What Did We Learn About Money in 2020?

Welcome to a new year! Wait, does this mean we can erase 2020 from our memory bank and just start fresh as if nothing ever happened? If only things were that simple. 2020 wreaked havoc on our jobs, our lifestyles, and our finances. We’re now left with the aftermath, and current-math, of a pandemic. Moving forward is not without its challenges, but at least we have 2020 vision (sorry, couldn’t resist the pun!).

Taking a moment to reflect on the past year, what did 2020 teach us about money? Here are three takeaways:

Have an emergency fund. According to a MagnifyMoney survey, over 4 in 10 people tapped into their emergency cash during the pandemic. With so many unemployed, and tighter restrictions on borrowing money, having an emergency fund puts people more at ease when times are tough. That also means when times are good, we should focus on building and maintaining our emergency fund. Between three to six months is the general rule of thumb, up to twelve months if your situation warrants it.

Keep it simple. In 2020, we revisited needs vs. wants with intensity. Everyone shed junk from our homes during quarantine, companies moved to less expensive states, and many folks downsized to smaller places or moved in with the parents. Although we will eventually go back to vacations and luxury things, we may be willing to sacrifice a bit more the next time around. Budget for the essentials, and perhaps shed some nice-to-have, but unnecessary expenses.

Investors, don’t panic. If you held investments in March 2020, your investments probably took a big dip. Despite the tumble, if you had held onto your investments from January 1 to December 31, 2020, you likely ended the year with a gain. Several stock market indices actually went up in the year of 2020 — the Dow with 7.3% gain and the S&P 500 with 16.3% gain. Here’s a good lesson not to make any sudden moves and stay invested for the long-term.

These lessons don’t just apply to adults. As with the Silent Generation, who was born in or around the Great Depression, children are watching how we navigate the pandemic. We will shape how they behave for the rest of their lives, giving us one more reason to focus on how we handle money this year and beyond.

If getting your personal finances is a priority in 2021 or you want to keep setting an example for future generations, then follow along each month as we dive deeper into topics like savings, employment, investing, and more. At the end of each post, we invite you to answer one question, and as always, your ideas and suggestions are welcome!

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Do You Need A Rainy Day Fund?

Rainy day fund. Emergency fund. Cash reserve. Call it what you prefer, but the important thing is to have one. What is a rainy day fund? It’s money set aside to weather unexpected “storms” in your life. For instance, did your car break down, and you need money for a repair? Lost your job and need money to survive until you find another job? Have a big medical expense that came out of the blue? When you suddenly need money, you’ll be thankful that you have a rainy day fund.

To build your own rainy day fund, you need to save towards it. Make it one of your savings goals, just like any other big purchase you wish to make. As you accumulate money in your rainy day fund, you may decide to cap it after a certain amount. If you earn steady income, you may find that an amount equivalent to 3 months’ expenses is a sufficient target goal for your rainy day fund. If your income fluctuates from month to month, you may feel more comfortable with covering up to 6 months of expenses through your rainy day fund. Some people choose to continue saving towards their rainy day fund even after they reach a comfortable amount. That way, if they ever need to break into the rainy day fund, they already built in a way to replenish what was spent.

Young savers probably don’t have a reason to save for a rainy day fund. After all, Mom or Dad is the rainy day fund. Kids can break from this mentality by having something to be responsible for. What is a possible sudden expense that can hit? Maybe it’s a vet bill for your pet. Or perhaps a replacement for a broken cell phone. It might even be new cleats for soccer. If kids are given the responsibility, they will more likely build a habit of saving for that rainy day fund.

Why make a rainy day fund a savings priority? Let’s play out the scenario without a rainy day fund. You could tap into savings for other goals to pay for this expense. But that means giving up or delaying those other goals. Some goals, like college or retirement, don’t have much room to postpone. If no savings exists, you would need to borrow money. Borrowing money requires that you pay back the loan, with additional interest, and that payback eats away at the money you earn. Not to mention if another unexpected expense occurs, even more money goes into paying debt. To prevent debt from taking control, put that rainy day fund first!

Regardless of what other financial goals you have, a rainy day fund should be at the top of your list. If it suddenly rained, wouldn’t you rather have an umbrella? That is exactly how a rainy day fund works!

Homework: What is the right amount for your rainy day fund? If you do not have one already, how much can you devote from monthly savings to build your rainy day fund?

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