Life was turned upside down for practically everyone in March 2020. As states locked down in response to the COVID-19 pandemic, the stock market plummeted, jobs were disrupted and income dried up for many families.
“The pandemic was really a reality check for probably tens of millions of people,” says Peter C. Earle, an economist at the American Institute for Economic Research.
As life returns to normal in much of the country, financial experts say there are the key lessons for Americans to take away from the past two years:
— You need an emergency fund.
— Retirees need money set aside for market upheaval.
— It’s easier to ride out an emergency if you’re debt free.
— We don’t need to spend so much.
— You can’t time the market.
— Having a financial plan provides peace of mind.
— Expect the unexpected.
You Need an Emergency Fund
Having an emergency fund has long been considered one of the cornerstones of sound finances. When unemployment hit double-digits early in the pandemic, those with money in the bank were prepared to continue paying their bills even after their paychecks stopped arriving.
Conventional wisdom says to keep enough in savings to cover expenses for three to six months, but given the extended nature of the pandemic, some are rethinking that amount. “I’ve seen people shifting to 12 to 24 months (of cash reserves),” says Beau Henderson, CEO of Georgia-based RichLife Advisors.
How much you keep in your emergency fund may depend on the stability of your current job. “If you have a variable income, maybe you want to have more of a cushion,” says Mike Torney, a certified financial planner and senior advisor with the Moneta Group in St. Louis, Missouri.
[Prepare for the Unknown With an Emergency Fund]
Retirees Need Money Set Aside for Market Upheaval
A full market cycle — that is, the time it takes to go from the peak in one bull market to the peak in a second one after a bear market — can take up to 10 years, according to Henderson. That means younger investors have plenty of time to recoup any losses after a stock market dip, but retirees don’t have that luxury.
Known as sequence of returns risk, the danger for retirees is that withdrawals taken out of investment funds during a down market could mean a permanent — and significant — reduction in the money they have available for the remainder of retirement. To avoid this risk, retirees should have a sufficient amount set aside in cash reserves to ride out a bear market. They can also minimize risk by ensuring their portfolio is properly allocated.
“Oftentimes, folks invest their portfolio with the goal of a certain performance level,” says Keith Barberis, certified financial planner with Barberis Wealth Management of Steward Partners in Bethesda, Maryland. Rather than focusing on performance, they should consider what level of risk is appropriate for their stage of life and financial goals.
It’s Easier to Ride Out an Emergency If You’re Debt Free
“A lot of people were facing a pretty adverse credit event at the start of the pandemic,” Earle says.
Those who were out of work faced the prospect of not being able to pay their bills. Fortunately for them, the government stepped in with a variety of initiatives such as stimulus payments and a pause on student loan payments, but, Earle notes, “That’s not a foregone conclusion in the future.”
Paying down debt and reducing your monthly obligations can make it easier to weather the next financial storm — whether that be a period of high inflation or a personal job loss.
[READ: How the Pandemic Hurt (and Helped) Women Financially.]
We Don’t Need to Spend So Much
The personal savings rate exceeded 33% in April 2020 as people stayed home and stopped spending during government lockdowns.
“I don’t think people realized how much of their income was discretionary,” Torney says.
If there is one thing the pandemic has taught us, it’s that we can make do with less. “We all learned how to stretch a dollar,” Earle says.
You Can’t Time the Market
It’s hard to predict when the stock market will take a turn, and if you pull money out to avoid losses, you could miss out when there is a rebound.
Missing those rebound days could mean a sizable difference in your portfolio. According to a J.P. Morgan Asset Management analysis, investing $10,000 and missing the 10 best days in the market could mean the difference between having $61,685 or $28,260 after a 20-year period.
“Markets are moving faster than ever,” says D. Tyler Vernon, regional director and partner at Merit Financial Advisors in Boca Raton, Florida. He notes that the market recovery in 2020 was one of the quickest recoveries in history, and no one knows when the market is going to turn next. “You don’t realize the next event is coming until you’re in it,” he says.
[Financial Health Plummets During Pandemic for Millennials, Gen Z]
Having a Financial Plan Provides Peace of Mind
The pandemic has also reinforced the need for people to have a financial plan that spells out their investment strategy. “It’s far too common that when people don’t have a plan in place, they tend to panic,” Barberis says.
“Panic can destroy a long-term financial strategy,” Vernon explains. It may mean making emotional decisions that have far-reaching implications.
For instance, the J.P. Morgan Asset Management analysis notes that the second worst day of 2020 was followed by the second best day of the year. Someone who panicked and pulled their money out of the market when it crashed would have missed recouping some of those losses on the next day.
Expect the Unexpected
A final takeaway from the pandemic is that it can be hard to predict when or how finances will be disrupted.
“The plan might not go according to plan,” Henderson says. That means people should avoid being too rigid. “Let’s make sure we have a plan with a lot of flexibility and contingencies.”
If there is a silver lining to the past two years, Earle says it’s this: “We have a remarkably stable economy here.” While people may endure financial hardship, the economic situation in the U.S. has never been as dire as what may be found elsewhere in world.
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7 Top Money Lessons From the Pandemic originally appeared on usnews.com
Update 06/28/22: This story was published at an earlier date and has been updated with new information.
