place,” he says. “Be realistic about where you are and choose one or two things to improve your situation eventually. We’ve been through a lot, so beating ourselves up is not a healthy process as we go through this recovery”
Review Your Financial Plan and Evaluate RisksPrevious