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Use the Pandemic to Teach Finance Basics

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SARS-CoV-2 microbes over a dollar bill (Credit: NIH)

Like most people, I have found myself challenged by the fallout from the COVID-19 pandemic. The social consequences are very real, so is the financial impact as millions of Americans face economic hardship and uncertainty.

(Related: The Record Economic Boom Is a Mirage)

As advisors, we are in a unique situation to help our clients and prospects reexamine their financial situation and goals. It is time for us the pandemic as a chance to re-envision their situation. As is the case with most of life, each hardship and challenge contains lessons to be learned. These lessons, if properly understood, can lead to long-term, positive changes.

Nowhere is this truer than in the area of personal finance. Even though the United States has long had one of the most successful, respected, and trusted financial systems in the world, COVID-19 proved that we are still vulnerable to “black swan” events.

The pandemic exposed numerous shortcomings and weak spots in the global financial system and highlighted the need to preserve market liquidity. Long-term interest rates created a situation where companies have taken on far too much debt.

The result of this excessive debt is that rating agencies will downgrade many companies. The downgrades then have the potential to create a tsunami that will overwhelm financial markets as the high-yield market has difficulty handling increased inventory.

We’ve also seen that service-based economies were not ready for an event such as the pandemic both here and around the world. Sharp declines in retail sales, for example, resulted as lockdown measures kept consumers at home. Many stores were forced to shut down, and, likely, a good percentage of those will never re-open. Even the surge of Amazon sales has not been able to blunt the pandemic’s impact on the retail sector.

Similar stories are being reported in the hospitality, travel, education, and senior services industries, all of whom have been strongly impacted by the COVID recession.

What should your clients do to keep on track during COVID-19?

It’s easy to become paralyzed by fear and uncertainty as we attempt to re-start the world. It is challenging to shut off distractions, filter news reports, and think of moving forward with money decisions and retirement planning.

However, there are some important financial planning lessons to be gleaned from the pandemic. If your clients apply these solid, “old school” principles of wealth creation and preservation, they can emerge from the chaos in better shape than you might imagine.

Your clients can do four things to avoid losing ground planning for their ideal retirement during the pandemic and after it has faded away. Use these recommendations to help clients examine and reshape their future and their goals.

1. Establish and protect an emergency fund.

Many of my financial services colleagues have complained that their advice about saving for a rainy day usually falls on deaf ears. Well, thanks to the pandemic, this is no longer the case. People who found themselves jobless and locked down realized that the impact of a crisis is lessened when one is financially prepared. Those who had managed to save six months of living expenses fared far better than those caught flat-footed when lockdowns were announced. An emergency fund is not just a good idea- it’s an absolute necessity in turbulent times.

2. Shift ideas about spending money.

For many folks, the global pandemic changed their ideas about spending. Homes and luxury goods that are difficult to afford even in good times create even more stress when jobs are cut or hours are reduced. I believe that the “lean and mean” mindset that many have adopted out of necessity will continue long after the virus has gone.

3. Think in terms of the long term.

COVID taught us that our economy is fragile in the short term but resilient in the long run. Even if your clients are only a few years away from retiring, they can still have a long-haul mindset. Instead of panicking, your clients need to partner with a trusted advisor like you to find ways to safely grow their wealth and protect it from erosive forces, such as increased taxation and inflation. Having a diversified and long-term approach to finances is key.

4. Prepare.

Emergency readiness is always a good idea. Many Americans live in areas prone to some kind of natural disaster. Having a few months’ supplies of non-perishable food, toiletries, and other basics goes a long way in creating peace of mind.

As we saw during COVID when panic overtakes rational thought, shelf-emptying frenzy sets in. Forward-thinking people can have more peace of mind by accumulating reasonable supplies of food, water, and medicines in case they can’t leave home for long periods of time. This isn’t “hoarding,” it’s just good common sense.

The bottom line: While a constant barrage of bad news can be distracting, your clients need to bond with you as their trusted advisor. Make adjustments that they feel will maximize their returns or protect your wealth their when the economy stumbles. Clients should apply old-fashioned, time-tested principles to their retirement planning, resisting the urge to pivot too dramatically. Doing these things will help clients be more confident, in the future, and less likely to make mistakes with their money.

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Tim Davis (Credit: Davis) Tim Davis, CLU, CEBS, is president of Davis Capital Corp. in Katy, Texas.


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