How will COVID-19 change personal finance?

by Hanna Horvath
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How will COVID-19 change personal finance?

The COVID-19 crisis has changed everyday life as we know it. Millions of workers are newly unemployed and many are struggling to pay their rent or mortgage.

The US consumer sentiment index from the University of Michigan has dropped 30 points since January, the lowest rating since 2011. The index monitors how consumers view their own financial situation and how they view prospects for the general economy over the near term and long term.

“Everyone is scared to death. We have become Great Depression babies psychologically,” said Laurence Kotlikoff, a professor of economics at Boston University. “Our entire financial behavior has changed over night.”

COVID-19 is already changing the way we consider and manage our personal finances. But how will it affect our long-term financial attitudes? We asked experts for their predictions.

We’ll downsize our budgets

Americans are already spending less by not commuting or eating out. When the crisis eventually passes, Americans will likely be even less inclined to spend, said Andy Tapparo, president of Tapparo Capital Management, a financial advisory and wealth management firm.

Consumers may critically reconsider their budgets, or avoid nonessential expenses altogether. This could include streaming services or pricey memberships. The same goes for larger purchases, like buying a new car or home. Kotlikoff believes people who would have bought homes may shy away, or lower their price range.

“They are going to try and downsize, live with their parents or get roommates,” he said. “They’ll be worried about overextending themselves.”

Bottom line: If you haven’t already, create a budget to track where your money is going. We have a downloadable budgeting spreadsheet here.

We’ll hoard cash

Nearly three in 10 American adults have no emergency savings, and only 18% say they could live off their savings for at least six months, according to a recent Bankrate survey. But the coronavirus crisis has revealed how swiftly financial emergencies can happen, and how important savings can be.

Coming out of the crisis, Americans will be hyper-focused on saving, said Scott Stratton, a financial planner and founder of Good Life Wealth Management. Three to six months of emergency expenses may no longer be enough for some families.

“It’s going to be hard to convince people that a pandemic won’t happen again, that the virus won’t come back in a year,” said Kotlikoff. “People will hoard cash to protect themselves.”

Bottom line: Emergency funds should be a priority coming out of the crisis. Here’s how to rebuild yours.

We’ll invest cautiously

Fears about the extent and duration of the crisis have roiled the stock market. Years of gains have been wiped out, and the country is well on the way to a recession. Investors will likely come out of the crisis with a much lower appetite for risk, said Stratton.

Viral outbreaks and other disasters often create uncertainty. When investors can’t predict the full impact of a disaster, they often sell off riskier assets like stocks.

“People are losing their income and jobs and seeing their portfolios tank at the same time. They are going to prioritize cash,” Stratton said.

Bottom line: While the market may be a rollercoaster for the time being, the best course of action is to keep calm and carry on. Check out our investing advice here.

We’ll be less likely to start businesses

Most small businesses have shut their doors in response to the pandemic, and their financial futures seem uncertain. While the federal government has offered billions in loans via the Paycheck Protection Program, nearly 7.5 million small businesses are at risk of closing permanently over the next five months, according to a recent survey by Main Street America.

“It’s going to destroy them,” said Gina Harman, CEO of the U.S. network of Accion, a nonprofit small business lender. “Many small businesses have been unable to access the loans, and many will fold. There’s also a mix of entrepreneurs who have recently started companies that will be unable to find funding or pivot to meet the crisis.”

Budding entrepreneurs may shy away from taking the leap to start their own company, as it may become more difficult to find funding.

“Most entrepreneurs start their funding with loans from friends and family,” she said. “That may not be possible anymore.”

Bottom line: Entrepreneurial stress is real, especially when times are uncertain. Check out these money tips for entrepreneurs, from entrepreneurs.

We’ll work longer

“A sizable chunk of the workforce will work a bit longer, either to give themselves more of a cushion come retirement or make up the ground that they’ve lost,” said John Scott, director of retirement savings for Pew Charitable Trusts.

Those who recently lost their job as a result of the pandemic may fall behind in their retirement savings. The shortfall could worsen if they tap retirement funds to cover current expenses. Those that are still working may see their retirement contributions shrink as some employers slash their 401(k) matches.

“The question is, are people able to get back on track? This is going to have an effect on people’s retirement preparation,” said Scott.

Bottom line: If you’re worried that you aren’t saving enough for retirement, you aren’t alone. Here’s how to catch up.

How to adjust

Black swan events often leave you rethinking financial goals. And while you can't control the markets, you can control how you react to it.

"What’s really going to go to the forefront after this is over is planning," said Tapporo. "I tell my clients to focus on their goals, not what's going on around them."

For example, consider actionable goals like shoring up your retirement funds, saving more emergency cash or change your investment strategy to better survive market downturns. Think of a goal that's specific to your financial sitution and set a reasonable timeline to achieve it.

Setting measurable, attainable goals is the key to reaching financial resolutions. We've got a guide to get you there.

Image: Nastia Kobzarenko