The coronavirus pandemic has upended the finances of many Americans due to job loss, stock market fluctuations and small business closures. These events have made some of the old “rules of thumb” of financial planning irrelevant, with many people having to rethink their previously held saving and investment strategies.
Here are some of the ways financial planning has changed, likely permanently.
Cash May Be Your Best ‘Investment’
Previously, holding too much money in cash was seen as a poor use of funds — the emphasis was on investing in assets that would provide a greater return. But the pandemic has taught us that having liquid assets is essential.
“We have always advocated all of our clients to have an emergency fund of cash that they can tap into right away, if needed, but the COVID-19 pandemic has really shown the value of that emergency fund,” said Michael Cocco, financial professional at Equitable Advisors. “In a year where we have seen some of our clients lose jobs, lose businesses, get sick, lose a loved one, the need for cash in the short-term has come up, and our clients had cash on the sidelines that they were able to tap into without having to liquidate any of their investments in the midst of the market meltdown. This emergency cash turned out to be their most important ‘investment,’ because it allowed their true investments to do their thing and to recover, and then some.”
Even though the markets are booming and bank interest rates are extremely low, Cocco is doubling down on this advice to focus on emergency savings.
“The markets are always unpredictable in the short-term so that cash will be their lifeline, if needed,” he said. “Don’t worry about how you are not earning interest on that cash — that is just the price to pay for the peace of mind.”
3 Months’ Worth of Expenses May No Longer Cut It for Emergency Funds
The old rule of thumb was to save three months’ worth of living expenses in an emergency fund — but the pandemic has shown us that you’ll likely want to have more saved up.
“Moving forward, the new norm for emergency funds may be six months to a year instead of three to six months,” said Christopher Berry, a financial advisor and certified elder law attorney for Castle Wealth Group in Brighton, Michigan.
You Can’t Take a ‘Set It and Forget It’ Approach to Your Finances
Before the pandemic, you likely only had to reassess your financial plan once a year or so. But the pandemic has shown how important it is to stay on top of your financial plans and adjust them accordingly.
“We’re even more cognizant in our discussions with respect to drastic market changes in a short period of time,” said Ryan Cole, vice president and director of financial planning at Bailard. “The pandemic was a stark reminder that financial plan assumptions need to be regularly reviewed. It will certainly be top of mind when we plan for our client’s financial futures.”