When the economy suffers, people often experience job losses, decreased income, and increased financial uncertainty. However, with careful planning and smart decision-making, individuals can take steps to stay financially stable during an economic downturn.
One of the most important resources to help you stay financially stable during unstable economic times is an emergency fund. Of course, you should be proactive to build your fund before a crisis. Your emergency fund should be a savings account set aside specifically for unexpected expenses. Ideally, you should aim to have enough saved to cover 3-6 months’ worth of living costs.
“A good rule of thumb is to build an emergency fund that equates to three months or more of net pay. If your income changes, you will then have three months to figure something out, regroup and adjust. If an unexpected expense occurs, you won’t be left digging into your primary income to cover the cost,” Henry Yoshida, CEO, Rocket Dollar, explains.
Gregory Ostrowski, managing partner, Scarborough Capital Management, pushes for a full six months. “An emergency fund is generally at least six months’ worth of expenses set aside in a savings account or other cash management account that is easily accessible and liquid (that is, you don’t have to sell anything, like a house, for the funds to be available).”
This emergency fund, if you’ve built it up before a crisis, is a lifesaver. Either way, there are other steps you can take to mitigate the effects of a dark economy.
Assess spending
When money is a concern, the first step, of course, is to figure out what you’re spending. Then you can consider where you might cut back, and what can wait a while – eliminating or minimizing unnecessary expenses. This could mean canceling subscription services you don’t use, eating out less frequently, or shopping for groceries on a budget.
James Schenck, president and CEO, Pentagon Federal Credit Union, says, “In an uncertain economic environment, you need to be making smart decisions about how you spend your discretionary income and live within your means. …. While it’s crucial to make a budget that works for you, it’s just as important to be proactive with adjustments to your spending habits. You should audit your budget periodically, as your spending goals will change over time, and you could encounter an unexpected purchase or squeeze on your budget.” Schenck recommends, for example, creating a meal plan to keep food costs in check and avoid impulse spending at restaurants. Keep track, make better financial decisions and know where your money is going and make deliberate choices.
Bill Keen, founder and CEO, Keen Wealth Advisors, prefers to talk about a “spending plan” rather than a budget. He says: “A spending plan represents freedom because it’s about choosing where to spend your money. So, in the face of a possible recession, now is a good time to evaluate: Do I want to keep making the same choices? Will I have to make different choices if my financial situation changes? You might choose to change nothing, or you might make substantial changes. The important point is you’ve consciously made that choice.”
Prioritize debt repayment
If you have debt, such as credit card debt or a car loan, it’s important to prioritize repayment during an economic downturn. Make sure you’re making at least the minimum payments on all of your debts, and consider consolidating or refinancing your debt to lower your interest rates. By paying off your debt as quickly as possible, you can reduce your financial burden and free up more of your income for savings or other expenses.
“During a recession, the Federal Reserve often ups interest rates in an effort to tame inflation. As the Federal Reserve raises interest rates, a lot of credit card issuers also raise annual percentage rates (APRs). This means that whatever balances you are carrying could get more expensive to carry down the road,” Henry Yoshida says.
David Herpers, SVP product, Credit One Bank, recommends prioritizing payments by interest rate. “You can look at the interest rate you’re paying on any current loans and consider prioritizing which debt you should focus on more. If you carry any debt with variable interest rates, consider refinancing or consolidating into fixed-rate options.”
It’s never great to be in debt, but during times of economic inflation, it’s even more important to get high-interest debt paid off.
Diversify – income and investments
During an economic slump, it’s a good idea to diversify your income streams as much as possible. This could mean taking on a part-time job, freelancing, or starting a side business. By diversifying your income, you can spread out your risk and increase your earning potential.
“Variety is the spice of life,” says Matthew Meehan, CEO, Shield Advisory Group, “and when it comes to your investment portfolio, it could make the difference between going under and staying afloat. One of the best ways to combat inflation is by diversifying your portfolio. … Your investments are each going to react differently to the world’s events. What may cripple one could actually be a boost for another.”
“Incorporating assets that tend to do well in a stagflation environment can make portfolios more robust and increase the odds of benefiting from a higher risk-free yield,” says Alex Shahidi, managing partner and co-chief investment officer, Evoke Advisors.
Invest in your education and skills
During a recession, it can be useful to focus on education and skills that make you more competitive in the job market. This could mean taking online courses or attending professional development workshops. By enhancing your skills and knowledge, you can increase your earning potential and improve your job security.
Kale Goodman, co-founder, Easier Accounting, says “Investing in yourself can look different for everyone. For some, it might mean reading books. For others, it might mean investing time and energy in your physical health to reap the benefits of confidence and higher mental acuity. For some, investing in yourself can look like buying a better mattress, so your sleep is more restful and you’re sharper throughout the day. For others still, it can also look like investing in a business class or courses to develop your skills.”
Likewise, Tyler Yang, CEO, Journey Advisory Group, says, “Warren Buffet suggests that the best protection against inflation is your own earning power. In other words, he recommends adding to and enhancing the skills and talents that make you most valuable in the
job market.”
Be informed – and patient
Finally, it’s important to stay informed about the state of the economy. Any potential changes could impact your financial stability, so keep up-to-date on the news and any new government policies or programs that could impact your income or expenses. By staying informed, you can make intelligent decisions about your finances and adapt as needed. And remember, above all, that the economy is cyclical, and no slump state will last forever.
Mara Garcia, CFO, Phonexa Holdings, warns against ditching investments and assets. “During times of economic unrest, consumers are often tempted to sell off assets to cover daily living expenses. … This is particularly true when it comes to today’s highly volatile stock market. Young or inexperienced investors may rush to sell stock at a loss when they’re in a financial pinch. However, these investors have to be mindful of the potential risks of selling their stock too soon.”
Stacy Francis, president and CEO, Francis Financial, agrees. “The key to successful investing is time in the market, not market timing. … The average bear market lasts a little over nine months. If this downturn is average, we may still have room to go, but recoveries often come quickly and without warning. Staying the course, staying invested and focusing on the long term can bring exceptional results.”
Take steps to stay financially stable
While a fluctuating economy creates challenges for individuals, there are steps you can take to stay financially stable. By building an emergency fund, assessing spending, prioritizing debt repayment, diversifying income streams and investments, investing in your skills, and staying informed, you can weather the storm and emerge stronger and more financially secure.
Adapted from Forbes Finance Council, a CFO networking group
