When the United States went into lockdown last year, it became clear almost immediately that the pandemic contained two disasters of historic proportions. The first claimed millions of lives. The second wiped out millions of jobs. Paychecks stopped coming, businesses went bankrupt, and bills piled up. None of us, it seemed, would emerge from the crisis financially unscathed.
But along the way, something remarkable happened. Today, a huge swath of Americans are better off financially than they were before the pandemic started. A Pew Research report in March found that 30% of adults said their personal finances had improved since January 2020. Another 50% said their financial situation remained just as good as before. And the sunny outlook extends to nearly everyone: men and women, old and young, and Americans of all races and education levels. Even two-thirds of those who earn less than $39,000 a year said their finances were just as good or better than before the pandemic hit.
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It wasn’t the outcome you’d expect from a once-in-a-century global crisis. For millions of Americans, it turns out, the pandemic served as a financial wake-up call. Forced to sit at home and worry about their budgets — and with fewer opportunities to spend their money — people got serious about getting their finances in shape. Personal savings rates hit an all-time high. A record share of borrowers began paying off their credit-card balances in full, driving down their revolving debt. Millions invested in the stock market for the first time, looking to build wealth as the S&P 500 soared. Even those who struggled to find work or keep their businesses afloat were able to lean on generous government benefits to get by and, in some cases, get ahead.
Amanda Khong, a 26-year-old blogger in Orange County, California, took a hard look at her financial priorities after she lost her job in sales and marketing at a high-end coffee chain. “Because of the pandemic, I’ve changed my mindset on money so drastically that I’ve been able to start my own business,” she told me. “I’ve been able to pay off my car, and I’ve been able to build up a savings that I feel comfortable will support me if something else happens. I can wholeheartedly say that the pandemic, through hardship, has taught me so much about financial security. I have never felt more secure in my financial knowledge than I do today.”
Recessions, of course, always force consumers to tighten their belts. But the sudden thriftiness, imposed on people by external circumstances, seldom lasts. This time, however, there are signs that the shift in how we approach our finances may be more profound — and more enduring. Just as the pandemic has spurred a revolution in remote work, it has also reshaped the way Americans think about money.
“Lives were lost, jobs were lost, freedoms were lost,” said Sheila Walsh, a certified financial planner and wellness coach at Willow. “And this has really caused people to pause and to assess their lives in a different and deeper way. Getting there is one of the hardest things — to show up. Now, many people are showing up in their financial journey. That in and of itself can change things. Whether it was a carrot or a stick that got them there, they’re there.”
Pandemic aid fueled a savings bonanza
The first thing the pandemic did to force a financial reckoning was cut off opportunities to spend. In March 2020, with airlines grounded and restaurants shuttered, consumer spending plummeted by 13.6% — the largest drop on record.
At the same time, the personal saving rate hit 33.7% — the highest level since the Federal Reserve started reporting the data 60 years ago. A year later, the savings rate remains elevated at 14.9%.
The savings boost was also fueled by government aid. Congress handed out three rounds of stimulus checks of up to $1,400 and gave the unemployed an extra $600, and later $300, in weekly benefits. Federal student-loan payments were paused, small businesses were offered loans to keep workers on payroll, and 4.2 million mortgages entered forbearance by the end of May.
Flush with cash, people started redirecting their incomes to pay down debts and plan. Since April 2020, consumer revolving debt — which includes credit-card balances that roll over from month to month and accrue interest — has fallen by 2.4%. That’s because a record 35% of borrowers are paying off their balances in full. Today, for the first time since 2008, fewer than 4 in 10 consumers hold revolving debt.
While Americans are already heading toward a return to prepandemic spending levels, many have learned to appreciate a leaner lifestyle. Vered DeLeeuw, 49, is a food blogger in San Francisco and the mother of two adult daughters. When the lockdowns began, she quit recreational shopping and curbed spending on high-end foods, cutting her family’s credit-card bill in half. “This has definitely taught me an important lesson,” she said. “I was over-consuming, for sure. I simply don’t need to buy things constantly. I’m happy at home with fewer things.”
Even lower-income Americans managed to save more during the pandemic. SaverLife, a San Francisco nonprofit, works to improve the financial security of its 500,000 members, the majority of whom are women and people of color with annual incomes below $35,000. Most were unemployed or furloughed during the pandemic, which drove up their credit-card balances. But thanks in large part to stimulus checks and other government aid, 58% of SaverLife members increased their savings balances by the end of 2020.
For those who live from paycheck to paycheck, even a small increase in savings can be vital. “The way our members save, it’s not like a constant up-and-to-the-right savings pattern,” said Tim Lucas, director of research at SaverLife. “It’s much more of a roller coaster. So adding some money to savings this month means financial stability for the next few months.”
SaverLife also distributed cash grants of up to $1,000 to 5,000 families and provided financial coaching to the recipients. During the pandemic, low-income parents who struggled to balance work and childcare suddenly had the time and motivation to get help with their finances. “The last year has made budgeting become more of a focus,” a mother of two told SaverLife. “I learned that getting some free money didn’t mean I should go spend it.”
Samantina Zenon, a 30-year-old in Queens, New York, spent years trying to make ends meet at a low-wage job with no benefits. “Constantly thinking about how I was going to pay rent was stressful, and there were times I felt like a failure,” she told me. “The pandemic really made me reflect on my personal career growth.” Zenon found work as a COVID-19 case investigator for the city, consulted a financial coach, and focused on building her online brand as a beauty influencer and actress. “My budgeting is much different now,” she said, “and it’s been working in my favor.”
Lockdown boredom drove investors to the stock market
Zenon, like many millennials and Gen Zers, took another significant step toward financial security during the pandemic: For the first time, she started investing seriously.
Investing in stocks is essential to building wealth. It’s a move financial experts recommend everyone make as early as possible, to take advantage of compound growth. But many people are intimidated to invest or don’t prioritize it because it’s usually associated with retirement, a milestone most of us save for haphazardly, if at all. Others think investing is only for the rich.
But during the pandemic retail trading exploded, particularly among younger investors. Three of the biggest online brokers — Charles Schwab, E-Trade, and Interactive Brokers — reported huge surges in investor activity during the early months of the lockdowns, opening more than 780,000 new accounts. Robinhood, the no-fee trading app, opened roughly 3 million new accounts, half of them for first-time investors.
The boom in online investing was fueled by a combination of extra money and extra time. “Part of it is just an attention thing,” said Dan Egan, vice president of behavioral finance and investing at Betterment, a digital financial advisor with half a million investment accounts. “Our usual hobbies and activities aren’t available to us. So there’s a question of, OK, what can we focus on? Stocks, we can talk to each other about stocks — about how Tesla did, how GameStop did.”
Betterment provides investors with cash-reserve accounts that serve as emergency funds. Many users, Egan said, deposited their first stimulus checks as a safety net. But as the government aid kept flowing, depositors increasingly put their extra cash toward “get rich” goals like investing.
Unfortunately, much of the trading frenzy was driven by young investors rallying around meme stocks. Behavioral experts such as Egan, who study how psychology influences financial investing, recommend that most people avoid day trading. Picking individual stocks, they point out, is complicated and risky, and it rarely outperforms passive investing. More often than not, the urge to get rich quick results in getting poorer, faster.
The surge in day trading shows no sign of abating. In an upcoming survey from Betterment, 58% of day traders said they expect to do it more as life goes back to normal. Only 12% said they expect to do it less. But even shortsighted trading may have a long-term upside, if it introduces millennials to the importance of investing. And research shows that most day traders grow tired of active stock picking, and give it up within the first two years. So long as they don’t succumb to defeat and ditch the market altogether, they’ll have plenty of time to make up for early losses.
Consumers now have a deeper level of awareness
The big question about the spike in financial savviness, as with so many other changes wrought by the pandemic, is how long it will last. Going forward, will American consumers continue to live within their means and save for the future? Or will they go back to spending — and borrowing — like there’s no tomorrow?
If history is any indication, there’s plenty of reason to suspect that the good financial habits will be fleeting. “Will it last? I’m hopeful, but I doubt it,” said Ted Rossman, senior industry analyst at CreditCards.com and Bankrate. During the Great Recession, he pointed out, consumer spending dropped sharply — only to return to prerecession levels as soon as the crisis passed. “As they say on Wall Street,” Rossman said, “the four most dangerous words are: This time it’s different.”
But financial planners report that the pandemic has spurred a level of introspection far beyond anything they’ve seen before. Consumers, it appears, aren’t just balancing their budgets — they’re attempting to balance their lives. “It’s really evaluating, what do you want your life to be about?” said Joy Liu, the head of training at The Financial Gym, a financial coaching center.
According to a report by Northwestern Mutual, the pandemic prompted 83% of Americans to create, revisit, or adjust their financial plan — and 95% expect their new habits to stick. Another report found that people have dramatically shifted their priorities by placing more emphasis on keeping their families safe and enjoying life. And when consumers were asked, “If you received a windfall/bonus of $500, what would you most likely do with the money?” About 85% said they would either save it or use it to pay off debt. Only 15% said they would spend it.
Meaghan Thomas, 38, had just left her corporate job in Louisville, Kentucky, to go all in on her family business selling organic spices about a year before the pandemic hit. “My teeth nearly fell out with worry,” she told me. “I started taking stock of our entire financial picture more than I ever had. I was determined to save more and build more security. I more than doubled the amount I put in my money-market account. I also started some more aggressive investing on the side. I just want more padding so that if an emergency happens I know we’re good for a long while.”
Walsh, the financial planner, witnessed such transformations firsthand. While much of the newfound financial awareness was forced on people by the pandemic, she acknowledged, the uncertainty of the past year also helped them get more comfortable talking about money with partners, family, and friends. “They’re examining if their money is aligned to their values, aligned to what’s important in their lives,” she said. The result was a deeper level of financial mindfulness — one that she thinks will outlast the pandemic.
“It’s not as much about keeping up with the Joneses,” she said. “It’s more about, what really matters to us?”
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