The pandemic has had a negative and positive impact on personal finances everywhere. Saliency refers to our tendency to focus on information that catches our attention and ignore others that are less visible.
This pandemic has made everyone health conscious. This action impacts your personal finance; healthcare costs in the future if one could take continual step towards to stay healthy. There is an associated positive impact. Watching friends and extended families spend sizeable amounts on medical expenses has made most individuals realise the importance of healthcare insurance cover for their family.
The other aspect id the importance of cash to meet emergency solutions. We have heard a lot from individuals who had to arrange for hospitalization of their friends or family members as to how various institutions involved in the process require cash payment for treating patients. Its true that we all use debit and credit cards for most of our transactions but we are far from being a cashless society. So, it is important that everyone should have emergency cash at home. One could keep half of month’s living expenses or an ad hoc amount that us reasonable to meet an emergency.
Negative saliency effect of the COVID-19 is personal bias- i.e. our tendency to take actions that improve our present happiness even if such actions can have a negative effect on our future well-being. Take discretionary spending. Spending more today can increase your present happiness at the cost of saving less for the future. Spending on non-essential items that can increase your happiness, albeit temporarily. This pandemic has shown that life can be short. So, why not enjoy life while one can, that argument goes.
Typically, such an argument would lead to increase amount of spending on experiences such a taking an exotic vacation. With the current restriction on travel, the focus has shifted to acquiring material goods, especially electronics that provide for a comfortable living.
The other negative saliency effect is the behaviour caused by the remarkable recovery in the stock market after the initial crash last March when the country went into first pandemic-related lockdown. The sharp rise in investment value has encouraged many individuals to increase their discretionary spending. This phenomenon is referred to as wealth effect. Individuals typically do not keep sizeable funds in savings account or have emergency cash at home because they do not want to lose the opportunity to earn higher returns.
Yet, they hold loss-making investments for long no minding the associated opportunity cost. Similarly, individuals buy extended warranty for air conditioners and laptops but are reluctant to buy healthcare insurance or term life insurance products. Why? Till now, most individuals did not face large healthcare costs. So, healthcare was not the salient factor. This behaviour could change because of COVID-19.
There is a caveat. The saliency effect mat last till one fear the pandemic and its impact in lifestyle. Once the fear subsides, the saliency effect too fade.
One has to act quickly to capitalise the positive effect of saliency effect. So, arrange to have some emergency cash at home and get adequate health insurance protection. To address discretionary spending, first set up systematic investments to meet life goals. Then, spend the rest of monthly income.