2020 has taken us on a ride of the unexpected and unpredictable… From a global pandemic, mandated quarantines, and market volatility to a presidential election with record voter turnout, this year continues to shine a light on what we have typically taken for granted. A major part of the conversation surrounding the events of 2020 is how it affected us financially. An all-time high for jobless claims in the United States led to economic challenges only comparable to the Great Depression and Great Recession.
With so many struggling, people have been forced to adjust their approach to their personal finances including spending, saving, and investing.
Lifestyle creep is when your discretionary income increases and you start perceiving your wants as needs because your standard of living goes up. Usually this happens when either you get a raise or your fixed costs decrease, leaving extra money available for spending, and can result in your decision-making habits becoming misaligned with your financial situation. Lifestyle creep can affect people at any level of income, as no one is immune to overspending.
The easiest way to combat the urge to spend instead of save excess discretionary income is to set a budget and stick to it no matter how much your income increases. Taking the time to decide what you really need as opposed to what you can afford is an important step to solidifying your financial future. When you have excess cash flow, strive to increase your savings before spending it by doing things such as building up your emergency fund or maxing out your contribution to your retirement account. Of course, it’s good to treat yourself, but not to the detriment of your savings and especially not so much that it lands you in debt.
Living within your means is one of the best ways to protect yourself from times of significant financial uncertainty like losing your job and strengthen your personal finances. Budgets don’t have to always be restrictive or a negative thing; they just need to fit your financial situation and act as a guide for your regular spending decisions.
- Emergency Fund
An emergency fund is savings you’ve set aside in case something unexpected happens, say a major expense popped up or you suddenly lost your regular stream of income. A good rule of thumb is to have enough saved to cover six months of expenses, such as mortgage/rent, utilities, car payment, insurance, healthcare, groceries, debt payments, etc. It’s a good idea to put these savings into their own high-interest bank account so that they’re separated from your usual, day-to-day spending. Most importantly, your emergency fund should be held in cash and not invested so it is easily accessible and you don’t have to worry about losing a portion of it over any amount of time. Saving and preparing now is a better option than ending up in debt later if you were to find yourself in a position where you had to rely on your credit cards or take out a loan.
The social distancing and phased reopening guidelines that most state and local governments established to combat coronavirus led to unprecedented business closures and layoffs. This took the U.S. by surprise and caused a mass influx of unemployment claims that the government couldn’t keep up with, leaving many to rely on their own savings until their claim was processed. Perhaps you’ve always had an emergency fund or maybe you never felt the need for one but if this year has taught us anything, it’s that we need to be prepared for the unexpected.
- Investing in the Stock Market
With all of the ups and downs of 2020, the stock market was no exception. This year has done its best to teach, or at least remind, us that investing is a long-term venture. Though the stock market experienced large declines in response to the onset of the COVID-19 pandemic in March and April, market recovery has been relatively fast and stable. Some investors let fear overcome them and sold out of the market as it was falling but then missed out on the recovery because it is psychologically difficult to know when to buy back in. Those who remained invested have not only experienced the full recovery but were potentially able to take advantage of thoughtful buys when the market was down.
If you’re concerned about what’s happening in your portfolio, resist the urge to jump ship and reach out to your financial advisor and discuss what you’re thinking before taking any action. Your advisor is both an investment manager and a guiding light when it comes to remaining objective during difficult market conditions. It’s understandable that market volatility can trigger a wide range of negative emotions, from anxiety to stress, but what counts is how we manage these feelings and protect our investments from them. Remember that your portfolio can be invested to fit the risk level you’re comfortable with as well as one that aims to meet your financial targets while helping you maintain your sanity in times of market turbulence. Focusing on short-term market changes won’t benefit your portfolio and will generally cause undue stress.
Being mindful of your spending, saving to create an emergency fund, and understanding that stock market volatility is a normal part of investing are all important ways to financially and mentally prepare yourself for sudden economic changes like the ones we’ve seen in 2020. It’s always a good idea to regularly check-in with professionals, like your financial advisor, when you have concerns about your personal finances. They can be a great resource if you’re not sure how much you should be spending versus saving or if your portfolio is invested in the best way to fit your lifestyle and long-term financial needs.