By Eric Tashlein
Your Finances
Eric Tashlein
While many people suffered financially due to job losses caused by the coronavirus pandemic, savings rates actually soared in March and April.
Americans increased their savings rate more than 1.5 times in March and then nearly tripled that rate in April, sending U.S. savings to a record $6.15 trillion, according to the U.S. Bureau of Economic Analysis. Over the previous six months total savings averaged $1.3 trillion a month.
Researchers said most employees continued working from home and had fewer opportunities to spend money on travel, eating out, entertainment or goods, so they were essentially forced to save.
If you are fortunate enough to fall into this category, the question becomes what to do with your excess cash? Will you go out and spend like mad now that the lockdown period is ending to make up for lost time? Or will you invest or save the money to hedge against future economic shocks? Perhaps you will do both.
The answer should depend on the state of your finances. If you already have a healthy emergency fund and a diversified investment portfolio, it’s okay to take that trip you put off or buy that furniture you were eyeing in February.
If your situation is more tenuous, consider using the excess cash to shore up your financial foundation. Remember, it doesn’t require a global crisis for you to lose your job or develop a health issue. Take the following steps to prepare:
Get on top of your planning. Assess your current financial situation and develop a long-term plan to improve it by eliminating debt and cutting spending. Create a comprehensive financial plan encompassing retirement planning, tax planning and investment planning, something a certified financial planner can help with. Obtain the types of insurance coverage you need, from disability insurance to life insurance.
Think like a millionaire. Most wealthy people get that way by working hard and then living below their means. They do not buy the fanciest house and the priciest car, nor do they indulge in unnecessary luxuries and over-the-top vacations. Rather than taking pride in possessions, they take pride in being productive and setting aside money to take care of their family’s future.
Build an emergency fund. If you don’t already have a savings or money market account set aside and designated as your emergency fund, start one right away. Set aside enough money to live on for six to nine months with no income stream. It’s a cushion that provides real peace of mind. Once your emergency fund is in place, you can start dedicating additional savings to your investment portfolio and to other savings accounts.
Adopt the “pay yourself first” strategy. Once you’ve started or enhanced your savings and investment program, keep it going by using automatic savings plans. These programs sweep money from your income directly into savings or investments accounts, ensuring that you prioritize the future first. If the first things you do with your income are pay bills and spend on goods and entertainment, it’s likely there will be nothing left over to contribute to savings, and you may even slide into debt.