5 Resilience to the economy’s ups and downs
The last two decades have seen a rollercoaster of dramatic events that have had major financial repercussions for all of us. The economic boom of the late 1990s and early 2000s was followed by the global financial crisis and then a recession in the early 2010s.
Since early 2020 the COVID-19 pandemic has had a radical effect on all our lives. For some households their income has been reduced despite the packages of government aid. But for others there has been an unexpected positive impact on savings levels resulting from a forced reduction in spending – particularly on travel, eating-out and entertainment.
More recently this unexpected drop in spending for many has been followed by a sharp rise in prices – particularly for energy – which is hitting every family.
Those who were able to save money during the Covid-19 lockdowns are fortunate to be better placed to cope with the subsequent price hikes for many essential goods and services - emphasising again the role of savings as a financial buffer.
So if you are fortunate to have some unexpected spare money what would you do with it now?
Activity _unit3.5.1 Activity 2: Using spare cash
If you find you have unexpected spare cash what would you do? Select all that apply.
The chances are that the answers may be a mixture of the suggestions above or some others not in the list. Perhaps rising inflation and higher bills make the rainy-day fund option the most sensible?
Theory suggests that unexpected spare cash tends to end up in savings accounts (or other assets) rather than being spent (Friedman, 1957). It’s not clear this will be the full story for those fortunate to have spare cash as a result of Covid lockdowns. But if this is proved right then it would be good news for those families who have been able to build up their resilience savings or save more for their pensions.
Hopefully there will be points in your working life when you have more money available, perhaps because your outgoings have reduced or you’ve got more money coming into the household. In these situations, it’ll be beneficial to save at least some of this extra money for the longer term.
We’ve covered many subjects in this session. Now it’s time to check your learning with another short quiz.