This year has been challenging, to say the least.
Millions of people have lost jobs. Savings accounts have been depleted as unemployment benefits are reduced or terminated. Retirement accounts have either lost substantial value or been raided to make mortgage payments.
Like any challenge in life, valuable lessons can be learned. Many people are looking back with dismay over not being prepared for an economic downturn. How have you fared? And what have you learned?
The following five money lessons from 2020 are intended to prepare you for future economic calamities — not punish you for the past.
1. Build a six-month emergency fund
If you’ve lost your job, unemployment insurance very likely doesn’t leave you much breathing room, if any, as far as paying your bills each month. The government stimulus package may have provided you some relief, but that’s tenuous at best. And as this is being written, we’re coming up on our sixth month of economic pressure, with no end in sight to COVID-19.
Through your own experience or watching someone you know struggle financially, you can see the effects of not having an adequate emergency fund. Having six months of living expenses tucked away in an account you never touch will give you peace-of-mind, knowing that you can keep your ship afloat for at least a half-year. Setting aside a percentage of each paycheck in an account you don’t touch is very sound financial planning.
2. Don’t panic with your investments
When people panic and start selling their stocks, the market falls sharply and quickly. This snowballs as more and more people panic and sell, suffering financial losses that wipe out years of saving and investing. Many people close to retirement age won’t be able to recover their losses before retiring, negatively impacting their lifestyle dramatically (if they’re even able to retire).
It’s been proven throughout history that the stock market always eventually rebounds after a depression or recession. Fortunes have been made by many who not only didn’t sell off their investments in a panic but bought stocks at discounted prices and watched them rise in value to new highs.
If you are risk-averse, move your money into more conservative investments, such as government bonds. If you’re invested in the stock market, vow to hold on tight and stay the course as the market capitulates and takes you on a tumultuous ride. It may be a few years down the road, but you’ll very likely be in better shape financially than you were before the downturn.
3. Increase your value to the marketplace
While most companies haven’t gone out of business in 2020, they have cut back on the hours they’re open and the number of people they’ve retained on the payroll. Employers have had to make hard choices when it comes to who stays and who goes. Hopefully, you’ve kept your job as reductions were made, even though you now may be working reduced hours.
In many cases, those people that were retained were considered the most valuable to the organization, not necessarily those with the longest tenure. They were kept because they were the best workers in their particular position, and could be counted on to take on other responsibilities, if necessary.
In preparation for the next financial calamity, what can you do to increase your value to your organization? Are there courses you can take to improve your skills? Can you develop deeper professional relationships with key people in your organization? Can you put forth more effort every hour you’re at work?
These are all things that are within your power to do. Ultimately, you’re responsible for your career development and your future. Commit to becoming indispensable to your company right now. Becoming more valuable in the market is one of the best money lessons we can learn in 2020.
4. Avoid debt at all costs
Many people had their financial pressure magnified in 2020 because of the amount of debt they were carrying. Creditors expect to be paid, regardless of whether or not you’re being paid. Shareholders of MasterCard expect to see revenue growth each quarter, increasing the pressure on MasterCard to get your payment every month.
Understandably, you may not have been able to pay cash for your house. But could you have paid cash for a reliable used car and avoided the hefty car payment that accompanied all of the options on the new car you bought?
Those people that avoided debt before 2020 experienced much less financial and personal stress than those with heavy debt loads. Do your level best to pay cash for everything you purchase. You’ll sleep better at night.
5. Keep your insurance in order
For many people, losing their job in 2020 meant losing their benefits too, putting them and their families at even greater financial risk. Health, life, and disability insurance benefits were left behind as they exited the company. What could have been done to minimize the financial risk assumed by the loss of benefits?
Here are the three key components of a benefits program and how you can be prepared to be minimally impacted if you lose your job.
- Health Insurance: In addition to health insurance you have through an employer, consider purchasing supplemental insurance policies on your own. Accident insurance and critical illness insurance policies are good to have if you lose your company-sponsored health insurance coverage and can’t afford to pay for it on your own.
- Life Insurance: Many companies pay for a basic life insurance benefit for their employees, equal to what their salary is. If you lose your job – you lose your life insurance. Purchase term life insurance on your own. Depending on your age, it’s reasonably inexpensive, and you’ll have it no matter what happens economically.
- Disability Insurance: An interesting thing has happened to many people that lost jobs: they’ve become entrepreneurs. If you’ve made this transition and now own your own business (even if you’re the only employee), you need to protect your income. Having disability insurance for the self-employed is a must. If you lose your ability to earn a living, you’ve lost your most valuable asset. Your future income depends on it; don’t risk it.
While optimism may be difficult to maintain in light of recent events, it's important to take the money we've learned from 2020 so far and use it to make it through this year.
Because, as the old saying goes: “Use the past as a tool, not a club.”
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.