COVID-19 Forces Far-Reaching Financial Lessons

A post-Great Recession Federal Reserve study of 5,000 people revealed that 46% percent of Americans admitted to not being able to cover an unexpected expense of $400 without resorting to a credit card loan, a loan from family or friends, or by force-selling a personal asset – perhaps one in a retirement plan. The current COVID-19 upheaval in the lives of millions of people, not just in American but worldwide, is a harsh reminder to all of us the value of putting money aside for a rainy-day or two… or twenty.

If it seems like I have a hang-up regarding what I call MILLION-DOLLAR HABITS. Yes, yes I do. They often start to form and cluster at a young age. Perhaps we learn them from parents, or perhaps they simply derive from a youthful “put-it-off-until-tomorrow” attitude that ultimately results in a financial situation that brings us face to face with the cumulative effects of poor decisions. For way too many folks, such calamities have come early in life… the relatively recent Great Recession of 2007-2009 and today’s Covid-19 Pandemic. And way too many young folks (and older folks, too) have been left holding the proverbial bag.

The “Great Recession” Redux

A post-Great Recession Federal Reserve study of 5,000 people revealed that 46% percent of Americans admitted to not being able to cover an unexpected expense of $400 without resorting to a credit card loan, a loan from family or friends, or by force-selling a personal asset – perhaps one in a retirement plan. The current COVID-19 upheaval is a harsh reminder to all of us the value of putting money aside for a rainy day or two… or 20. I speak at length about Rainy Day funds in past WynnSights blogs, and in You, Me & the Tree - a nifty lifestyle blog where I make an occasional guest appearance as "Tips From Pops". Check it out!

Rainy Day Realities

Back to reality. Young people tend to avoid budgeting along with forestalling the saving of money for emergencies. Apparently, they don’t want to face the occasional reality of more outflows than inflows – a quandary that necessarily leads to eliminating some desirable luxury or the guilt of not eliminating such a luxury. Just remember, without the guidance of a budget, you are inviting the pain of financial distress without realizing it.

Credit Card Crutches

Without a financial plan (i.e., a personal budget), one clear signal that you’re living on the edge is not being able to pay off credit card balances each month, opting month after month to pay the minimum. Improper use of credit cards is the bane of intelligent financial planning. The possession of too many cards encourages folks to live beyond their means. My personal habit is to use only one credit card. To carry several helps us hide from the reality of how much we’re buying on credit. Putting all of our charges on one card eliminates the excuse of “I had no idea how much I was spending.” And the discipline of paying off that single balance each month helps you avoid the great black hole of credit card debt.

Another clear signal that you’re living on the financial edge is a reluctance to open monthly bills right away. Open them immediately. Do not let them stack up. And pay them as promptly as monthly cash flow allows. The stress associated with that looming stack of unopened bills is unhealthy. Paying them promptly promotes self discipline, a healthy outlook on life, and of course, a healthy credit rating.

Good Financial Habits

The long and short of developing good financial habits stems from having a good financial plan – one carefully followed to avoid the pitfalls of poor decision making. If you work for a company that provides access to 401(k) or 403(b)-type plans, be sure to participate and most certainly take full advantage of any matching offer by your employer (FREE MONEY)… an automatic 100% return on the matched contributions. How many other 100% returns on investment do you enjoy in life? And give serious consideration to opening a ROTH IRA (funded with earned, after-tax dollars) and dare to be average by building your investment portfolio around a low-cost, highly diversified index fund.

Remember, it’s never too late, but early is best! And aim for 10-15% of your gross pay as a savings objective. Yeah, I know, that’s tough to do… but maybe not as tough as you think. By developing good (or eliminating bad) financial habits and displaying a good work ethic, you are almost guaranteed a financially stress-free life both before and during retirement. Knowing that you are growing a comfortable nest egg no later than in your late 30s and early 40s does two important things: it becomes a tremendous stress reliever, and it provides a sense of satisfaction that your future is more and more financially secure each day.