With several companies announcing positive vaccine results and wide-scale distribution ramping up, more and more people are able to envision a post-pandemic world. While many will think first of matters like kids returning to school, visiting family and friends or just eating out, Fisher Investments thinks there is a less-seen factor you ought to consider weighing: How a return to normalcy may affect your budget. The outbreak has had large effects on many people’s spending and saving decisions, and its potential end could entail similarly large shifts. The time to weigh this in a measured fashion is now.
When economies locked down last spring, day-to-day life shifted radically for many. On the income side, some workers sadly lost their jobs, saw earned income fall and may have tapped savings and/or government resources for assistance. But on the expense side, many people saw costs fall—even those with no change in income. Due to layoffs, furloughs and remote work, many spent far less on things like gasoline and auto-upkeep for commuting, dry cleaning or buying new work attire. Lunch expenses may have declined, replaced by larger grocery bills. Expenditures on activities like travel, eating out and entertainment (e.g., in-person sports or concerts) all fell markedly. Perhaps you had to invest in faster internet access or a new subscription entertainment service. Some people bought or sold property and moved!
The result of this is that Fisher Investments thinks many more Americans will have seen some impact on their budgets from the COVID lockdowns than from most recessions. Even if your income didn’t change or rose, your expenses likely shifted. This, partly, is why the US savings rate surged in the downturn, leaving American households unusually flush with cash this close to a recession.
With the pandemic’s end coming into view, it is time to consider your budget—and how it could change again. Some sort of a reversal is possible. If you are employed and will return to an office, commuting expenses and dining out may come back, too. But also, many households will feel a pull to spend more on “fun”—which is an entirely understandable feeling given the year we have been through. We don’t wish to dissuade anyone from doing so, but think you should be careful about it.
Start by pulling your expenses from 2019. Most banks and/or financial services firms offer functionality allowing you to access this information online and download it. From there, categorize what you spent by bucket—housing, utilities, gasoline, auto expenses/upkeep, insurance, health care, food out, food at home, alcohol, travel and more. Look at several months’ worth. Then compare these months to the same months this year. That should give you a look at the pandemic’s impact on your spending. Maybe it is zero, but broad macroeconomic data suggest that isn’t true of very many American households.
Then think forward. What changes did the pandemic bring to your finances that will stay? If, for example, you moved, then a change in housing costs isn’t a pandemic effect that will vanish. Perhaps you have found you enjoy cooking more now and don’t wish to spend as much on meals at restaurants. Perhaps you found you miss travel more than ever and want to dial up expenses on that. Regardless, this is your chance to reshape a budget that keeps the things you have learned to value and discount others. If you weren’t much of a saver or investor before, perhaps this is your chance to reshape your financial future and add more stability.
Of course, if you are unemployed—as too many tragically are—this exercise is still in the future for you. We doubt we need to tell you that maintaining financial discipline is key in that scenario. This is perhaps doubly true if you are receiving extra benefits from federal or state programs set to expire. Maybe governments will extend them, but those are political decisions you can’t forecast. Even if they do extend benefits, we would advise practicing the utmost austerity—you never know when the government will choose to end them, and you can’t know what your employment status may be then. We also don’t yet know if the government will extend provisions allowing penalty-free early withdrawals from retirement accounts. We consider such moves a last resort for the truly desperate, but that will be even more the case if 10% IRS penalties for withdrawals prior to age 59.5 come back in 2021.
If you are returning to work after a layoff, it is important to size up how your time out of work impacted your financial plans. It would be easy to say that if you drew down savings, you should build it back up. But in Fisher Investments’ view, it is equally important to take a holistic look. A few useful questions to consider:
• Did you increase credit usage?
• Did you draw down retirement assets?
• Did you delay large purchases?
• Did you sell investments you had earmarked for the future?
• Did this experience alter your financial or life goals?
If the answer to the final question is “no,” then prioritizing paying off debt and rebuilding savings should be a high priority for you. If your goals have changed, then you may need to reassess not only your current situation, but your investment and financial plans.
This crisis has dealt all of us blows in a variety of ways that range widely in severity. As the pandemic’s end draws near, we suggest taking time to think critically about what you have learned about your finances during 2020. It may help you navigate a return to normal spending and saving in 2021—and beyond.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
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