I recently sat down for an interview with Leslie Gaydos who is a news reporter from NBC right here in Boston. The focus of the interview was the COVID-19 pandemic’s surprising side effects when it comes to consumer behavior. You see, with our economic world constantly changing, consumer behavior also changes with the times so this topic is relevant in today’s pandemic-fueled markets. Let’s first take a quick look at history to better understand what this means.
Depending on how old you are, you may have seen the birth of general-purpose credit cards in the 1950s, the OPEC oil embargo of the mid-1970s, or the birth of the internet in the 1990s – perhaps you witnessed all three. These events, among others, all created sweeping changes in how the American consumer behaved and their relationship with money. Some of those changes were temporary while others have been long lasting. Events like the OPEC oil embargo caused a shift in what type of cars we bought and who we bought them from. But that was only a temporary side effect. The end result of the OPEC embargo was a near half century drive toward a level of American energy independence, and these days large pickup trucks are all over the US roads. On the other hand, most of us can’t imagine a world without credit cards or online shopping.
Hmmm . . . I can attest that my 3 girls certainly can’t. The problem with that it is always with my credit card!
So, it might be easy to add the pandemic of 2020 to the list of historical events that changed American consumer behavior. The difference with what we are experiencing now with the pandemic is the suddenness of the change in the way people spend and save. You could call them the COVID-19 “money quirks.”
With our time together this week, I would like to review with you a few things that Leslie and I discussed, in no particular order. And folks, if you are interested in the full interview and missed it, you can see it at https://cutterfinancialgroup.com/media/.
First off, while the economic news has not been very good, including record high unemployment and plenty of stock market uncertainty, a June 2020 survey by the University of Chicago found that 80% of Americans are “satisfied” with their own financial situation. The 80% number is all-time high for personal financial satisfaction. The same survey showed an all-time low of 14% when Americans were asked if they would call themselves “happy.” Much of this surprising contrast seems to be coming from both a sense of gratitude and empathy. Most Americans are saddened for those who have suffered the brunt of the economic storm and at the same time grateful for their own stability through the crisis.
We then moved on to spending, because the most dramatic shift in behavior we’re seeing is how quickly Americans have increased their savings and turned down their spending. Credit card debt here in the U.S. has hit a three year low after peaking just prior to the start of the pandemic in February 2020. This new behavior has created a good news – bad news story. It’s good to see consumers saving more and paying down debt, and for those who are paying down debt, it’s important to be consistent in always at least making minimum payments and tackling high interest debt first. On the flip-side, a swift decrease in spending is creating a drag on the overall economy.
In fact, the trend to save is near all-time modern highs. In April of this year Americans were saving an average of nearly 30% of their discretionary income and that number was still at 20% as of June. In previous years, the savings rate was running near 7%. The pandemic has clearly demonstrated the need for folks to have an emergency fund of three to six months of expenses. For those who have strong savings, it’s important to remain consistent and to keep planning and investing for retirement.
Another unusual new phenomenon is the shortage of coins available in the marketplace. Banks and businesses can’t keep enough coins on hand. This is because COVID-19 has people increasing their use of electronic and card payments, while the US mint has slowed production of non-paper money. This means fewer coins are in circulation everywhere.
As with many previous economic crisis’, more people are seeking the refuge or “safe-haven” of gold. Gold hit all-time highs during the middle of the summer. Here again, we see another COVID “money quirk.” While it’s not unusual for people to turn to gold in times of uncertainty, typically gold and the stock markets have an inverse relationship. The past few months have shown a different story. As the stock market is scratching back to its pre-COVID February 2020 high, gold has risen right along with it. Investing in gold requires people to do their research and I typically suggest you consult a financial advisor who uses a rules-based approach to investing before making any significant moves.
We finished up the interview with some overall takeaways for their viewers. First is that the uncertainty around COVID-19 has made Americans, at least for now, far more conservative when it comes to money. These are the times that make personal budget review as important as ever. You need to be looking at your spending and savings, and then make the appropriate adjustments (If you do not have a budget template, feel free to go to our website to get one).
While we need to adjust to our circumstances and make necessary adjustments, I did make clear to Lesley’s viewers the basics of a good investment system remain the same. A complete retirement system is like building an engine. You need all the right pieces in the right places for the engine to run smoothly. After all, a strategically built investment plan, one which must include a downside risk mitigation strategy, fuels the income that retirees need. So build it well and it’ll survive whatever the economy throws your way. Remember, while we can never predict the markets, it does not mean that we don’t prepare. Make sure you are prepared.
And as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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