The past few years have been a bit of a roller coaster ride when it comes to wealth and investing, and it’s not getting any easier. EY research shows that 40% of those surveyed said wealth management has become more complex—that number balloons to 52% for high-net-worth individuals.
People carry more debt than ever, and there’s still talk of a possible recession. During uncertain economic conditions, you should take some critical steps to protect yourself and your assets.
1. Create a Budget and Stick to It
Start with the fundamentals. Create a budget listing your monthly expenses to understand the impact of expenditures. When you have a budget, you’re more likely to think twice before spending something outside your financial plan.
Budget for savings and retirement as necessary expenses to help prevent you from putting off paying yourself. For recurring bills, consider setting up auto-pay to ensure you pay your bills on time, or better yet, utilize a financial tracking platform like Mint. The last thing you want in an uncertain economy is to hurt your credit score from delinquencies in case you need new credit or financing.
Finally, look for ways to reduce discretionary spending. Cutting excess costs can save you money, and those additional funds can go toward cushioning your savings account.
2. Maintain an Emergency Fund
A recent survey showed that less than half of people have $1,000 in savings for emergencies like medical bills or car repairs. It’s crucial that you create an emergency fund, especially during uncertain times. You need a cushion to handle unforeseen events in rapidly changing economic conditions, continuing inflationary prices, and worries about job loss or layoffs. The rule of thumb is to have 3-6 months of living expenses in an emergency fund that you can access quickly.
With rising inflation and a volatile stock market, consider pausing your savings and using that money to help offset higher costs. However, retirement savings is one area you do not want to cut back, especially if you receive matching investments from your employer. If your employer matches your 401(k), it’s free money.
3. Get Debt Under Control
In Q3 2023, household debt increased by $228 billion, according to the Federal Reserve Bank. Consumers now owe more than $1 trillion in debt. Delinquency rates also rose by a third from the same period in 2022. While household net worth rose significantly between 2019 and 2022, any pandemic savings are dwindling. The Fed says average savings rates have dropped precipitously.
Credit card debt is now at record-high levels. Considering the average credit card interest rate as of November 2023 was 27.8%, there is an increasing risk of ballooning debt. Paying down debt is one of the smartest things you can do.
If you’re struggling to pay down debt, consider these strategies:
- The debt snowball: pay off the smallest debts first while making minimum payments on larger ones.
- The debt avalanche: pay off debts with the highest interest rates first to minimize interest payments.
- Debt consolidation: Combine multiple debts into a new loan with lower payments or interest rates.
4. Match Your Investment Mix to Your Risk Tolerance
How comfortable are you on that roller coaster ride with the ups and downs? In an uncertain economy, you’re likely to see more volatility. You have to be comfortable with the amount of risk you’re taking. If you haven’t checked your investment mix lately, it’s a good time to do so.
While the S&P 500 has an average return on investment of 10.6% a year since its inception in 1926, there have also been years like 2008 and 2020 that saw 20.3% and 19.07% declines. Those nearing retirement age may be uncomfortable riding out a declining market and waiting for it to bounce back. However, younger investors may be fine, even looking for bargains, because they have time to recover.
Risk tolerance is a highly personal decision. What works for one person may not work for the next. Make sure you are comfortable with the amount of risk you’re taking. Consider using research tools like EquitySet to simplify the complex data and analytics associated with stock performance. Doing so can often make equity investment less intimidating and more profitable.
5. Get Professional Advice
Before you make any decisions about your wealth management, consider getting advice from a trusted financial advisor. A professional financial advisor can assess your current situation and help you develop a comprehensive plan to meet your financial goals.
The best advisors will provide an objective view of your financial situation through the lens of expertise. They are aware of market trends and different investment vehicles with various levels of risk and reward. By looking at your whole financial picture, they can create an integrated approach to create a personalized strategy for you.
Is Recession on the Horizon?
The latest survey of business and academic economists by the Wall Street Journal had some promising news. The majority of those surveyed in October 2023 now believe the U.S. economy is not heading into a recession. That’s a significant change from just a few months ago.
However, not all economists agree. In fact, 39% of those surveyed by the National Association for Business Economics reported a more than 50% chance of a recessionary period in the next 12 months.
Regardless of how the economy responds in 2024, start taking stock of your income, expenses, and investments in case of a potential downturn. It’s always better to be prepared.
