The last 12+ months have likely had a financial impact on everyone. What kind of impact runs the gamut, from those who lost their jobs or some part of their income to those who managed to save additional money due to their limited ability to eat out, go to movies and concerts, even gather with friends in a world restricted by pandemic concerns.
Regardless of how you were affected by 2020, it can be a good time to review your financial situation and in particular, explore your family’s budget and your approach to it.
There are only 3 things we can do with money: we can save, we can spend, and we can give. According to the Federal Reserve of Kansas City, “savings as a percentage of disposable personal income rose from 7.2 percent in December 2019 to a record high of 33.7 percent in April 2020. Although the savings rate has since retraced some of this rise, it remained at 13.6 percent as of October 2020—higher than its peak in any recent recession and nearly twice its pre-recession level.”1 Given that, let’s look at savings.
No matter what stage of life you’re in, savings plays a huge part in your current spending habits and your long-term goals. There’s a reason the term “pay yourself first” is so prevalent. The starting point for savings is to establish an emergency fund, which is crucial so an emergency expense does not derail your longer-term financial objectives.
Your emergency fund should be equal to about 3-6 months of expenses, depending on how secure you want to be. The events of 2020 have certainly highlighted the critical need for this savings.
If you’re like many Americans, you may have some excess savings as a result of lower expenses, and less extra-curricular activities since March of last year. What should be the priority for this circumstantial “windfall”? First, it’s important to look at your competing goals. Start with retirement to determine the amount you need to save to meet your retirement goals. Next look at shorter-term spending goals like a car, second home, or future weddings. It’s a good idea to write all of these down and work on prioritizing them. We can, of course, assist with an action plan to get these goals on track.
Next month, we’ll discuss the other two uses of money, spending and giving.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.