2020 in review: Top 12 personal finance trends and lessons learned last year

#1: How the concept of emergency savings evolved

Experts tweaked their recommendation on minimum emergency savings prior to COVID-19, but many have doubled down when it comes to conserving money for their personal finances post-pandemic.

The rule of thumb to have around Dh3,500 ($1,000) emergency savings fund if you were paying off debt is now outdated. The bare minimum needs to be one month’s worth of living expenses if you’re in debt-repayment mode. This is why many have become more conservative for their own emergency fund.

When the standard three to six months used to sound more than sufficient for most households, now there are some people aiming for a year’s worth of emergency savings. While that can sound overwhelming for most newbie savers, financial planners still find that most of their clientele currently find six months to be a reasonable time period.

#2: Trying to keep even more cash on hand

The standard personal finance advice is to have at least three months of living expenses stashed away in something liquid, just as a precaution.

Though many transactions are now cashless, the desire to hold more physical cash during a time of crisis may give some people a sense of control over the situation, experts opine. Cash provides a certain level of control and certainty that digital and electronic payments don’t.

How much to withdraw is a personal choice, financial advisers say, while adding that the more important thing is not to panic, because that can lead to bad financial decisions.

When some expressed concern about having enough cash at home because of coronavirus, financial planners further added that one should have cash available, but not because of the virus. The goal now is to have enough cash on hand to be self-sufficient for a few days under any circumstance.

#3: Shift in stance towards upskilling, retirement planning

The use of technology has evidently been taking most to a new level of productivity and growth, and matter experts recommend using the downtime to upgrade skills to stay relevant in the job market, while planning to keep earning for well beyond 60 years old.

While it is still recommended to have a side hustle that you slowly build up over time, keep in mind that 60 is widely seen as the new 40, and many reiterate you will need to keep yourself busy and earning well into your 70s.

COVID-19 has changed the way we should all go about retirement planning. Interest rates have plummeted, as central banks and governments pump an enormous amount of liquidity into the system.

As a result, it takes a much larger amount of capital to generate the same amount of income. Therefore, we all need to be saving more for retirement, withdrawing less in retirement, or plan to make supplemental retirement income.

#4: Changed approach to investments, stock markets

Another crucial lesson was that individual stocks can certainly lose all their value and go bankrupt. However, the whole stock market cannot go bankrupt.

A diversified, balanced portfolio will lose money about one out of four years but will generally trend upwards over time and is highly unlikely to have a negative return over a five-year period, data indicates.

Unless you are a professional money manager, experts reiterate to not try and time markets and enter or exit on the basis of major world events. If the market crash in March made you redeem your entire stock portfolio, the rebound that followed implies risk profiling was wrong and extreme aversion to risk.

Safety can be built by having a large enough emergency fund rather than putting long-term portfolios at risk. Another key personal finance lesson is that asset allocation is the most important part of getting your financial planning right. If you have a good enough safe asset base — high credit quality debt funds, fixed income products — then you can ride out the volatility.

Rather than tips on living frugally, many experts are offering ideas for making more money, whether that’s investing in real estate, stocks or peer-to-peer lending. The starting point is however extreme saving while you are earning a salary, especially if your savings dried up this pandemic. Some still recommend at least 50 per cent of income each year to go into building an investment portfolio.

#5: How vital it is to better allocate money to assets 

The saying that goes to ‘not put all your eggs in one basket’, applies to investments too. It suggests you should not put all your investments in one particular asset.

No one could envisage that pharmaceutical funds, which were facing a slack period since 2015, would generate over 50 per cent returns because of the pandemic. So, it is important to diversify, using asset allocation, and keeping in mind the risk profile of the investor, being you.

Ideally, asset allocation should be done as per the financial goals of the investor rather than the historical performance of the asset.

As a thumb rule, 80 minus your age should be the per cent of your assets invested in equity and the balance in debt. So, if you are 35 years old, 80 – 35 = 45; 56 per cent should be equity (45/80) and 44 per cent should be debt.

#6: Choose gold to complement your money portfolio

Investing in gold is risky but the risks are manageable, many learned this year. Gold can help you manage the overall risks in your portfolio. However, this did prove to be a double-edged sword for most.

As a sole investment, it offers low long-term returns and possible losses. It can be a vital asset to your investment strategy when used correctly. Because gold is an unproductive asset, many experts suggest limiting the amount of gold you include in your portfolio. One suggestion is to add gold to no more than 5 to 8 percent of your portfolio.

Gold prices surged this year to trade over $1,800 (Dh6,611) per ounce, crossing a major milestone not reached since 2011. Now, as coronavirus uncertainty continues to push the precious metal higher, some experts are suggesting gold could rise even higher.

Gold is up about 22 per cent so far this year, as lower interest rates and central bank stimulus have supercharged existing upward momentum for the precious metal.

Gold is typically seen as a “safe haven” asset in times of uncertainty because it is less volatile than other investments, like stocks. What’s more, the metal moves inversely to the US dollar, meaning that when the greenback moves lower — as it has done lately — gold moves higher.

#7: Investing lump sum during falling market phases

Periods of steep market corrections like the one witnessed during the months of March and April this year provided an excellent opportunity for buying quality equities at very attractive lower valuations.

Hence, mutual fund (with multiple stock investments) investors with an investible surplus, should have been able to exploit such bearish (persistently declining) market phases by investing lump sum to top up their existing equity fund investments.

Doing so would have allowed them to average their investment cost at much lower levels and can help reach financial goals sooner.

#8: Not losing sight of spending during a crisis

Consumer spending declined significantly in the initial weeks following lockdown. Though it is tough to spend money when you are confined to your home, one key lesson that was learned is how blurred the line between basic necessities and discretionary spending can become.

Workers who were able to maintain their incomes during lockdown, planners say, likely saw their expenses decline and savings rate increase. One of the challenges savers may experience is lifestyle creep. As incomes rise, spending tends to follow suit, resulting in possibly a never-ending cycle of limited saving capacity.

So, another takeaway is that now may be as good a time as any to set up a regular savings plan to invest money monthly while spending may still be lower than normal. If saving happens automatically, and is budgeted, you may not even notice the missing money.

#9: How rash, risky financial decisions can prove costly

In times of crisis and volatility, admittedly it's difficult to focus on the long term outlook because it’s difficult to visualise how the economy, stock markets and business might pan out. But it is essential not to make rash financial decisions when things look risky – another vital experience learnt in 2020.

Economic uncertainty and global volatility across nearly all markets left investors on the edge of their seats waiting for the final blow that would send global stock markets tumbling downhill, but it never happened.

When reviewing this year, this lesson will often serve as a reminder, especially when looking back and imagining a scenario of how much investors would have lost if they’d opted out of markets as soon as things started to look tough in March.

#10: High credit card debt + low savings = financial fragility

Multiple surveys reported that millions with credit card debt have added to it during the pandemic globally. While many UAE credit card issuers offered various types of financial relief programs during the coronavirus pandemic, they often come with long-term costs since many cardholders will continue to see interest accrue.

A better proven approach for many was to simply take out a personal loan to pay off credit card balances in their entirety. Data showed that, in the first three months of 2020, borrowers with credit card debt were charged an average interest rate of 15 per cent. Meanwhile, those who used a personalised loan to consolidate debt were only charged interest at a rate of 8 per cent, which is considerably lower.

With loan rates significantly lower than credit card interest rates, if you were to use a personal loan for debt consolidation, you would save on interest, which would not only lower the total amount that you end up paying over time, but help you to pay down your debts faster.

#11: Insurance covers needed for COVID-19, natural disasters

Many people around the world faced unexpected natural events, apart from COVID-19. Consequentially, 2020 taught us that adequate health insurance is important. With a large number of people losing jobs this year, we also learnt that one cannot simply rely on the employer's health insurance plan.

If you lose your job, you will lose your health cover as well. It is important to make sure your whole family is covered under the health insurance plan. One should also look beyond compulsory third-party damage covers when it comes to vehicle insurance.

Vehicle insurers this year also shelled out a lot of money for people affected by other natural disasters, like cyclones and floods. Damage from floods and cyclones are not covered under third-party damage coverage plans. One needs their home and business places insured against natural calamities or accidental fires.

#12: Learning to manage debt more aggressively

The main advantage of paying off debt aggressively is that you'll pay down the debt quicker and avoid accumulating extra interest in the long-term – this is what drove most to pay down debt quicker.

Whether you’re carrying credit card debt, personal loans, or education loans, one of the best ways to pay them down sooner is to make more than the minimum monthly payment. Doing so will not only help you save on interest throughout the life of your loan, but it will also speed up the payoff process.

What’s the best way to pay down debt? World renowned personal finance guru Dave Ramsey likes the ‘snowball’ method. You look at all your debts and pick the one with the smallest balance. Forget about the interest rate and the type of debt. Just choose the smallest amount and throw all your resources at paying that down. You do still have to keep up minimum payments on your other accounts, of course.

The theory is that aggressively attacking the smallest amount will allow you to see some immediate results, which then kicks motivation into high gear – and that was clearly observed by financial planners as a rising trend in 2020 and expected to continue well into the upcoming year.