The long-term consequences of the global economic shut-down are, at least for now, unknown. But we can see some short-term implications that should cause us to pause, reflect, and plan when it comes to our future financial state, even if we outsource the financial planning task to others. For example, unemployment levels in the United States have spiked in a manner that many would have previously declared nearly impossible. Businesses of all sizes and shapes are starting to declare for bankruptcy protection, and some will be closing their doors for good. Educational systems are struggling with the uncertainty of how to continue instruction in a lingering pandemic situation. All of this has the potential to lead to a fairly dire economic situation.
How do successful household CFOs respond to this economic chaos in the short-term and the inescapable reality of lingering uncertainty for the long-term? One competency of wealth building comes to mind in particular. Planning and monitoring personal finances are critical competencies of those who build and sustain wealth over time. Recall from The Millionaire Next Door that those who are adept at accumulating wealth (i.e., prodigious accumulators of wealth or “PAWs”) spend significant amounts of time monitoring their investments and planning for future financial decisions. In our research for The Next Millionaire Next Door, these findings were supported: a full 64% of PAWs report agreement with the statement “I spend a lot of time planning my financial future.” Only 49% of under accumulators of wealth (or “UAWs”) agree with this statement. Those who monitor and plan their finances tend to have a higher net worth than those who forego those behaviors, regardless of income level or age.
But even the most skilled household CFOs are having difficulty right now seeing through the haze of our current economic conditions to anticipate what the future may hold. While the future is always to some extent uncertain, it is even more so today. For those who exhibit millionaire-next-door-type characteristics, the most common reaction in this type of environment is caution and a “tightening of the belt.” This prudent attitude and behavior tends to lead to short-term behavior that prepares for the worst-case scenario, maximizing the probability of long-term survival (financial or otherwise).
This data begs the question: What about those who are more inclined to focus on the short term, or that show a propensity to enjoy prolific consumption and spending money? Do prolific shoppers read the headlines alluded to above the same way as those who tend to be more frugal? How is the UAW’s reaction to the current economic environment different than the PAW’s? We have seen some amount of data and anecdotal evidence indicating that, at the beginning of this crisis, some amount of prudence and caution set in. As this crisis progresses and we all become somewhat accustomed to a new normal, some of us may begin seeking a return to life as we knew it. Recent news reports indicate that shopping for entertainment (dubbed “relief spending”) is not only chewing through our budgets but also consuming any surplus that may arrive in the form of stimulus/relief checks. Thus it appears that while some of the household leadership team may be engaged in the prudent and cautious efforts of stockpiling cash and attending to the details of finances, others may be looking to online retailers to ease their anxiety. As an example, consider the analysis from Walmart’s CEO recently:
“Call it relief spending, as it was heavily influenced by stimulus dollars, leading to sales increases in categories such as apparel, televisions, video games, sporting goods and toys . . . .” [Wal-Mart CEO Doug McMillon]
Of course, depending on the financial stability of the household, this so-called “relief spending” could have the opposite psychological effect. While we may gain some short-term pleasure by buying something new, the long-term effects of relief spending may leave us less prepared than before for whatever crisis comes next.
Depending on your perspective, geographic location, or other level of experience with the Coronavirus and its health- or economic-related outcomes, the current situation may not appear to be as dire as it seems to others. Regardless of whether COVID-19 has struck your ZIP code or city in a significant way, the state of the financial world is changing. The good news is that there are key characteristics that can help lead our households through the crisis. As the household CFO, if you tend to have a financial personality that aligns with prudent spending and a focus on the long-term, the chances of success increase. If not, consider adopting some of the millionaire-next-door type behaviors and attitudes, even if only during this season, to ensure your household is prepared for the increased unknown.
6 thoughts on “Relief Spending, Personality, and Planning”
We are saving more money than ever. I feel absolutely horrible for those out of work or who have had their hours cut. We have, for the most part, really watched our spending and continued to use a monthly budget to guide us. The budget has helped us to prosper and we will continue to make one every month! My son graduated high school this month and, unfortunately, we didn’t get to take the trip we promised him. We also didn’t spend money on yard signs announcing his graduation. Instead we are saving that money because we know we will still go on that trip, but it will have to be delayed. And we are all OK with that.
SW Airlines cancelled our trip to Hawaii and gave us credit for our next trip. I have a senior this year so maybe a trip to be scheduled next summer. I’m glad though I can set aside the funds for the unknown. I’m fortunate to be an Essential Worker as are my older two children. COVID-19 was a blessing. My renter was able to stay in the US 3 more years from 2021. She is also an Essential Worker. It meansxthe ability to save more. No job is guaranteed but we are grateful. Stimulus funds assisted in paying forward monthly expenses to be prepared for any storms ahead.
Very good summary of the problems created by the stimulus program.
The extra money was used by most of the people who got the money to buy things that didn’t help the economy very much.
Now we will have problems
For us(my wife and I) we added to our “go to hell fund” with the stimulus money. We are both lucky that we are still working. With all the upheaval the virus has caused being cautious with spending is something we thought to be a good idea. Great post! Thank you
My stimulus money made up for the two weeks I was considered “nonessential” and on furlough, so it was distributed toward household expenses, investments and funding my HSA just as a paycheck would have been. In fact, because I wasn’t commuting to work, my living expenses were cut nearly in half during the shutdown and I leveraged my time off into some freelance projects that ended up paying me more than I expected. I may be one of a handful who end up better off in 2020.
Neither wife nor I qualified for “stimulus” checks, and we didn’t lose our jobs either in the high tech industry. We are definitely PAWS. We learned from the Dot Com crash, the Great Recession and now the CCP-19 pandemic, that Warren Buffet was correct when he stated the greatest opportunity for wealth growth is when there’s “blood in the [Wall] streets”. We’ve been very fortunate; our portfolio increased just over $1M, increasing our overall net worth by 21% or so. I jokingly tell my wife a 10% drop in the S&P500 is a correction, 20% a depression and a 30% a “gift from God”. The problem with UAW is they do not deeply understand the consequences of “opportunity cost”, which limits options later in life as one’s career draws to a close. There are consequences to a lifelong materialistic lifestyle.