A lot is changing in our economy. As we emerge from the pandemic, we are going to see permanent changes in how business is conducted, companies that exist and how people work. For example, a large number of retail businesses that rely on face-to-face sales activity will likely not reopen. The travel industry has been really damaged as flyers will carefully consider getting on a flight with people who may have the virus. Many non-profits look to not have the cash needed to survive the lock down period. Lastly, the entertainment industry including amusement parks, movie theaters, Broadway and sports teams all need to reinvent their business models in some fundamental manner.
All of these impacts will also create changes in the principles we follow to manage our money. I believe for at least the next 24 months we are in for what I call the “Baby Steps Economy” with improvements happening at a slow-but-sure pace as consumers gain more and more confidence that they are safe and not exposed to the virus. The only thing that would change my view is, if through medical innovation, we discovered a vaccine that protected everyone. If a vaccine is invented, the pace of economic activity will increase dramatically, but for certain businesses (like large retail malls), the pandemic exposed their long-term competitive weaknesses.
With the above in mind, here are my new normal money principles:
Cash is king. You must have excess cash flow each month. You can’t spend more than you bring home. We all need to accumulate and manage our cash flow as best as possible. In these uncertain times, having a cash cushion is essential.
Reducing consumer debt levels is a top priority. There is no sense paying 12% to 25% interest on consumer debt in a zero interest rate world. Consumer debt needs to be avoided at all costs and steadily reduced. This means reducing savings for the long-term to get the burden of this obligation reduced.
Refinance your mortgage and student loan debt to take advantage of lower interest rates, if possible. Locking in lower rates for long periods of time would be an excellent strategy.
The most important asset of most people is their ability to earn a living. You must keep your employable skills at very high and competitive levels. Jobs are going to change and the only way to stay employed is to have a top skill set.
Returns on savings and investments will be substantially reduced. Given the economic uncertainty we face and the about of government stimulus being spent the level of annual return on bank products and investments has been reduced substantially and will likely stay at lower levels for the foreseeable future.
The ability of federal, state and local governments to continue to spend at existing levels is not sustainable. At some point very soon we will need to pay for the bailouts and subsidies through higher income and property taxes. You need to prepare for taxes increasing.
Having and building an emergency fund of at least six months of living expenses is mandatory. In fact, you should likely increase this amount to have a sum of money set aside for retraining in case of losing your job.
The absolute amount of dollars you save needs to increased dramatically. If you were saving 5% of your earnings before, you will need to increase that as much as possible. With lower investment returns and unemployment uncertainty present, you will need to have as much put away as possible to build assets for later in life.
What we learn and experience from the pandemic will shape all aspects of our lives much as the Depression of the 1930’s impacted our ancestors. I don’t know what will happen, but I do know that things will change for all of us. From where we work (at home), to how we educate our children (more virtual sessions), including how we have a doctor’s visit (telehealth). The same applies to our money. What has conventional wisdom just last year will likely no longer apply. We are in for an interesting period. Welcome to the new normal.
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