The drastic economic impacts of COVID-19, and ensuing quarantine, spurred many of us to form some new habits. While quarantine snacking and Netflix binging are habits you may need to curtail, you may have developed some habits that are worth keeping. In this blog post, we want to cover 3 financial habits you may have developed during the pandemic and reasons to keep them.
Cutting back on spending: A recent study by Bankrate showed that 52% of Americans said they were cutting their spending during the height of the pandemic due to concerns about the economy or stock market. As we all know, many restaurants, bars, and stores were completely shut down for weeks, if not months, while the country dealt with the COVID-19 pandemic. The uncertainty forced consumers to curtail spending on nonessential items during these months.
The COVID-19 pandemic has not only curtailed some consumer spending, it has also helped some consumers focus on paying down their debts. In a recent study done by WalletHub, Americans began the year owing more than $1 trillion in credit card debt! In 2019 alone, credit card debt increased by $76.7 billion. This trend reversed in 2020 amid the pandemic, and credit card balances dropped by more than $118 billion so far this year. Some of this credit card paydown may be related to added stimulus and unemployment benefits; however, there is clear evidence consumers are starting to pay more attention to their spending habits and debt.
So, what do all these studies mean? The key takeaway should not necessarily be to curtail all spending or focus solely on paying down debt. However, the lesson should be to strike the right balance between living for today and planning for tomorrow. You can do this by having a cash flow plan that can help you enjoy yourself today while also helping you reach your other goals such as reducing debt and saving for your future.
Sticking with your portfolio: As we have written about in countless blog posts during the market sell-off in March, investors who stick with their portfolios during the market downturns are often rewarded in the end versus those who sell out in order to “wait for the market to settle down”. Perhaps you were listening to us back in March. The Bankrate study mentioned above also showed that 66% of those with retirement or investment accounts intentionally did not touch their investments.
While not selling out during market gyrations is a great habit to keep, not chasing returns or the “next hot stock” is also part of sticking with your portfolio. One of the bad financial habits we have seen investors develop during the pandemic is “day trading”. As this article points out, the number of new accounts that retail investors have opened on platforms such as Robinhood and E*Trade have ballooned during the pandemic. Investors have been scooping up high flying tech stocks in a similar fashion to what happened in the late ‘90s, and we all know how that ended.
Working with a financial advisor not only can help you stay invested during tough times but also can help keep you from chasing investment trends and fads that could end up inhibiting your ability to achieve your long term goals. A good financial advisor will help you understand the risks you are facing in your portfolio and how to prepare for those risks, both mentally and financially.
Building your emergency fund: Americans are realizing the importance of building an emergency fund like never before. As we wrote about at the onset of the pandemic, we suggest having 3 to 6 months of expenses set aside in an “emergency fund”. However, this is just a rule of thumb. How much you need to set aside will depend on your individual circumstances. Factors such as your overall financial situation, number of earners in the household, and the stability of your income are all considerations. Having extra cash outside of your investment portfolio can help you meet life’s unexpected surprises, regardless of how the financial markets are behaving.
The COVID-19 pandemic caught many Americans off guard and changed many of our financial habits. Some for the good and some for the bad. With therapeutic treatments and vaccines in process, the COVID-19 pandemic will hopefully be short-lived. However, you should ensure that these 3 financial habits are here to stay. If you would like more information on how you can leverage these financial habits, please contact us today!