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The one-year anniversary of the COVID-19 pandemic beginning to wreak havoc in the U.S. is fast approaching. With it comes the grim reminder that millions of Americans have been infected, hundreds of thousands have died and countless lives continue to be affected by this ongoing crisis. It's important to give those traumas their due, and to recognize that the threat is not over yet, even as vaccines are being administered. But it's also worth considering what lessons can be carried through to post-pandemic times.
U.S. Consumer Finances During the Pandemic
The COVID-19 crisis caused massive job loss and sent the economy spiraling. Millions of Americans lost their jobs, leading the government to provide enhanced federal unemployment benefits and extend protections to workers who usually wouldn't qualify, such as gig workers.
But the economic story wasn't all negative. In fact, the average FICO® Score☉ rose by seven points in 2020, to a record-high 710, according to Experian data. Most Americans—69%, to be precise—now have credit scores of 670 or higher. That's at least partly due to average credit card debt dropping by 14% and credit utilization ratios declining by 12%, both of which factor heavily into credit scores.
There are a number of reasons why Americans' credit profiles may have improved during the pandemic. Relief measures such as stimulus payments and automatic student loan forbearance may have enabled people to pay down some of their other debts or save money, reducing their dependency on credit cards. Homeowners may also have been able to suspend their mortgage payments, freeing up cash for other bills. Forbearance on federal student loans was recently extended until October 2021, providing further relief for the millions carrying student debt.
These measures won't last forever, of course, and people will still need to find a way to pay their mortgages, rent and student loan bills when forbearances and moratoriums end. However, there are steps you can take to establish financial stability before those payments come due again, and which will help prepare you for future economic shocks.
Create an Emergency Fund
Those who had extra savings stashed away for a rainy day may have been shielded from some of the economic fallout from the past year. An emergency fund serves as a buffer between you and financial hardship. If you lose your job or suddenly become ill, you don't want to panic about how you're going to pay your bills or buy groceries. By building up your savings now, you can help avoid a financial crisis in the future.
Ideally, your emergency fund will have enough money to cover all of your expenses for three to six months. If you've had to use emergency savings over the past year, this may seem like a huge amount, but you can use it as a guideline as you're able to begin saving again. When calculating how much you need to save, consider:
- Mortgage or rent
- Internet and phone service
- Insurance (medical, auto, homeowners, renters, life, pet insurance)
- Monthly prescriptions
- Car payment
This is also a good time to review your monthly budget and look for ways to reduce your expenses. By cutting non-essential purchases, at least for a while, you can quickly build up your emergency fund.
Although having six months of expenses in savings is optimal, don't stress if you can't sock that much away to start. Putting any amount of money aside for emergencies will help you avoid taking on debt during a crisis.
Keep Your Spending and Debts Low
Widespread restrictions on shopping and dining out, not to mention social distancing mandates, took a toll on people's psyches this past year. But those limits also created an opportunity to shift habits away from spending to emphasize savings. Experian found that 32% of Americans were spending less or attempting to cut back in 2020. Most states also saw a drop in average consumer debt as well.
Being more prudent with spending is a habit that will serve you even after the pandemic ends. Mindful consumption can help you avoid impulse purchases and credit card charges, either of which can leave you strapped for cash or saddled with high-interest debt. If you often found yourself frustrated by your spending habits pre-2020, you can turn the pandemic into an opportunity to establish new attitudes around money.
By reducing your spending, you can put more money in the bank. Whether you leave it in an emergency fund or an account for long-term goals, such as buying a house or taking a much-needed vacation after the pandemic ends, you'll have the satisfaction of knowing you're building toward your bigger picture. You may even decide to begin investing once you've topped off your emergency account.
Keeping your debts as low as possible is also important. For one thing, it's difficult to pay down debt during an emergency. You want to keep as much cash on hand as possible, but you also have to make your minimum monthly debt payments to avoid late fees and default. Missed or late payments also appear on your credit history and can lower your credit scores. High-interest debts, such as credit cards or personal loans, can also become more difficult to pay down if your hours are cut or you're out of work.
If you keep your debts to a minimum, it will be easier to maintain good credit regardless of what's happening in the broader economy.
Expect the Unexpected
Most people will tell you they never expected to live through a global pandemic, and at the start of 2020, few people could have imagined how the year would turn out. But there's an important lesson in that, which is that anything can happen. Hopefully the world won't see another pandemic in the near future, but it's possible. Economic downturns are inevitable, at some point or another. All the average person can do is to think differently now about preparedness.
That doesn't mean you should avoid spending money at all costs or that you should never splurge on a vacation or a purchase you've had your eye on for a while. It simply means that it's wise to prioritize things like emergency savings, retirement savings and other financial buffers before making extravagant purchases.
It's also a good time to take stock of your lifestyle and consider where you want to put your money and attention going forward. Perhaps you've been feeling weighed down by having too much clutter or too many possessions. Maybe you'd like to be able to travel more often after the pandemic ends. You have an opportunity now to downsize and sell some of your unwanted items, and then put them into a fund focused on your most meaningful goals.
The world has seen how quickly life can change, and that may have you thinking about seizing the moment or taking advantage of new opportunities as they arise. Building habits around financial stability and saving can allow you to do just that.
Set Aside Money for Emergency Supplies
Even before COVID-19 and the widespread supply shortages that came with it, the Centers for Disease Control and Prevention (CDC) recommended having an emergency supply kit in your home. The list of must-haves includes a two-week supply of food and water for you and your family members, a seven-day supply of prescription medications, and emergency tools.
It's important to budget for these items, whether you're building an emergency kit from scratch or simply updating food and medical components in an existing one. You'll also want to keep some cash on hand in case of power outages in which you can't pay for goods with a credit card or withdraw money from an ATM.
Setting aside emergency cash and ensuring you have enough money in the bank to keep your kit current can help you in the event of a bad storm, natural disaster or other unforeseen events.
Focus on Everyday Habits
Financial preparedness isn't something that happens overnight. By developing a budget, consistently saving money and keeping an eye toward achieving stability and momentum for your goals, you can position yourself to better withstand unforeseen crises.
One helpful measure of your financial well-being is your credit score, which reflects how you're managing debt. It can be a good barometer for whether you've created healthy money habits and are on your way to becoming more resilient in the face of a crisis. A good credit score can also help you reach your financial goals by reducing the cost of borrowing money and helping you qualify for everything from an auto or mortgage loan to a credit card with excellent travel rewards.
If you're not sure what your credit score is, Experian Boost™† allows you to not only access your score, but also potentially raise it instantly. You can also get free credit monitoring from Experian so you can track activity in your credit file and keep an eye on your credit score.
While everyone hopes to see the COVID-19 pandemic wind down during 2021, one of the best things you can do for yourself this year is to learn from the turbulence of 2020 and work toward improving your financial health so you can weather whatever may come next.