How the Pandemic has Changed Our Financial Habits

If you think back to the beginning of the Covid-19 pandemic, and specifically about your finances back then, it’s more than likely that you’re going to fall into one of two camps. Your story is either a pretty difficult one – because your employment was affected by the virus, and you’ve had to rely on other forms of support – or a happy one, because your work was unaffected but you were able to save more than ever. Across the world, but especially in the USA, this story is the same.

Given that, it’s tempting to conclude that the pandemic has fundamentally changed the way that we relate to money, the way we plan our finances, and our financial habits. Look a little deeper, though, and you’ll see that not that much has changed. 

Saving and Spending

First, let’s look in a little more detail at the effect of the pandemic on our personal finances. Back at the beginning of the pandemic, way back in early 2020, there were many who predicted that it would decimate economies around the globe, and that this would have a catastrophic effect on personal finances – as demand for goods and services plunged, jobs would be lost, and many people would sink into.

Now, as vaccination rates climb and we enter a period of re-opening, we can see that this hasn’t happened. Or at least that’s what the headline figures suggest. Instead, it seems that many people have been able to save more than ever over the past two years. In March 2021, for instance, the personal savings rate in the USA — which reflects the ratio of total personal saving minus disposable income—surged to 26.6%. This compares very favorably to the period before the pandemic, when this same rate hovered around 10% for many decades.

It’s also clear, however, that this figure doesn’t capture the complexity of what has happened to our financial habits over the past two years. People who work in professional, white-collar jobs are those who are most likely to be included in this figure, and these people were also least likely to have their work affected by lockdowns. People who work in the sectors that were most affected by the pandemic – hospitality and logistics, for instance – haven’t been so lucky.

In fact, the statistics here are deeply concerning. More than 50% of Americans recently reported to The Balance that they have less than $250 left over each month after necessary expenses, and more than 10% said that their salary doesn’t cover these expenses. Another piece of research by T. Rowe Price is even more concerning, with nearly 70% of respondents saying their financial well-being had been negatively impacted by COVID-19, citing layoffs, reduced work hours/salary cuts, and overall less income as the top three reasons.

Financial Health

At first glance, these trends might suggest that we are entering a new period of uncertainty when it comes to the financial health of the population. It’s apparent that the pandemic has widened the gap between those who can afford to save and invest, and those who don’t have enough income to cover their basic expenses.

The reality, however, is that this is not a new situation. In fact, the pandemic has only exacerbated the impact of financial habits on individuals’ finances. In other words, Covid-19 hasn’t changed our financial habits that much – it’s just acted as a way of curtailing bad habits for those who were already secure, and increased uncertainty for those who were already struggling.

To see this, we need only look at the reason why the savings rate has increased. In most of the surveys already mentioned, most people report that their savings have increased because of reduced spending. That is, the huge balance of savings that has built up over the past two years represents money that would have otherwise been spent on leisure activities that were closed because of the pandemic.

This is quite a bleak insight, in two distinct ways. Firstly, while those who were able to work remotely may congratulate themselves on saving so prudently, it seems that their habits haven’t changed – just the ability to indulge them. Secondly, a proportion of the money they have saved would have otherwise been used to pay low-income workers – pushing these workers into debt.

Building Better Money Habits

It’s not all bad news, though. Take another look at the statistics contained in the research above, and you’ll also see that most people know what good financial habits are, even if they don’t follow them very often.

Specifically, most people appear to be following the standard advice when it comes to building good money habits. For those who earn more than they spend, most of this money will first be saved into an “emergency fund”. These emergency funds have taken a hit in the last two years – prior to the pandemic, 71% said they had a sufficient emergency fund. Now, 42% say they need to replenish their emergency fund, with 44% saying they need to increase the size of it.

Once you have an emergency fund that can cover six to twelve months of expenses, it’s time to start planning for your future financial health. For most people, the next best place to put extra money will be into a pension plan. That’s because many pension plans offer (almost) guaranteed returns over the long term, and your employer may contribute to the plan as well. Once you’ve used your maximum pension allowance for the year, it’s time to invest. Investing a little extra cash from an early age is the best way to build up wealth in the long term, because you will get the most benefit from compound interest if your money is working for you for the maximum possible time.

The Future

And so, to return to the question we began with, it’s pretty clear that the pandemic hasn’t changed habits all that much. The average American now has more savings than they did before the pandemic, but research suggests this is due to the decreased ability to spend this money elsewhere.

It’s also clear that, whatever the future brings, the fundamentals of building financial health will stay the same – put aside an emergency fund, then contribute to your pension, then start to make some low-risk investments.