Alligator jaws. Or the “less than” symbol in math. Notice how both show divergent diagonal lines. In economics, this is fast becoming known as the K-Shaped recovery, where different people, sectors, and industries experience unequal growth. While most see adversity, others find opportunity. Either way, the pandemic has had an impact on how people view money and their personal finances.
That’s how it has been with any major event in history — a paradigm shift is a necessary effect. The Great Depression of the early 1930s was a precedent to removing the link between gold and the US Dollar. The Global Financial Crisis of the mid-2000s saw how government bailouts are a thing.
As for this pandemic? Well, the jury is still out on what changes ultimately stay. Many of these changes may revert to old ways once infection rates drop and health risks fall back. But for now, let’s take a look at five key trends in personal finance caused, at least in part, by the pandemic.
Greater attention to emergency funds
Two things to say here. One is the need to have an emergency fund. That is not a new trend by any means, as financial advisors have been preaching this forever. But second, and more importantly, is the possibility of actually having to use that emergency fund.
Emergency funds are typically three to twelve months of your monthly expenses. There is no absolute rule as to what this number should be, and in reality, it does vary from one person to another. A larger emergency fund is safer, but not necessarily better. What’s apparent though is how people regret saving less than they should have.
In Bankrate’s May 2021 Financial Security Poll, the number one financial regret Americans had was not saving enough for emergencies, topping the vote at 20% of respondents. In the same survey, saving more for emergencies is also the biggest change Americans plan to make post-pandemic.
So while saving for emergencies isn’t anything new, the pandemic has undoubtedly triggered a renewed awareness of having enough in an emergency fund. The threat is real, folks.
For the fortunate few who were unaffected by, or maybe even benefited from, the pandemic, one related way they’ve strengthened their emergency fund is by refinancing debt at today’s lower interest rates. Less monthly expenses mean you need less in total emergency funds. All things the same, you are actually increasing your emergency buffer in percentage terms! Pretty smart if you ask me.
Shifting budget allocations due to work-from-home
Hard times call for tighter budgets (as we might expect). People shift from buying whatever they want to buying only what’s absolutely necessary. But what’s interesting is the shift in allocated expenses caused by remote work arrangements.
Although the move towards remote work was probably on its way, the pandemic certainly hurried the process. That is no secret. Home office technology and companies’ tolerances for work-from-home agreements have improved by leaps and bounds.
This has shifted the emphasis to different types of expenses. For example, better home offices mean increased spending on faster internet connections, quality webcams, better chairs, and so on. The shifting budget means there’s been less emphasis on car insurances, gas allowances, and office clothes — well, at least for trousers that’s true.
The shifts in spending apply to all companies, large and small, as they either rent out smaller spaces and adopt a hoteling policy, or have employees work exclusively from home.
Now, if the pervasiveness of remote work stays, then budgets for private housing could also shift. More and more people now choose to live in suburban areas, versus city condos and apartments, for the added space and lower costs from lower interest rates. Not to mention the larger spaces for social distancing.
Time will tell if this trend persists. But with the recent developments in tech and society’s adaptations to video conferencing, we are likely going to refer to the new work arrangement balance, of remote vs. close quarters, as the post-COVID reality.
Multiple income sources and expanded employee benefits
The sudden job losses caused by the pandemic have highlighted the need for multiple sources of income. Many people now see job security as a myth. And this has led to the hunt for freelance work and small businesses on the side.
Fortunately, technological improvements have also made freelancing gigs and side hustles easier. Some of the more popular options include blogging, social media management, app development, and tutoring. Others are about good old hustle work like delivering groceries or pet-sitting.
A particular niche that’s seen tremendous growth since the pandemic is content creation — specifically YouTube content creation. The Pew Research Center reports YouTube’s massive growth during the pandemic leads other social media platforms, with competing platforms not far behind. Contents creators are winning, period.
Somewhat related to this trend, and of particular interest for the non-entrepreneurial type, is the increased reliance on employee benefits. Just like remote work arrangements, employee benefits have been expanding prior to COVID-19. This trend is likely going to continue moving forward.
For instance, Fidelity reports how student loan debt, which continues to hit all-time highs, has been an increasing concern to Americans. They mention how student debt employee benefits, as one part of an inclusive benefits toolkit, may help attract and retain a diverse workforce.
Investing awareness for a larger population
Investing gains have been remarkable, and people are sure to boast about them on social media. Some pundits would say there’s a disconnect between current prices and reasonable values — that current prices are irrational. And others counter this by pointing out how markets remain irrational for extended periods anyway.
Whether the increased popularity of investing is justified or not, this is a trend that’s been surprisingly prevalent during the pandemic. In a Charles Schwab survey, their findings say 15% of US Stock Market investors got their start in 2020, calling them the “Generation Investor.”
Much like the search for multiple sources of income, investing has been seen as a way to supplement a household’s earnings. The strong recovery of the stock market and large gains in cryptocurrency, justified or not, have encouraged those with money to invest and ride the uptrends.
Between February 12 and March 23 of 2020, the Dow lost 37% of its value, only to see stocks bounce back to their current all-time highs. A recovery like this is sure to get the public’s attention.
At the same time, brokers have been competing for investors’ money by lowering fees and commissions. This has created a positive feedback loop, with more and more investors (or speculators) joining in. According to Jonathan Craig of Charles Schwab, “We’ve seen tremendous growth and engagement among individual investors over the past year as a result of lower trading costs…”
Similarly, cryptocurrency’s growth has been huge, pegged by most to the lack of confidence in fiat money. Many see crypto as an alternative store of value (much like gold), but an equally large group of people also question its current valuations. In any case, the large gains have been an attractive draw for the public, too.
Financial independence and YOLO
Ultimately though, the pandemic has allowed greater introspection. Is money really the objective, or is it a means to an end? For many people, the pandemic has been a signal for money’s greater purpose. And we’ll probably find two camps. Personal finance truly is personal.
Financial independence is ironically one of the newfound goals of people. How much do you need to be financially independent and retire early? The pandemic has shown them how achieving this goal leads to the pinnacle of living, a life with meaning.
For people hoping to achieve financial independence, the recent stock market crash and rally have affected them one way or the other. It has either been a setback or has expedited the process.
On the other hand, and maybe for a large number of people, the pandemic has shown them how fragile life can be. And to them, this means not worrying about money as long as they earn what is necessary. To them, it is all about enjoying life. Because YOLO, right?
Consumer confidence is slowly coming back, and so is the spending on leisure and communal activities. No surprises here though. Management consulting company McKinsey & Co. calls this revenge spending, as the pent-up demand is unleashed and consumer spending rebounds. But optimism remains uneven, as the younger crowds tend to be more hopeful.
The general bounce back is in fact quite common after major economic downturns. But it is especially expected in constricted industries like travel, restaurants, entertainment, and the like.
Moving Forward Into 2022
Major events like the pandemic typically result in major shifts in behavior. While most changes appear to be defensive in nature (emergency funds), others have been about finding opportunities (investments). And for some, the pandemic’s ramification is lesser regard for money, in a kind of way (YOLO).
Which trends will carry on is unknown. 2021 has been a transition year, and people’s views on money and personal finance will continue to evolve, à la Delta, as we move further out of the pandemic.