It’s hard to watch the news and not feel a little concerned about your finances. Trade wars, stock plunges, interest rates fluctuating, combine that with stagnant wages and an inflating cost of living--it’s enough to get even the most stalwart savers wringing their hands. In fact, 25% of Americans report worrying about money all the time.[i] So, what can you do? In this article, we will outline 5 tips to help recession-proof your lifestyle so that, while the economy and markets may have ups and downs, you can feel secure.
Tip 1. Live Within Your Means
Ah, the most obvious and oftentimes most challenging advice. But if you want to recession-proof your life, you need to color within the lines—that means live within your means. When nearly 8 out of 10 Americans live paycheck to paycheck[ii], this can be easier said than done. So, first off you have to know how much is really coming into your house. Your gross return is your salary, but your net return is how much you actually have to work with after taxes and expenses. Next you need to create a thorough budget factoring in everything you spend on from bills, to student loans, to gym memberships. Seeing all your expenses together will help you do two things, the first is having a real idea of where your money is going, the next is cutting out or down on unnecessary spending. If when you put all your expenses together you come up with a negative, or are using credit cards to fill in the gaps, then you are living beyond your means. This may mean downsizing, a less expensive home, a more practical older model car, etc.
To help you save in an out of sight/out of mind way, take advantage of any employer match 401(k) or retirement savings plans. It may be worth setting up a portion of your paycheck that goes directly into savings as well. If you are a joint income household a good goal is to try to live off of one person’s salary, using the second to pay off high-interest debt, mortgages, and save more aggressively for the future. This will also help you weather a rough patch in changing economies, for example if someone loses a job, or becomes sick.
Tip 2. Have Emergency Savings
Did you know that 44% of Americans would have difficulty covering $400 for an emergency?[iii] It’s true, and as we mentioned above, a lot of people are living paycheck to paycheck with just one unexpected expense like a car in need of repairs, or an illness, putting someone behind or in deep debt. If you have a lot of debt and little to no savings, experts recommend building up your emergency savings first before you start paying off debts.
A few tips to help build up emergency savings would be to set up automatic deposits into a savings account, or to put all your checks into savings and only moving out an allowance for bills and extra spending. Doing a thorough purge of extraneous spending, especially memberships that deduct monthly may be all it takes. The average American spends nearly $240 monthly on subscription services which is 197% more than they estimate they pay.[iv] One third of Americans spend more on coffee than they invest in a year.[v] Little things like bringing a lunch could save you nearly $1000 a year.[vi] Having a big yard sale or selling valuable but underused items may also be a relatively painless way to beef up your savings.
Tip 3. Think Long-Term When Investing
If you worry over every bump in the stock market, experts will tell you, you are doing it wrong. Unless you are a day trader, watching the unpredictable rises and falls will only give you premature grays. Better advice is to check periodically, even yearly, to track your projections and adjust as needed. Investing is a long-term growth market, meaning those few dollars here and there will keep compounding and growing with minimal meddling. Even with market volatility, the period of 1950 to 2009 showed, once you adjust for inflation and dividends, that the average annual return came out to 7%.[vii]
Tip 4. Diversify!
No doubt you’ve heard the importance of having a diversified portfolio by now. You want to spread your wealth and risk around to protect yourself. Having your interests in various areas provides a cushion in case something happened. Being diversified does not just mean within your stocks, but also different types of assets, or classes. Stocks, bonds, treasuries, money market accounts, mutual funds, exchange traded funds, not to mention real estate. There’s a lot more than just stocks so, seeking out a qualified financial advisor to talk through your options may be a good choice. You want your money smartly invested and professional advice may make all the difference.
Tip 5. Credit and Debt
Having good credit can be a real game changer. If you don’t, once you have an emergency fund, the next step should be working toward paying off your debts and getting that credit number higher. Having a good credit score will qualify you for low-interest loans, make you a better candidate for a mortgage for a home or an investment property, get you better credit card offers, and more. Keeping your score may be as simple as paying your bills on time, keeping old cards open, and keeping your debt to credit ratio low. Monitoring your credit for errors will also help. If you have a lot of debt, there are various ways to address it. You may be able to negotiate payment plans or consolidate your debts.
The snowball method of tackling debt is where you pay off your smallest debts first while paying minimums on all others and working you way up to the larger debts. No matter what, getting rid of debt, especially high interest debt, and raising your credit score will also provide additional padding and protection during a rough patch.
The theme is getting ahead of things so you can be prepared for the unexpected. If you have an emergency fund, then you can weather an emergency. If you live within, then you aren’t overextended and are able to save. If you have long term savings strategies, that should protect you from the present-day fluctuations. The more time and discipline you apply today, the stronger and more secure your future will be.
Paces Ferry Wealth Advisors, LLC is a Registered Investment Advisor (RIA) with the U.S. Securities and Exchange Commission (SEC). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.