How to Manage Money in a Pandemic: A Behavioral Research-Based Approach

By Heidi Johnson, Director, Behavioral Economics, Financial Health Network In the past few weeks, record-breaking numbers of people have filed claims for unemployment as industries shut down in response to the novel coronavirus. Millions of people have very suddenly and unexpectedly lost their jobs or substantial portions of their income. While policymakers are responding by…

Monday, April 27, 2020
 How to Manage Money in a Pandemic: A Behavioral Research-Based Approach

By Heidi Johnson, Director, Behavioral Economics, Financial Health Network

In the past few weeks, record-breaking numbers of people have filed claims for unemployment as industries shut down in response to the novel coronavirus. Millions of people have very suddenly and unexpectedly lost their jobs or substantial portions of their income. While policymakers are responding by increasing unemployment insurance benefits and creating economic impact payments, these measures may not be enough to fill the gaps between income and expenses for many of those who have lost their jobs or had their hours cut because of the pandemic.

It’s hard to know what a “good” financial decision is in an unprecedented situation, and good decisions can look different for each individual based on their unique situation. At the Financial Health Network, we have compiled behavioral science research on financial decisions to understand the challenges people may be facing and to identify strategies that can help. Here, we share our tips for how to spend savings and rework bills and debt to support financial health in a pandemic.

How to Spend Down your Savings Smartly

It can feel painful to take money out of a savings account when you’re facing financial hardship, particularly if you’ve been saving for another goal, such as a vacation or a down payment on a home. Behavioral researchers have found that people use a system called mental accounting, in which we mentally earmark different buckets of our money for different purposes. This system helps us avoid spending the earmarked money on something else, but can get in the way when the unexpected happens. Some people also fear that starting to tap into their savings could lead to depleting them altogether — a phenomenon known as the “what-the-hell effect” that has been demonstrated in dieting behaviors and may apply to our money management as well.

Additionally, too often, people turn to high-cost credit instead of using the savings that they actually have. Researchers have found a significant gap between the number of families who have at least $400 in liquid savings, and the number who say that they would use their liquid savings to cover an unexpected $400 expense (76% and 56%, respectively). Other studies have found that about 41% of households carry credit card balances in amounts that they could have covered with the money they held in checking and savings accounts.

For anyone experiencing a loss or drop in income, now is the time to use that emergency fund instead of paying high interest rates on credit. It’s OK to use your savings to stay afloat to support your financial health in the near-term. You can consider the following tips to rebuild your savings when you can:

  • Set achievable goals for rebuilding your savings, and make a plan to get there. Recent research suggests that the amount of short-term savings that can help a family weather an emergency is smaller than the rules of thumb that we’re used to hearing. The JPMorgan Chase Institute estimates that maintaining six weeks of take-home pay in savings can help weather a simultaneous dip in income and spike in expenses. Other researchers find that the average low-income household needs about one month of income in savings. Smaller goals (such as several weeks of expenses in savings) are more motivating, making them more likely for households to achieve than goals that feel insurmountable (such as saving several months’ worth of expenses).
  • Make a plan to get to your savings goal, which can help to close the gap between intentions and actions. Lay out the steps you’ll need to take to start saving again and be as specific as you can. For example, you can note down when you will start saving after getting a new job, how much will you save, how often, and what tools will you use (such as a payroll deduction, an automated bank transfer, or something else). When your financial outlook is looking brighter, you’ll already be one step ahead toward achieving your goals.
  • If you’re fortunate to have more saved than you’ll need right away, separate the money that you’ll need for upcoming expenses from the rest into a designated account. That way, you can be confident that it won’t all disappear, and have a designated pot that matches what you need right now.

How to Rework your Bills and Manage Debt

Unfortunately, many people facing a loss of income because of the pandemic don’t have enough of a savings buffer to carry them through. With social distancing requirements, we’re all cutting back on some of the minor expenses that pile up in normal times: a warm beverage from the coffee shop, tickets for a concert, or a sporting event with friends and family. But those cuts won’t be enough if you’ve been laid off. Workers who were already facing financial health challenges will face the biggest obstacles in weathering this time. According to the U.S. Financial Health Pulse, only 8% of people who were Financially Vulnerable had savings equivalent to three months of expenses in 2018. For these workers, and many others, finding ways to deal with bills and manage debt is becoming all the more urgent.

Unfortunately, this urgency can undermine people’s ability to navigate the complexity of the decisions needed to rework their financial strategies. Finding ways to stay on top of necessary expenses while navigating a sudden drop in income takes up valuable mental bandwidth, which can lead to a scarcity mindset that makes it harder for people to make decisions that benefit their financial health.

To get out of the scarcity mindset, you’ll need to find some slack. Slack can come from seeking help from friends and family, additional credit to temporarily cover expenses, or reduced payment obligations. It may be difficult to get new credit if you’ve experienced a drop in income because of underwriting requirements. Down the line, new credit also becomes another bill to pay that depletes mental bandwidth. For building slack with credit, we recommend:

  • Considering any existing lines of low-cost credit first, such as a home equity line of credit.
  • Being cautious about using credit cards to cover your expenses. The exponential growth bias means credit card interest can add up much more quickly than we expect.
  • Exploring whether your bank or credit union offers a low-cost targeted loan product to help customers weather the crisis. For example, Financial Health Network member BECU is offering a 0% APR personal loan to assist with paying bills for its members experiencing a loss in income. Check out how our Members are responding to the COVID-19 crisis on our resource hub for more options.

There are several options to consider for reducing your payment obligations right now. We know that it can be daunting to reach out to billers and creditors, especially when you’re worried about what you’ll find. People check their investment accounts less frequently when the market is down, in a phenomenon called the “ostrich effect.” Similarly, avoiding your billers and creditors can feel psychologically easier than risking exposing yourself to bad news — but you may be surprised by how many options you’ll have for payment flexibility as creditors respond to the pandemic. We recommend:

  • Checking the websites of all your creditors and billers to see what relief may be available. Don’t forget to consider bills that you may have set to autopay; although those bills won’t be top of mind, you may find savings by working with those billers to reduce your regular payments. Financial institutions are providing payment relief options for credit cards, personal loans, auto loans, and others if you contact them, and many utility companies are pausing service shutoffs for nonpayment. In many cases, foreclosures and evictions are on hold for several months while people may have trouble making full payments, and many people will be eligible for mortgage or rent relief. By exploring all of your options, you may find some slack where you least expect it.
  • Planning how to reallocate the money that usually goes toward paying your federal student loans. The federal government is suspending all payments on federal student loans until September 30 2020 — which means that if you’re one of the millions with federal student loan debt, you just got a monthly bonus in the amount of your regular payments. Use that bonus to help with your remaining bills after getting any reductions available. If you have private student loans from a bank, credit union, or educational institution, reach out to them to explore any payment relief options as you would for your other billers.
  • Prioritizing your payments to cover the debts that can impact your credit report right away if you miss a payment, such as credit cards and any loans you have. Many people experience debt account aversion, which drives them to fully pay off a debt when they can. On a limited budget, this could cause you to fall behind on other payments–- and potentially have a negative impact on your credit score. If you can’t make all of your payments in full, making a minimum payment can keep you in good standing and protect your credit. Be aware that when it comes to medical debt, the credit bureaus provide a six-month grace period before they will include medical debt on your credit history.

People are facing challenging decisions right now about how to make ends meet with the sudden and unprecedented halt to many industries. Consider how behavioral tips can help you reprioritize your short-term financial obligations to optimize your financial health, while also considering how to plan for savings. These tips can help to keep your finances afloat until we can restart our economy and get back on track to achieving financial health for all.

Business Leaders: Learn more about how the Financial Health Network is supporting organizations as they work to help their customers, employees, and communities. Visit the COVID-19 Resource Hub for related research, solutions, and news; or email Heidi Johnson to learn more about how behavioral science can help your customers or employees at

Written by

  • Heidi Johnson
    Director, Behavioral Economics
    Financial Health Network