10 Money Lessons from the Pandemic
With a steady vaccine rollout (in the U.S. at least), declining COVID deaths, and warmer weather, the world appears much more hopeful than it did last year at this time. And while we all probably wish we could wipe our memories of the pandemic using the Men in Black Neuralyzer, there are some valuable money lessons we can take away from this past year.
If you're going to forget something from the pandemic, let it be the failed sourdough loaves and NOT the 10 money lessons we learned from this past year (and Tiger King…let's never forget Tiger King).
#1 - Things rarely go as planned
Unless you had access to a time-traveling DeLorean, you probably did not anticipate the past year unfolding the way it did. Most of us probably had trips lined up, weddings to attend, and maybe even plans to start a business. Sadly, those events didn't go as planned. This is a humbling lesson when it comes to financial planning. We could develop the perfect plan, only for it to quickly go out the window. It's not ideal, but that's part of planning, understanding that it may not go according to plan. Anytime you're developing a plan, financial or otherwise, learning to be comfortable with uncertainty is a valuable skill. Developing this mentality, even when times are good, can make adapting to the unexpected just a little bit more manageable.
#2 - Emergency funds exist for a reason
"Establish an emergency fund" is probably one of the most common pieces of financial advice, so much so that even I get tired of hearing it as a financial planner. However, I still tell all of my clients to maintain 3-6 months of living expenses in cash. Because, as we've seen, you never know what might happen that disrupts your income. Even though it seems like a brighter future is ahead of us, do NOT forget how many people lost their source of income for months. Start planning for the unexpected today by accumulating a few month’s worth of living expenses.
#3 - Timing the market is futile
I remember sitting on a phone call with a client at the end of February (in the old school days when it was still being referred to as the Coronavirus). He asked what I thought about all the virus speculation. At that point, we didn't know what it was so that's what I told him. I said, "The stock market is currently reflecting the collective available information about the virus, and will continue to do so." A few weeks later we saw one of the worst stock market crashes in history.
To everyone's surprise, one year later, when the economy has still not fully been reopened, the market is at an all-time high. Not a single investment or economic expert predicted that the market would recover as fast as it did, yet here we are. If you would have moved to cash in mid-march to wait out the pandemic (like many people did), you would have lost a fortune. All that is to say, you cannot time the market. Invest for the long-term. Set your target asset allocation (based on your goals and risk tolerance) and let it ride. And don't get so confident in the stock market that you put your short-term cash needs in the stock market to get a little "boost". Because as we've seen, the stock market could tank at any time, for any reason (or for no reason at all).
#4 - Investment risk tolerance
Related to the point above, we also learned our true investment risk tolerance. Do you remember how it felt when the S&P 500 dropped 12% in a single day on March 16, 2020? Did that day and the following weeks make you consider selling everything and moving to cash until the pandemic is over? This volatility tested a lot of people. A lot of people who thought they could handle a market crash found it was much more difficult to maintain a disciplined, patient investment approach when they saw the balance in their accounts drop substantially overnight. It hurts differently when it is no longer hypothetical. You can learn more about risk tolerance in an earlier article I wrote on "How much investment risk should I take?"
#5 - What is “essential”?
With the uncertainty of income, you probably had to determine what was "truly" essential in your life. A lot of people were forced to budget and track expenses, because not doing so could mean not being able to pay bills. This meant evaluating what was actually needed versus what was a luxury. It meant not taking on unnecessary debt, cutting back on travel, and dining out less.
Beyond the monetary essentials, we also learned that those luxuries aren't what makes life meaningful; rather, it's quality time with loved ones that bring a deeper sense of joy, fulfillment, and peace. For some of us, the pre-pandemic schedule was filled with non-stop activities that didn't necessarily enhance relationships. The pandemic gave us an opportunity to be grateful for our health and our relationships (which is ultimately more "essential" than money).
#6 - Diversifying income streams may be necessary
Not knowing how your primary source of income could change can be really scary. And for most people, their primary source of income is their only source of income. So when the pandemic hit, a lot of people started to search for a new means of making money. I've heard of so many people starting a new business or side hustle over the past month. People have been forced to adapt to a world where a salary is not guaranteed. This brought out the entrepreneurial spirit in a lot of people, and I anticipate that even when the dust settles, many will continue to look for ways to diversify their income, as to insulate themselves from the risk of one of those income streams being unexpectedly impacted.
#7 - Life insurance & estate planning are worth it
It's unfortunate that it took a pandemic for many to realize the importance of planning for an unexpected death. Life insurance and estate planning are often glossed over, especially by younger people, because they never anticipate anything like that happening to them anytime soon. Everything assumes they're safe. But sadly, every one of us has the risk of dying tomorrow, as morbid as that sounds. And while we can't absolutely avoid that risk, we can mitigate the impact of those events on friends and family. Depending on the situation, dying without life insurance or estate documents can place undue stress on surviving family members during an already devastating time. Having risk measures in place can reduce that burden. While we hope we never have to utilize it, we plan for the worst. Because sometimes, the worst just might happen, as we saw this year.
#8 - Scammers will take advantage of every situation
Scammers capitalize on fear, and in 2020, there was a lot of fear. So naturally, scammers took advantage of that. Since January 1, 2020, there have been 260,130 fraud reports totaling $407.3M in losses (as of the time of this writing), specifically pertaining to COVID. Many of these scams revolve around online shopping, travel, diet products, stimulus checks, and IRS filings. These will likely continue as scammers get more sophisticated with their techniques. Just remember, the IRS (or any government entity) will never call you out of the blue asking for personal information. And they will definitely never tell you to pay via a money gram or gift card. If you suspect something is off, hang up the phone and do some investigating. Don't give in during a moment of panic--that's how they get you.
#9 - Your financial advisor can be virtual
This past year required almost every business to adapt to a virtual setting. Fortunately, I've been doing virtual meetings long before COVID, but now the rest of the world has seen that it can actually work, even with your financial advisor! Yes, there is a level of comfort that comes from meeting someone in person, but finding and working with an advisor who works 100% virtually is absolutely possible and effective! There are several clients I work with whom I've never met in person. And we have a great relationship! Plus, they don't have to get dressed up and fight through traffic to get to my office. While I love meeting people in person, this year showed us that professional relationships can thrive in a virtual setting. Meaning, you're not just limited to advisors in your area. You can find the right fit for you, regardless of where he/she is located!
#10 - The best investment is in your health
Finally, in the year of a public health crisis, we learned that one of the best investments you can make is in your health. As the CDC recently reported, nearly 78% of people who were hospitalized for COVID were overweight or obese. Being intentional about getting adequate sleep, exercising regularly, spending time outdoors, eating unprocessed whole foods, and laughing with loved ones will not only make you feel better every day, but it will also increase your healthspan (quality of life over time) and reduce the risk of illness due to a robust immune system. Additionally, the more you take care of yourself today, the less you’ll have to spend on medical expenses down the road. More importantly, a healthy lifestyle provides you with the opportunity to continue engaging in the activities you love with the people you love.
So in a world that is obsessed with investing in the latest cryptocurrency or NFT, don’t forget to invest in your own health!