Personal Finance Lessons from Covid

What have we learned?

I have kept on my desktop since late January this WSJ article on Personal Finance Lessons from Covid and have been meaning to write about this topic since then. The WSJ article is primarily focused on personal investing, which may be the least important aspect of our collective covid experience. We have all had our own unique covid experiences, which unfortunately are not over, but here are some of the lessons that I learned or was reminded of during the past 18 months or so:

Stuff happens. We have known for hundreds of years that deadly pandemics are not only possible but likely. Something like 10-20 million people have died so from covid and this was not even close to the worst pandemic in history. Pandemics are what Donald Rumsfeld would have called a “known unknown” and there is no excuse for not anticipating them. And yet too many of us failed to prepare adequately for covid, both from a public health and a personal finance perspective. At some level this was a failure of basic risk management, collectively and individually.

Sound personal financial planning requires that we prepare ourselves not only for “normal” future events but also for some amount of variation from whatever it is we consider normal. (We might think about this statistically in terms of expected outcomes, variations from the expected or mean outcome, fat tails and asymmetric distributions.) We can’t eliminate all the downside risk in our lives, and we should not attempt to, but to the extent possible our personal financial plans should build in some element of resiliency and disaster protection. And if you believe that covid really was an extreme outlier which could not have been anticipated or planned for, think instead about some of the more common risks that can also upend one’s personal financial plan in the same way that covid did: the loss of your job (for whatever reason), a prolonged illness with big medical bills, the premature death of the family breadwinner (or primary child care provider), a big increase in the cost of living, or even the breakdown of your car or a flood in your apartment.

During the past 100 years or so, we have experienced two world wars and many more limited ones; a global depression and several severe recessions; a decade of stagflation with double digit interest rates; another decade of zero (or negative) interest rates; several oil crises; the collapse of the US savings and loan industry and a near collapse of the global banking system; several stock market crashes; the creation and collapse of the Soviet Union; the creation, extension and partial disintegration of the European Union; numerous genocides and forced migrations; various sovereign debt and currency crises; the proliferation of nuclear weapons and several nuclear disasters; and several major pandemics. And these are just some of the bigger and more noteworthy things which have impacted us collectively and which came immediately to mind. Stuff happens—big and small, frequent and infrequent, global and local, good and bad— and we should attempt to prepare for it, individually and collectively, even if we don’t always know exactly what “it” is. I suppose there is a lot to be critical of with the Boy Scouts, but their motto “be prepared” isn’t one of them.

Personal finance should reflect our personal priorities. We sometimes need to be reminded that “personal finance” is the means to an end, not the end itself. We were not put on this earth to make money, buy a house or graduate from college. These are all good things, but only if they are put to good use and help us to achieve other worthwhile objectives. What we do in life matters, as does how we do it. Life is not a game, and it not true that “he who dies with the most toys wins”. (I saw this slogan on a tee shirt years ago at the Deutsche Bank gym and it has bothered me ever since.) Before we get too far into building our own personal financial plans, we should perhaps think a bit more deeply about our personal values and priorities—what we hope to accomplish in this life and why. And we should reconsider our financial plans from time to time over the balance of our lives, as our experiences, understanding and personal priorities change.

Human capital is the most valuable asset many of us will ever have. How would you value an investment that pays you annually, with moderate risk, an amount of $____ growing at a rate of __% over the next 50 years? [Fill in the blanks with your own earned income expectations.] This is how you should think financially about the value of your human capital—your native intelligence, work ethic, personal integrity, education and employment-related skills. For many student readers, your human capital after graduation from college will already be worth several million dollars and it will likely grow substantially in the years to come as you gain real world experience, skills and expertise. Many of you will for personal reasons choose not to maximize the financial return on your human capital, but will instead pursue careers in public service or in fields which generate substantial non-monetary returns (intellectual engagement, work-life balance etc). This is not only OK, it is laudable and it would perhaps be good if even more of us chose these paths. But our human capital is only valuable if we put it to good use, and for most of us this means getting and keeping a good job in whatever field we choose to pursue.

Don’t take your job for granted. In a strong labor market, many young people seem to take for granted their continued employment and employability. They assume that if they quit their job (or lose it) they can always get another one, with a few weeks or months off work to boot. But this was not the experience of many people who found themselves unexpectedly out of work during covid, many of whom are still unemployed. And it will not be the experience of many who find themselves looking for a new job in a less robust labor market than we have currently. When I was young, I know that I often took my continued employment and employability for granted and as a result I became somewhat arrogant about my own prospects with little sense of personal vulnerability. This was not only offensive to others (including my employers), it also jeopardized my ability to provide financially for my family when my career hit some unexpected speed bumps down the road.

Make sure you have good health insurance. If we didn’t know this pre-covid, we do now. We should all make sure we have good health insurance and keep it in place without interruption. Arrange for premiums to be paid automatically so you don’t inadvertently let your policy lapse. And if you have employer-provided health coverage with good benefits, you should be thankful for it. Only half of all US residents are covered by employer-sponsored health plans, which are subsidized not only by employers but also by the US tax code. In 2019, more than 10% of all Americans did not have any form of health insurance—including many of the most vulnerable among us—and this number has likely increased during covid. The Affordable Care Act (aka Obamacare) extended health insurance coverage to 20mm previously uninsured Americans, but ACA policies are generally not great and are often quite expensive for those who don’t receive government subsidies. If you don’t have health insurance, one trip to the emergency room can easily set you back several thousand dollars and the cost of a major surgery can run well into the five or even six figures. For those with chronic health conditions, the lack of affordable health insurance may mean a lifetime of struggling financially to make ends meet, often unsuccessfully.

Rent don’t buy. We all know individuals who gave up their high cost apartments and moved into cheaper digs during covid, sometimes by moving back in with their parents. Perhaps this is true for some of you, in which case I am sure that your parents loved having you back home but I suspect that you may have had somewhat more “mixed” feelings about the situation. Others were able to stay in their own homes only with the benefit of rent deferrals and eviction moratoriums, which will soon lapse. But as difficult as covid was for renters, it was likely much worse for those who owned their own homes, and especially those who had financed the purchase with a big mortgage. There are many good reasons to buy a house or apartment at the right point in your life, but residential real estate is a very illiquid asset particularly in a bad economy. One should not underestimate the value of the flexibility inherent in a leasehold, particularly for young people at a time of high economic uncertainty and demographic mobility. It is one thing to pay a few months of rent on an unused apartment; it is another thing entirely to be forced to sell a home in a down market and watch your home equity quickly vanish, leaving you not only homeless but broke.

Build your rainy day fund. It is not really fair to compare the economic impact of covid to the proverbial “rainy day”. Covid has been more like a financial typhoon, leaving devastated individuals, families and communities in its wake. But as bad as covid has been, the economic and financial impact on most of us has been much less severe than what our predecessors experienced in the 1930s during the Great Depression. During covid, the US federal government went to extraordinary lengths to shelter many of us from the most severe personal financial consequences of the pandemic—with PPP loans, extended and enhanced unemployment benefits, covid-relief checks, student loan deferrals, mortgage and rent deferrals, eviction moratoriums, etc.

Since the onset of covid in early 2020, the US federal debt has increased by $5+tn and the Federal Reserve has increased the money supply by $7+tn. These sorts of unprecedented governmental expenditures may well have been completely justified under the circumstances—I am not suggesting to the contrary—but it may take us years if not decades to deal with some of the financial aftershocks. And so as a matter of financial prudence, we should probably not assume that we will all benefit from this same level of governmental support during our next economic or financial crisis, whatever the cause and whenever it comes. (Keep in mind that our last global financial crisis was just 12 years ago and we still had not recovered from the financial aftershocks when covid hit.)

It is commonly accepted personal financial planning advice to build an emergency fund equal to 3-6 months of income (or expenses), although many of us seem to have great difficulty doing even this for various reasons. (It has been reported that the average American does not have enough cash savings to pay for a $400 auto repair bill.) Three to six months of savings may be adequate for many people in “normal” circumstances, but it strikes me as pretty light in a post-covid world. During covid even 12 months of cash savings might not have been sufficient for many people, or rather would not have been but for the various government support programs noted above.

Building a substantial emergency fund (or having a secure low-cost line of credit) should be a higher financial priority than it seems to be for many of us, and it should probably be prioritized ahead of many other good uses of spare cash (eg paying down student loans or funding your retirement plan). And this is true even in a low interest rate environment like the present. The only obvious exception I would make (after paying one’s rent, health insurance premiums etc) is for paying down credit card debt, which can incur interest charges of 15-20% or more per annum (plus late payment penalties). Very few of us can stay solvent for long if we are carrying (or growing) a large unpaid credit card balance or other forms of usurious debt (eg payday loans).

But holding large amounts of cash does have a cost. While it is said that “no one goes broke with too much cash”, it would perhaps be more accurate to say that no one goes broke quickly with too much cash. (I hold a lot of cash and having been going broke slowly for years now.) Inflation and low interest rates will over time eat away the real value of cash, but an appropriately sized rainy day fund will nevertheless come in handy during emergencies. Most of the time that rainy day fund may seem like an expensive luxury—the proverbial cash burning a hole in your pocket—but it may literally be a life saver in times of emergency. Think of the cash like an insurance policy, and a relatively low cost one at that.

If you have dependents, buy life insurance and more than you think you need. No one likes to buy life insurance, perhaps because it reminds us of death or worse because it conjures up images of the life insurance salesman Ned Ryerson from Groundhog Day. But if you have financial dependents—spouse, children, aged parents or others you are supporting—then you probably need some amount of life insurance, unless your personal net worth is quite substantial and liquid. The odds of any one of us dying in any given year is quite small, of course. Even at my age (65) the probability of death in the next 12 months is only about 1% (but growing quickly), and for most of my student readers it is only a small fraction of 1%. During covid, of course, the likelihood of premature death went up significantly for many. But even in a covid world, the primary risk to be managed in one’s financial plan is attributable not to the frequency of occurrence (very small) but from the magnitude of the consequence (very large). And for those of us with dependents, the financial consequence of premature death can be catastrophic for those we leave behind.

Good financial planning, including the right amount and type of life insurance, will help mitigate this risk. When I was 30 years old I had a good job, a non-working spouse, three young children and a large mortgage. I should probably have had several million dollars of term life insurance to pay off the mortgage and provide at least partial income replacement in the event of my premature death. At that time I did have some life insurance, but mostly of the wrong type (whole life) and not nearly enough of it (amount of death benefit). Fortunately I did not die, but the lack of adequate life insurance was nevertheless financially irresponsible on my part. During covid millions of people died unexpectedly “before their time” and it is likely that many of them were underinsured, including many working age adults with dependent families. For young people in good health, life insurance is cheap. Buy some, more than you think you need, even if it means talking to Ned.

Take care of one another. We do not live on this earth alone. We all have family, friends and neighbors who are important to us (and us to them). And we all know that there are many less fortunate people who could also use our help, particularly in times like the present. Our personal financial planning should reflect and accommodate these social relationships and obligations, in ways that are feasible, appropriate and sustainable. For many of us during covid, this has meant opening our homes to out of work family members or others, continuing to employ and pay individuals whose services we didn’t really need, and increasing our charitable contributions to organizations that serve those most in need. It has also meant behaving responsibly from a public health perspective, by following covid protocols, wearing masks and getting vaccinated despite the personal inconvenience, expense and risk. A pandemic is the classic example of a “public” health crisis, where our individual behavior impacts those around us and not just ourselves. By all means we have to take care of ourselves and our families, but we also have a moral obligation to take care of others as well. And our personal financial plans should anticipate these expenditures and reserve the necessary resources.

Life is short. Enjoy it! Many of us lost loved ones during covid, and some of these stories have been truly tragic. Losing loved ones is never easy, of course, but for some reason covid deaths have seemed different and not just because of the large number of “excess deaths”. We all know intellectually that life is unpredictable and short, but sometimes it takes the unexpected loss of a loved one to remind us of this fact. And being reminded of this during covid should impact how we think in the future about our personal financial (and non-financial) priorities and the choices we make on a daily basis.

Covid has been a truly horrid experience for many, but there are some good things that have come out of it as well. Many individuals have rediscovered the joys of a warm and welcoming home shared with family and a small number of close friends; have realized that they do not need to commute 3-hours a day to a job they can do remotely; have decided it is finally time to make a fresh start and stop laboring in an industry with notoriously bad working conditions; or have restructured their personal plans to prioritize family and friends, public service or charitable giving. We should embrace these new opportunities for change when appropriate, and not just let them pass by unnoticed when things get back to “normal” and we all return to the daily grind. Work is important, of course, but it is just one part of life. We should all work to live, not live to work.

It is said that we should never let a crisis go to waste. And this is how I feel about covid. It was a major crisis of course, painful for all of us and a disaster for many, but I think we all probably learned some important lessons about life and about ourselves during covid. And if that is true, then this latest crisis will not have gone entirely to waste.

Be well and stay safe.