June 18, 2020
More than three months after the World Health Organization announced COVID-19 outbreak as a pandemic, many Americans find themselves evaluating their financial picture. The pressure of stock market losses, less income and increasing debt is taking it’s toll and many are wondering how, and if, they will ever recover.
While many of us have never lived through anything like COVID-19, this is certainly not the first time Americans have suffered financial hardships. There are the events that effect everyone, like the Great Recession and 9/11. Then there are the individual occurrences that many of us encounter through our lives that can set us back financially like job loss, divorce, or the need to supporting family members.
However, the way people have dealt with financial challenges in the past may shed light on how we can overcome the financial repercussions of COVID-19.
A new study by Ameriprise Financial found that nearly three-quarters of people have experienced at least one major financial setback – often costing more than $50,000, and in some cases more than $100,000. But almost 90% of the 3000 respondents staged a comeback and managed to put their finances back in order.
“Unfortunately, as we’ve seen in recent months, everyone – regardless of their income or assets – is susceptible to financial setbacks,” said Marcy Keckler, Vice President of Financial Advice Strategy at Ameriprise. “Though it’s hard to predict exactly when and how an event will impact your finances, we can anticipate that there will be ups and downs along the road to financial security. As investors grapple with the impact of the current crisis and look for ways to get their finances back on track, we can learn useful lessons from people who’ve previously experienced financial setbacks, and eventually made a comeback.”
Most Common Financial Setbacks Experienced:
Survey participants said the number one financial setback they experienced historically was market losses (26%). Other financial hurdles they most often cited included earning less money than expected (23%), job loss (20%), supporting family members financially (17%), bad financial decisions (16%), divorce (12%) and illness (12%). More than half (52%) of respondents said their setback cost them $50,000 or more – of these, a third (34%) said it cost $100,000 or more.
Top 5 Paths To Recovery:
- Time: Regardless of the event, one thing about bouncing back was consistent – it took time. Nearly two-thirds (64%) of investors said it took them one to five years to get their finances back on track, while some respondents (19%) said it took six to ten years, and 8% said it took more than 10 years. Only 9% of respondents said it took less than one year to make a comeback.
- Adjust Your Spending: After experiencing a financial setback, the most important thing you can do is re-evaluate your spending. 50% listed this as a step taken to get back on track. Start by dusting off your budget, or creating a new one. Split all expenses into two categories: needed and wanted. These are often referred to as fixed and discretionary but in a financial crisis, it’s easier to make adjustments if you take a hard look at what you can live without. Start at the bottom of your “want” expense list and start cutting. Keep cutting out the things you can live without until you’re able to live on your current income and/or savings.
- Save More and Better: 37% of survey respondents said they changed their saving behaviors. So many Americans don’t have enough in their emergency and retirement accounts, and it causes the most pain and damage during a financial crisis. Not having adequate savings forces many to go into debt, which makes recovery that much more difficult. When adjusting your spending, cut enough of your ‘want’ expenses to allow room to save each month. Start with whatever you can, as little as needed. The most important thing is to start.
- Find More Income: This may seem obvious, but still it’s sometimes overlooked. There are only two ways to have more money: earn more or spend less. Of the respondents, 26% said working more or longer helped them out of their financial troubles. If possible, ask for more hours at your current job. If not, get a side hustle. The opportunities to make extra income are endless, and there’s something for almost everyone. Think about all of your skills and abilities and how you can monetize them. Examples are: childcare, consulting, freelance writing, virtual assistant, cleaning, graphic design and landscaping.
- Meet with a Financial Planner: Financial planners can help you navigate the current climate, and prepare for your future. They consider your whole financial picture, work with you to manage your current financial troubles, create goals and develop the best path to recovery.
The good news is that there’s opportunity to learn from our setbacks, and grow stronger. When it comes to planning for their future, setting aside emergency savings was the number one way respondents said they were now preparing for the unforeseen. In fact, as of January, almost all who’d previously experienced a financial setback (97%) had created an emergency savings fund, and the majority (64%) said their cash reserve could cover six months or more of expenses. The study also shows the majority of respondents (56%) said they now feel stronger as a result of having experienced a financial setback.
As for the current crisis we’re living in? Keckler advises us to stay focused and be patient. “We’re halfway into the year and have seen millions of people’s finances upended overnight,” said Keckler. “No one knows what lies ahead, but it’s important for investors to stay calm and focused on their financial goals. With time and patience, they may be able to bounce back from financial hardships.”