What has Covid-19 taught us about personal finance?

During this difficult time from Jan onward in 2020, we have seen significant changes to the entire global economy as well as individual and personal impact a whole due to the Covid-19 virus.

Covid-19 Details here – https://en.wikipedia.org/wiki/Coronavirus_disease_2019

Note: This article will predominately focus on the financial impact of Covid-19. However, we are in no way minimizing the seriousness of this virus and the significant health implications throughout the world. For those affected by the virus either directly or indirectly, we wish you and your family healing and better days ahead.

Throughout the beginning of 2020, we have seen some serious economic effects throughout the world due to the virus – On a global or individual national basis we have seen significant impact to individual economies, corporate businesses and even individual household personal finances.

Government Stimulus Overview

We won’t go into extreme detail here about the national, international impact, but we need to highlight some of these large incentive plans that are being launched throughout the world…See the following examples:

If we look at other countries throughout the world, we can see that they are spending large percentages of their GDP (Gross Domestic Product) and may include: significant national debt increases, reduced tax income and other potentially unforeseen future problems due to this extensive spending.

infographic/#3ef1bc8fca52https://www.forbes.com/sites/niallmccarthy/2020/05/11/how-global-coronavirus-stimulus-packages-compare-infographic/#3ef1bc8fca52

Personal Finance Impact

Now that we’ve highlighted the large stimulus that is being launched by national governments around the world, let’s bring the focus a little closer and see the impact on individual families finances. Again, we are not here to highlight the significant economic challenges brought on by job loss and reduced income, rather we are looking to see if we can learn some lessons to allow us to move forward in a stronger manner in order to make our finances more resilient for any future struggles or unforeseen circumstances that may arise.

5 Lessons Learned – Hindsight is/in 2020

(#1) Job stability is uncertain – With higher and higher unemployment numbers affecting countries around the world, it is certainly a scary situation for most individuals and families. Specifically in the US labour market, the unemployment numbers have continued to fall on a weekly basis but still have reached 40M people; one of the highest at any time in recent history. Certain industries are hit harder then others due to the overall shutdown of most economies. Specific examples of those sectors hardest hit by the shutdown and social distancing include retail, restaurants, bars, theatres and concerts. The bright spot in the midst of this crisis is we are observing people using the stimulus money provided by governments to re-educate themselves and look for different career paths.

(#2) Cash or Saving Money was recently uncool – As recently as 2019, due to the huge stock market gains and readily accessible credit and loans, actually saving cash was thought to be almost foolish. Even more, from the year 2013 to 2018, US consumer spending was on a huge rise and people were focused on conspicuous consumption of retail goods, homes and vehicles. Moreover, with interest rates falling, the incentive to save cash in the bank was even diminished further.

(#3) Stock Market Gains are not Guaranteed – If we refer to our last point, another argument was “Why keep your savings in cash when you can toss these funds into the market and make a significant return of 25% or more?”. Well, through hindsight, we now saw immediately in 2020, straight on the heels of a these massive market gains in 2019, the stock markets experienced it’s worst Q1 quarterly performance in 124 years. We know know this is due to the Covid-19 crisis and closing down the entire world for a number of months.

(#4) “Cheap borrowing” fuels personal financial instability – If we look back at the last 18-24 months, we see that interest rate declines and relative stability at low levels of borrowing cost drove the housing markets and personal consumption levels to new highs in 2019. This was the clear sentiment over the past few years when borrowing got out of control; specifically regarding auto or car loans. Based on the linked article, it states “People buying a new vehicle continue pushing the envelope, borrowing more and, on average, paying more each month for their auto loan.” Now in 2020, with job losses and wage reduction, “pushing the envelope” of borrowing causes unneeded stress in an already difficult situation.

(#5) Personal income should not be our goal – If we look into our societal standards, we see there is a huge focus on large incomes and how much people make for their jobs. While this is not in itself a bad thing, it also misplaces the focus of personal finance – Rather than focusing on a large income (and typically the spending associated with it), we should be focused on a balanced lifestyle of spend, save and invest. If we take any of these facets out of context, we will see immediately that our quality of life will suffer. Over-spending, causes financial instability as we mentioned earlier. Over-saving, causes frustration with living in the current world, not having money to enjoy even simple and inexpensive luxuries like coffee, books, concerts, movies or video games. Finally, over-investing puts our current lifestyle on hold as we wait for the inevitable “better tomorrow” but as we all know now – 2020 looked great in 2019 but not so great in reality.

Conclusion

If we summarize this article, we see that there are some key aspects to our lives that can be identified as a focus area in order to provide additional resiliency for these type of situations.

Job Stability – If you have an uncertain job or work in a high turnover industry, please start or increase your emergency fund – Set aside a finite amount of cash that will assist you through the few months or however long it may take to recover.

Cash Saving – As we mentioned in point 1, saving cash is needed for increased job stability and recovery. However, saving cash is also handy if you have a stable job and are just going about your daily life – With cash in hand, you can react to situations quickly – Like making a decision to purchase something that you have always wanted without the instability caused by borrowing; perhaps even on sale. Cash savings can also be used to manage risks for upcoming repairs, like housing or cars – Separate funds can be made for each of these items.

Stock Market Gains – Relying on the stock market to always go up (it does typically over the long term, but not every year) will get many of us into trouble. Therefore, ensure you have taken item 1 & 2 into account as well – Have some cash ready for job stability, purchases or maintenance of homes or cars. If you have money left over after these items – Feel free to invest these funds.

Cheap Borrowing – Relying on credit and borrowing to fund your lifestyle is an expensive and stressful endeavor – It adds uncertainty into your life and make you accountable to the debt holder. Working through a job loss or downsize (which itself is difficult) it can be magnified if two cars are financed, maxed out credit cards, a huge mortgage and furniture loans are all due as well. Consider your future self before you sign up to borrow money.

Personal Income – Focus your efforts at finding a balance between income, saving and investing. This way you can live today in peace (with minimal debt), have money to purchase items you want or need and have enough invested to help you through in the future and hopefully retire with wealth.

Thank you for reading – Stay safe and Healthy,

The PFE Lab Manager

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