Sam Brownell was recently quoted in two GOBankingRates articles, “8 Major Ways We’ve Had To Adjust Financially Due to the Pandemic” and “How We Budget Has Changed Forever”, and wrote this blog post as a follow-up piece with his full thoughts:
Spending and Savings
The COVID-19 pandemic has had a huge impact not only on the macroeconomy, but also on Americans’ finances and savings and spending habits. A lot of Americans have changed their spending habits due to the pandemic, as certain industries were deemed essential, and others were shuttered. For example, at Stratus Wealth Advisors, we work with many business owners in the lumber and hardware industry and as these were essential businesses, they experienced rapid cash flow growth. Using that cash flow to diversify their assets outside of their business was a great way to grow their liquid net worth – a key planning goal for business owners.
We’ve noticed that many of our clients, as well as others we talk to have become more meticulous with their spending. A lot of people feel the need to become financially savvy, and so we have noticed an increase in folks attending our webinars and reading our blog posts. The pandemic opened people's eyes to the fact that just one source of income is never enough. Further, our business owner clients realized how important it was to diversify their net income and not rely on selling their business as the only avenue to fund their retirement. Every downturn is different, and business owners have to prepare like their industry will be hurt in the next downturn.
If you are a business owner, depending on the type of business you have, there may have been a reduction in transportation costs and office supplies. However, a reduction in transportation costs does not apply to certain businesses, such as lumber dealers, who already provided delivery services prior to COVID-19 but have increased delivery services to meet contactless customer demand during the pandemic. Finally, with most people working from home, there has been a lot of investment in communication software such as Zoom and Microsoft Teams so business owners and employees can talk to each other and to clients.
For families it is much the same. There have been areas of savings like gas and travel, and many families will need to continue to weigh their expenses versus their income for months to come. For example, discretionary items have become a source of emotional stress for many families. Do we spend money on a big wedding if we don’t know whether we can actually have it? In cases like these, it is important to discuss the options with all stakeholders in an environment where the family feels comfortable expressing their opinions. At Stratus, one of the biggest lessons we have learned from this pandemic is the importance of listening, which is often more important initially than offering advice.
One interesting aspect of the pandemic is that many of our clients’ aggregate spending has not decreased – it has simply shifted. For example, grocery spending has surged while restaurant and entertainment spending has shrunk. What will be interesting is to see to what extent these spending habits normalize during the rest of 2021. For some clients, they can’t wait to travel and go to restaurants again, while others will be much more cautious. We believe the key is understanding how each client’s risk profile has shifted because of the pandemic and meeting them where they are, as opposed to forcing them into a pre-pandemic model.
We have also seen the younger generation becoming more invested in the financial markets and doing research themselves, rather than consulting financial advisors. Generally, I think it’s useful for everyone to plan for their financial future, and time will tell how many younger folks will be interested in third-party advice as their lives become more complicated.
As spending habits have shifted and families have focused on spending less, it has also allowed people to save more – which is always good – but it does not work as well when interest rates are near zero as they have been for the better part of the past decade. We encourage people to save as they always have, by outlining their short and long-term goals and then placing assets in different risk buckets (e.g., cash for next month’s home repair, a mix of stocks and bonds for retirement, etc.) depending on the goal.
In terms of budgeting, it has been fairly similar to pre-pandemic budgeting, whether we are talking to our family clients or our business owner clients. The more uncertain the future is, the greater the need for conservative budgeting and cash accumulation. Budgeting helps to establish some form of accountability across the family and the business. With the uncertainty caused by the pandemic, budgets have had to be updated frequently – as often as every month.
Further, budgets have also been designed to be very flexible to account for sudden expenses or lack of consistent revenue. For example, a 2021 budget is different from 2020 in that it has gotten rid of expenses at the bottom of the priority list – the ones that do not have to be incurred. The removal of non-essential expenses has been crucial for businesses because they have had to increase spending on items such as PPE, deep cleaning services, and social distancing signage, something that was not thought of before the pandemic (except if you were a health worker).
Early in the pandemic, we provided our clients with a cash flow analysis template that allowed them to project income and expenses, and we followed up with them each month to make updates. As the lockdowns continued, we adjusted the frequency of the updates depending on their situation. Folks who work in service jobs or own essential businesses found their lives were more stable than initially thought, while folks in the hospitality or entertainment industries had to be much more budget conscious.
At Stratus, our job is to make sure that people are better prepared for the future – both personally and professionally – through sound financial management, and that hasn’t changed much. The crash in the stock market in March 2020 provided a great opportunity for people to invest at low prices if they had a well thought out asset allocation and rebalance strategy.
The pandemic has reinforced our investment policies of first having a well thought out financial plan and then building an asset allocation based on the unique goals, concerns, and expectations of each client. We believe it is important to set a target allocation and then place a tolerance range around the allocation (e.g., small caps are 10% of the portfolio plus or minus 2%). This tolerance range allows us to monitor portfolios based on risk, and when asset classes are out of balance, we rebalance by selling the appreciated asset and buying the under-appreciated asset. This consistent approach helped to buy equities in March and sell certain equity positions over the last few months as the market has rebounded.
We have not rethought many of our investment strategies since the pandemic, but we have changed some aspects of our planning process. Since we often work with independent business owners, a big change in our advice is tapping into government relief programs. When extra help is available, there is no point in being too proud. Cash is still king and during uncertainty, if you can accumulate cash at low rates or get grants, then it behooves you to do so.
While the pandemic has drastically shifted the economy, finances, savings and spending habits, and our approach to financial planning, not all of it has been bad, and we continue to try to look on the bright side – and help our clients do the same.