Among them: You really do have to plan for emergencies, and your personal-finance decisions don’t exist in a vacuum.
9 min
With 2020 in the rearview mirror, and the end of the pandemic (fingers crossed) in sight, there’s a lot of economic damage to be assessed. But there are also a lot of personal-finance lessons we can learn—lessons that will put us in good stead, whatever the economic future holds.
Lessons about the importance of emergency funds and having different income streams. Lessons about how this time really isn’t different (no matter how much it feels different). Lessons about how personal finance is truly personal. And much more.
These are some of the lessons we heard about when we asked financial advisers and others to reflect on the past year. It was a year, no doubt, that many people would prefer to forget. But before we try to wipe those memories clean, here are some of the things that investors, savers and spenders would do well to remember.
One clear lesson from the past tumultuous year is that more Americans should work to build an emergency fund of at least one month of spending. An accessible emergency fund (kept in an easy-to-access form like a savings or checking account) can help alleviate the need for drastic cuts in spending when facing temporary shocks to your income.
While an emergency fund cannot make up for losing your job and facing long-term unemployment, it can help to reduce the impact of shorter-term economic disruptions. For instance, last year many households had members who were furloughed for several weeks while governments had mandated closures of their employers.
In addition, those facing longer-term unemployment often had to wait weeks for benefit checks to start to flow in. In such cases, having several weeks or more of accessible savings can reduce the need to undertake painful spending cuts or borrow at high interest rates to make required payments.
—Scott Baker, associate professor of finance at Kellogg School of Management at Northwestern University in Evanston, Ill.
The pandemic has taught us that financial discipline is possible. The restrictions on life’s pleasures, like travel and eating, caused all of us to rethink how much we spend on these activities. We reflected on our excess indulges and realized the value of spending moderately and saving intentionally.
Building cash reserves from unspent money on niceties sparked greater confidence in handling life’s shocks. Many of us appreciated the extra money to weather job loss, reduced income due to cutbacks or caregiving responsibilities, and mounting medical bills.
We also start thinking more about how we should spend our money, whether it was because of sheer boredom or a greater appreciation of life in the midst of constant Covid-related casualties. Life’s experiences often serve as the catalyst for changing financial habits and mind-sets.
—Lazetta Rainey Braxton, co-CEO of 2050 Wealth Partners, New York
The best time to invest is when others are fearful. In 2020, we faced risks unlike any we’ve dealt with in our lifetimes. Being told you’re in danger triggers all your evolutionary defence mechanisms intended to keep you safe. Unfortunately, none of these instinctive reactions is useful in the arena of long-term investing. In March, investors’ fears extended well beyond their portfolios and into their personal well-being.
It’s common to hear “this time is different,” but there are two things that tend to remain true of all bear markets. First, buying when the market is down at least 30% has historically been an excellent entry point for stocks. Buying stocks in March required you to embrace fear and uncertainty in exchange for the higher expected returns.
Second, while all bear markets are inherently different, the common thread is that they always end. Investors must be willing to lose money on occasion—sometimes a lot of money—to earn the average long-term return that attracts most people to stocks in the first place. And if you can be a buyer in times of fear, your chances of earning above-average returns improve.
—Peter Lazaroff, chief investment officer at Plancorp, St. Louis
The biggest personal-finance lesson from 2020 is the importance of comprehending and managing risk. Unfortunately, this is one of the concepts of personal finance where knowledge is lowest, according to the TIAA Institute-GFLEC Personal Finance Index. While risk is a constant in our life, we often do not insure enough against the risks we face.
We should ask ourselves: Does my family have the proper coverage in case of health problems, including the ones created by the virus? And in case we have a high-deductible health plan, do we have enough to cover the deductible? And are we covered in case someone becomes disabled? Should we change or increase our long-term disability insurance? And importantly, do we have life insurance to protect our family in case of the death of the income earner(s)?
These are difficult questions to confront and ask, but the pandemic is a good reminder that it is better to be safe than sorry.
—Annamaria Lusardi, university professor at George Washington University in Washington, D.C.
There has never been a better time to put front and centre the need for every adult to have a will. No one expected the level of tragedy that occurred world-wide last year. And people don’t want to think about the idea of dying one day—a reason why they often kick this can down the road. But a big lesson of 2020 is that you should be prepared for the worst.
Whether you’ve built a net worth like Tony Hsieh, former CEO of Zappos (who had no will) or you are worth $10,000, it’s important for the family you leave behind to understand the wishes you have for your assets and belongings. It’s also important to check your beneficiary designations. If you have life insurance, a 401(k) or an IRA, they are a contract of law and will go to that named beneficiary, whether or not you have a will. People often forget to update or change those beneficiaries.
—Ted Jenkin, co-CEO and founder of oXYGen Financial in Alpharetta, Ga.
The events of 2020 reminded people of the foundational reasons behind their financial life—their “why.” Many people have reconnected personal finances with the things most important to them: how they use their time, how their money fuels their family and home life, what their investments support and fund, and how their careers enrich their lives. Personal finance does not exist in a vacuum; it exists in light of what we value most.
Last year has reminded people of what they value and has also helped identify what is not important. For many people, it’s that all the details around finance and money should come back to a core purpose—facilitating the lives that we all want to live. That has real-world impact on the decisions we make about how we derive income, how we spend our resources and how we invest.
—Jared B. Snider, partner and senior wealth adviser at Exencial Wealth Advisors in Oklahoma City, Okla.
The Covid-19 pandemic has left more Americans feeling the need to delay their retirement as both a short-term and long-term financial fix. And that is a wake-up call for many would-be retirees about the importance of not having retirement plans and expectations set in stone.
A whopping 81 million Americans reported that their retirement timing has been impacted by the pandemic, with most believing that they will need to work longer than they had previously planned, according to a survey on work and retirement attitudes and expectations that my firm, Age Wave, has just conducted in partnership with Edward Jones. Most are putting off retirement for an average of about three years, according to the survey.
For many Americans, a few extra years of work can offer a financial buffer. It also can provide continuing social connections, mental stimulation and contribute to a sense of purpose—which, for many people, can be a silver lining after this difficult year.
—Maddy Dychtwald, co-founder of Age Wave, a think tank and consultancy in the San Francisco Bay Area
Extrapolating the recent past too far into the future is a big mistake. This is known as recency bias, and it is one of our biggest downfalls as humans. Last year taught us a powerful lesson, in both directions.
Optimism was the order of the day early in 2020 with the market making all-time highs. Compare that with March, when things looked like they would never recover. In both cases, investors would have been well-served not to assume the recent past was going to continue forever. Many investors we spoke with in March wanted to make dramatic changes to their investments because they were assuming things would continue to get worse.
This is why a diversified portfolio that you can stick with regardless of the market environment should be the cornerstone of almost everyone’s investment strategy.
—Jeff Mills, chief investment officer of Bryn Mawr Trust in Berwyn, Pa.
It is always nerve-racking to watch the market go through a sizable correction as investors find it increasingly hard to differentiate the economic ramifications versus the results created by the media. When the downturn is caused by a pandemic, it adds another layer of complexity to the confusion. The brain says, “This time is different.”
The truth is that each recession is different, but the discipline which investors adopt to manage their portfolios should remain intact. Investors with proper asset-allocation discipline that incorporates liquidity strategy should refrain from giving orders to their advisers when the noise grows to become overwhelming. Selling orders out of despair led to liquidating at the bottom in March and missing the unpredictable quick rebound in April and beyond. The unprecedented global pandemic sweep was met with the unprecedented speed of monetary and fiscal policy adjustments and the fastest vaccine development witnessed. It was evident that the market worked itself out.
This time is no different from any other time. It’s time in the market rather than timing the market that matters in the long run.
—Jessica Guo, financial adviser and senior portfolio manager/international wealth management adviser at UBS and founder of Guo Group in Wellesley, Mass.
It was the year of Covid-19, skyrocketing unemployment, a shrinking economy, a $3.3 trillion ballooning of the U.S. budget deficit, racial riots, heated political discourse. Yet, rather than plunging, the U.S. stock market responded by surging about 20%, as measured by the total return of the Wilshire 5000 Total Market Index. What gives?
In the 33 days between Feb. 19 and March 23, when the pandemic gained its foothold in the U.S., domestic stocks plunged nearly 35%. Many people told me stocks would not recover until we had a vaccine. Even some people who realized the phrase “this time is different” was the costliest phrase in investing told me, “This time really is different.” (Admittedly, if going into the year I had known what was going to hit us, I’d have bailed on stocks.)
Why did stocks recover and soar in the wake of such horrible economic news? The weaker explanation is that the decline in future corporate cash flows was less than the reduction in the discount rate used to value those stocks. This was caused by plunging and now near-zero interest rates. The much stronger explanation is simply that the stock market continues to fool us.
Lesson learned: If we can’t even explain the past, just think how futile it is to try to predict the market’s future.
—Allan Roth, founder of Wealth Logic in Colorado Springs, Colo.
The Covid-19 recession has proved once again that every investor should always have an investment plan and strategy that can weather events such as what we have experienced.
A three-bucket strategy is a wise approach as investors rethink how they should invest their money. A short-term bucket should have one to two years of expenses in short-term instruments such as cash or short duration bonds. An intermediate-term bucket should be for monies not needed for two to five years, such as core bond funds. A long-term bucket should consist of money not needed for at least five years and can be invested in equities. This approach will prepare investors for any short-term risks that arise, such as coronavirus-related recessions, without sacrificing the integrity of their portfolio.
—Brian Walsh Jr., senior financial adviser at Walsh & Nicholson Financial Group in Wayne, Pa.
Rebalance your portfolio when market movements cause your equity mix to stray from your target percentage. Doing this—buying more equities when under target or selling when they are above—is a good way to buy low or sell high.
In most years, rebalancing helps your portfolio’s return by a percentage point or two. Once in a while, it can double or triple this when equity markets decline steeply and recover, like during the 2007-09 recession. There hasn’t been such an outsize rebalancing opportunity until last winter when the pandemic hit.
However, you won’t realize these benefits unless you actually do the rebalancing. Otherwise, all you will realize is your fear of missing out when markets do eventually turn.
—Jonathan Guyton, principal at Cornerstone Wealth Advisors Inc. in Minneapolis
Last year’s tumultuous market reinforced the importance of staying invested. It looked like financial markets were doomed near the end of the first quarter. We saw days where markets went down over 10%. Many investors panicked and went cash fearing the worst. Since then, the markets have rallied and anyone who tried to time the market and go more conservative is probably feeling a bit of regret.
—David Blanchett, head of retirement research at Morningstar Investment Management in Lexington, Ky.
Just as investment advisers recommend having a mix of investments in your 401(k) to minimize stock-market risk, it’s critical to have a mix of income sources. Many global citizens took the pandemic as a call to action and used technology to create new income streams through blogging, selling courses, writing e-books, posting video content, coaching or consulting, setting up an online shop, investing and so much more. In the 21st century when the majority of transactions occur digitally via the web, technological literacy is as critical as financial literacy.
—Yanely Espinal, director of education outreach at Next Gen Personal Finance in New York
Many investors are quick to dismiss bonds given their historically low yields. However, the events of the past year have reinforced the importance of including fixed income within one’s portfolio.
When Covid-19 first hit, from mid-February to the end of March, the S&P 500 plummeted 34%. A diversified portfolio of equities and fixed income outperformed the broad stock market during the scariest times of the year. The stabilizing bond exposure helped many investors stay the course and minimize emotional selling during this time.
Having bond exposure in early March also provided investors with a wonderful rebalancing opportunity. As investment-grade bonds significantly outperformed the market, investors could use proceeds from selling bonds that stayed flat or appreciated in value to buy stocks that were trading at a discount from just a few weeks earlier.
Additionally, bond exposure helped the many Americans who had to liquidate investment assets to meet their cash-flow needs as employees were laid off or furloughed from their jobs during the year’s quarantine. Selling their bonds provided a more stable cushion for many investors. Being forced to sell stocks at rock-bottom prices instead could have had a devastating impact on their finances.
—Jonathan I. Shenkman, a financial adviser at Oppenheimer & Co. in New York
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
What a quarter-million dollars gets you in the western capital.
Alexandre de Betak and his wife are focusing on their most personal project yet.
The bequests benefit charities, distant relatives and even pets
4 min
Charities, distant relatives and even pets are benefiting from surprise inheritances. They can thank people without children.
Not having children is becoming more common, both among millennials and older people. A July Pew Research Center analysis found that 20% of U.S. adults age 50 and older hadn’t had children.
And many of these people don’t have wills. An AARP survey found half of childless people age 50-plus who live alone have a will, compared with 57% of others that age. Those without wills have less control over what happens to their money, which often ends up in the hands of people who don’t expect it.
This phenomenon of a surprise inheritance is common enough that it has a name: the laughing heir .
“All they do is get the money and go, ‘Ah ha ha, look at that,’ ” said Michael Ettinger , an estate lawyer in New York.
Kelley Gilpin McKeig, a 64-year-old healthcare-industry consultant in Ridgefield, Wash., received a phone call several years ago saying her cousin Nick Caldwell left behind money in a savings account. They hadn’t been in touch for 20 years.
“I thought it was a scam,” she said. “Nobody else in our family had heard that he had passed.”
She hunted down his death certificate and a news article and learned he had died about a year and a half before in a workplace accident.
Caldwell, who was in his 50s, had died without a will. His estate was split among cousins and an uncle. It took about two years for the money to be distributed because of the paperwork and court approval involved. Gilpin McKeig’s share was $2,300.
Afterward, she updated her will to make sure what she has doesn’t go to “just anybody down the line, or cousins I don’t care about.”
There are trillions of dollars at stake as baby boomers age.
Most people leave their money to spouses and children when they die. A 2021 analysis of Federal Reserve survey data found that 82% of heirs’ inheritances came from parents.
People with no children say they want to leave a greater share of their estates to charity, friends and extended family , according to research by two Yale law professors that surveyed 9,000 U.S. adults.
Rebecca Fornwalt, a 33-year-old writer, created a trust after landing a book deal. While her heirs are her parents, her backup heirs include her sister and about a half-dozen close friends. She set aside $15,000 for the care of each of her two dogs.
Susan Lassiter-Lyons , a financial coach in Florence, Ariz., said one childless client is leaving equal interests in her home to her two nephews. Another is leaving her home to a man she has been friends with for a long time.
“She broke his heart years ago and she feels guilted into leaving him property,” Lassiter-Lyons said.
A client who is a former escort estranged from her family is leaving her estate to two friends and to charity.
Lassiter-Lyons, who doesn’t have children, set up a trust for her two dogs should she and her wife die. The pet guardian, her wife’s sister, would live in their house while taking care of the dogs. When the dogs die, she inherits the house.
In the Yale study, people without descendants—children or grandchildren—intended to give 10% of their estates to charity, on average, more than triple the intended amount of those with descendants.
The Jewish Community Foundation of Los Angeles, which manages $1.3 billion of assets, a few years ago added an “heirless donors” section to its website that profiles donors and talks about building a legacy.
“Fifteen years ago, we never talked about child-free donors at all,” said Lew Groner , the foundation’s vice president for marketing.
In the absence of a will, heirs are determined by state law . Assets can wind up in the state’s hands. In New York, for example, $240 million in unclaimed funds over the past 10 years has arrived from estates of the deceased, not including real estate, according to the state comptroller’s office. In California, it is $54.3 million.
Financial advisers say a far bigger concern than who gets what is making sure there is enough money and support for a comfortable old age, because clients without children can’t call on them for help.
“I hope there is something left to leave,” said Stephanie Maxfield, a 43-year-old therapist in southern Colorado. “But if there isn’t, I think that’s OK, too.”
She said she would like to leave something to her partner’s nieces and nephews, as well as animal shelters and domestic-violence shelters. Her best friend is a beneficiary.
Choosing an estate executor and who would handle money and health decisions on your behalf can be difficult when you don’t have children, financial advisers say. Using a promised inheritance as a reward for taking care of you when you are older isn’t a good solution, said Jay Zigmont , an investment adviser focused on childless people.
“Unfortunately, it is relatively common to see family members who are in the will decide to opt for cheaper medical care (or similar decisions) in order to protect what they will be inheriting,” he said in an email.
Kirsten Tompkins, who is from Birmingham, U.K., and works in consulting, along with her husband divided their estate among their dozen nieces and nephews.
Choosing heirs was the easy part. What is hard is figuring out whom to ask for help as she and her husband get older, she said.
“A lot of us are at an age where we are playing that role for our parents,” the 50-year-old said, referring to tasks such as providing tech support and taking parents to medical appointments. “Who is going to do that for us?”
