As we look back on the last 12 months, there are some things that we may want to forget. Indeed, it was a year of unexpected challenges for most Americans. Job loss, pay cuts, working from home, canceled vacations, and homeschooling kids may have been just a few of the curveballs that Covid-19 has thrown our way.
But let’s not put it all behind us quite yet — Covid-19 has taught us some valuable financial lessons that we would do well to remember. Now moving forward, we can all be a little wiser with our finances. Here’s how.
1. Make your emergency fund a priority
A recent study conducted by Credit Karma* reported that, during the pandemic, 30% of those interviewed were forced to draw money out of savings in an attempt to make ends meet. This is not surprising, as more than 50% of responders reported having some sort of “financial setback” during 2020. These financial setbacks have also resulted in the rise of credit card debt across America.
If Covid has taught us anything, it is that we must be financially prepared for emergencies. Many people now realize the essentiality of having an emergency fund of at least 4-6 months stashed away in an accessible place, such as a checking or savings account. Having this fund in place gives you a financial cushion in times when you may suffer a pay cut, job loss, unexpected medical expense, or another emergency. When hard times hit, you are able to draw from this fund rather than relying on credit or savings to get you through.
Building and maintaining a three to six-month emergency fund needs to be a fundamental financial priority. Focus on creating this fund before paying down debt or investing in other areas.
2. Keep perspective in a bear market
Back in March, the primary emotion surrounding the stock market was fear. And for a good reason: the market plunge of nearly 35% had even the most experienced investors wanting to run for the exits. However, this market drop proved, once again, that those who stick to their investment plan and buy when the market is down will profit thereby. The market quickly rose again in April, beyond almost everyone’s expectations. Throughout the last year, the market has continued to perform surprisingly well due to a variety of factors.
History has always proved that the market will rise again; however, bear markets still cause many investors to make short-sighted decisions out of fear. But remember, although each recession may look different, they all have the same result: they come to an end. Investors who have diversified portfolios with proper risk exposure for their situation and allow their portfolios to rebalance while markets are down will have much better long-term returns than those who panic and sell while the market is falling.
3. Have a comprehensive Estate Plan
This pandemic has, truthfully, made us all a little more aware of our own mortality. With that thought comes the idea of preparation: is your estate ready to be passed on to your heirs if something were to happen to you today?
Estate planning is the act of preparing your estate (assets, investments, funds, etc.) to be passed down to your heirs if you were to pass away or become incapacitated. This may include some or all of wills, trust(s), financial powers of attorney, healthcare directives, and other financial steps that will ensure the burden on your loved ones is as light as possible after you pass. Ask your financial planner about the next steps to take to create and/or update your estate plan and feel the peace of mind that comes from being prepared.
4. A little planning goes a long way
There is no way to predict a year like the one we all just lived through. However, there are many ways to plan and prepare for the unexpected. Overall, the financial turmoil of early 2020 proved to us all that having a financial plan in place is essential. So, as we move into this new year, commit to creating, evaluating, and/or updating your financial plan. Work with a financial advisor you trust to ensure that you are creating a plan that will help you be prepared for whatever the future may bring.
Here at TrueNorth Wealth in St. George, UT, our fee-based financial planners specialize in creating comprehensive financial plans catered to your specific needs. Contact us today for a consultation, and together we will ensure that you have a plan and the tools to reach your short and long-term financial goals.