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How COVID-19 could shape the way we save, spend, and invest

Shelly  Gigante

Posted on April 28, 2022

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
COVID-19 behavioral financial changes

It’s no stretch to say that the coronavirus crisis, which challenged our health care system, economy, and job security in ways that most Americans could have scarcely imagined, has been a defining moment in our lives.

Sociologists are already speculating about the probable ways in which the global pandemic may shape social behavior going forward, from the custom of handshaking and doling out hugs to a renewed appreciation (in this the digital age) for the simple pleasure of being physically present with the ones we love.

If history is any guide, the economic fallout from COVID-19 may also change the way we save, spend, and invest — most poignantly so for the young people who watched their parents suffer an income loss without a financial safety net, fret over their 401(k) balances, and negotiate with lenders to defer their loans.

Psychology and bias

“I do think it will alter behavior, especially for those just starting out,” said Daniel Crosby, a psychologist and behavioral finance expert with Brinker Capital, an investment management firm in Berwyn, Pennsylvania. “There’s an effect in psychology known as ‘primacy and recency,’ in which our memory is strongest for things that happen either early in a sequence or most recently in a sequence.”

As a result, he said, the pandemic will no doubt alter most people’s behavior in the short term.

“But it will be especially impactful for those just starting out on their investment journey, who have no other context for how the markets work,” he said. “For them, all they will know is volatility and uncertainty and those lessons are likely to last a lifetime.”

Jason Voss, a former portfolio manager, author, and senior consultant for Focus Consulting Group in Long Grove, Illinois, agrees.

“It’s very easy to use what has happened in the COVID-19 crisis as an anchor or filter for making all decisions,” he said. “There are so many moments in history where people’s finances were put at risk or hurt that changed behavior for extended periods of time.”

Generational change

Indeed, America’s major milestones, particularly those that precipitated an economic shock, left an indelible mark on the financial decision-making of prior generations. Many adopted a new perspective that became the mantra by which they lived.

For example, the generation that came of age during the Great Depression, when food and jobs were scarce, famously made it their mission to “use it up, wear it out, make it do, or do without.” Many of that era shunned the stock market for good, having witnessed its 1929 collapse, in favor of keeping their money under their mattress. (Learn more: How MassMutual helped people in the Great Depression)

“When I began my career 30 years ago, it was really tough to sit down with clients where the husband, who perhaps had served in World War II, and his wife were both of the Depression era,” Voss recalled. “I remember that it was nearly impossible to try to convince them that equities (stocks) were a better bet.”

It was a different story entirely for the post-war generation of the late 1940s and 1950s, where rampant consumerism prevailed.

“We were a nation that manufactured things and a lender of the things we manufactured,” said Voss. “It wasn’t just our nation that needed to rebuild after WWII, but other nations as well, and America helped to finance that so there was a lot of wealth coming to the United States.”

With help from government lending programs primarily aimed at veterans, Americans purchased homes, moved to the suburbs, and started families in record numbers — giving rise to the baby boomer population. The desire to “keep up with the Joneses” at that time created an appetite for debt and an instant gratification culture that continues today, said Voss. The first credit cards were issued in the United States in the 1950s. (Learn more: Handling credit card debt)

The list of economic catalysts that modified financial behavior is long. There was the first technology boom in the early 1960s, when frenzied “space age” investors snapped up electronic stocks in droves, only to learn a painful lesson about portfolio diversification when the bubble burst. There was the high-inflation era of the early 1970s, when bonds stopped providing low-risk returns and retiree pension checks no longer covered the cost of living.

“Bond portfolios lost a lot of value at that time and people started avoiding bonds like crazy,” said Voss.

And, most recently, there was the dot-com bubble, caused by excessive speculation in internet stocks, which burst in 2000, followed by the 2008 financial crisis, which was caused in part by the housing market collapse — both of which created broad distrust of Wall Street. (Learn more: Life insurance, annuity portfolio alternatives )

A 2018 report by online investment firm Betterment, which examined consumer behavior 10 years after the financial crisis, found that the memory of 2008 continued to affect everything from attitudes toward finances and the financial industry to optimism for a secure financial future.1

“Regardless of age, income, and gender, the research finds that the scars of 2008 are still very raw for millions of people today,” the report found. Indeed, the data revealed that most consumers remained deeply distrustful of Wall Street, with nearly 30 percent no longer contributing to their retirement account and 14 percent continuing to save but only in cash. The exception? Young people.

“Despite graduating into one of the toughest job markets in decades and seeing the real-time effects of the crisis, as well as being first-time or new voters amid controversial government involvement in bank bailouts, younger generations are the most trusting of and optimistic about Wall Street’s future,” the report found at the time.

The pandemic effect

It’s too soon to predict how the COVID-19 pandemic may shape financial decision-making going forward, but it seems likely to serve as a cautionary tale about the importance of having one’s financial house in order at the very least, said Voss.

“People adapt to their financial experience and I think the thing that will change is that people will learn to save money again so that they can withstand an emergency situation, whatever that may be,” he said, noting that many households had stopped putting money into a savings account over the last decade with interest rates so low against a backdrop of surging investment returns.

“I think that the importance of having some savings set aside is paramount on people’s minds now like it hasn’t been in a long time,” he said. “This will absolutely change our relationship with savings and how much debt we carry because that’s ultimately where the stress is coming from. If you have enough savings during the lockdown, even if you lost your income, you are prepared for this and can just focus on enjoying the time with your family. When you have high levels of debt, it creates far more stress.”

The latest MassMutual State of the American Family survey confirms that more than half (52 percent) of families with household income of $50,000 or more and at least one dependent had less than three months’ worth of readily available savings set aside. Roughly 8 percent had nothing at all.

According to Crosby, those who experienced financial pain most profoundly during the pandemic, including children with two parents who lost their jobs, may also become too conservative in their investment allocation in the future, which could put their long-term financial security at risk.

“Middle-aged investors could imagine a tech bubble or a banking crisis, having lived through them, but I think few of us could have vividly imagined a scenario in which almost every business in America had to shut its doors against a killer virus,” said Crosby. “The likely impact will be that a generation of investors will be cautious against the recurrence of a similar pandemic. The danger is that they will be so cautious that they underallocate to risk assets in the long term or that they end up fighting the last war, oblivious to other, more pressing threats.” (Learn more: Investing basics)

Loss-aversion bias

Indeed, loss-aversion bias plays a critical role in investor psychology, said Voss. Loss-aversion, which has been observed across all species, describes the tendency to experience pain of loss to a greater extent than an equivalent gain. Thus, when the stock market tumbles 20 percent, investors tend to feel the sting far more profoundly than they might rejoice at a comparable positive return.

“That can be paralyzing when things go wrong, which is exactly what the folks who lived through the Great Depression experienced,” said Voss. “Their pain of loss in losing money in the stock market was so great that their rule became ‘never again.’”

For some, however, loss-aversion causes the opposite response.

“In a big investment decline, there can be a mentality of double or nothing,” said Voss. “As in, I’ve already lost all this money so I’m going to just bet it all to see if I can recover. If COVID-19 wiped out 10 years of your savings, there may be a tendency to invest in riskier assets, like an illiquid pre-IPO biotechnology fund, because I’m going double or nothing.” That, too, puts long-term financial security in jeopardy.

Other influential variables

Financial behavior, of course, is not dictated by economic events alone. Parental influence, personality, and health also play a role.

“Psychologists point to a bio-psycho-social model to explain just about any human behavior, including financial decision-making,” said Crosby. “This means that some of our behavior is inherited, some is learned, and some is a function of our particular life experiences.”

There is also the interplay between these variables, along with our physical and emotional health.

“Physiological considerations, like having inadequate sleep, excessive caffeine or alcohol intake, or a lack of exercise, may lay the groundwork for an outsized stress reaction to something like the very real stressor of a spreading virus and damaged economy,” said Crosby. “That’s why it becomes crucial to control the controllable at times like these and ensure that we are seeing to positive actions that are within our power.”


The effects of the COVID-19 crisis on our collective psyche remain unknown, but history suggests it may leave a permanent mark on the way we save, spend, and invest — particularly among the young people who will came of age during the pandemic.

Parents who have never discussed money management in the household before can use the economic fallout still underway as context to teach their children, on an age-appropriate basis, the fundamentals of financial planning, including the need for an emergency fund, how to live within their means, and how to invest for long-term goals. (Learn more: The pandemic and financial lessons for kids)

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This article was originally published in April 2020. It has been updated.


Betterment, “Betterment’s Consumer Financial Perspectives Report: 10 Years After the Crash,” September 2018.

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