How to Prepare Your Personal Household for an Economic Downturn
If you have been following the news, you have surely been hearing that a recession could be looming. U.S. GDP has shrunk for two quarters in a row, which is the textbook definition of a technical recession. However, we are also seeing record-low unemployment and sustained corporate profits, which has the Oval Office arguing that the country remains “on the right path” despite unfavorable GDP reports. (1)
Regardless of what you believe, there is no reason you should not protect yourself if this period of economic uncertainty begins to severely affect you and your family’s financial health. Whether you have to deal with inflation or layoffs, here are 5 tips to consider to make sure you protect your household in case of a downturn.
Assess Your Emergency Fund
Now is the time to ensure that you have enough money set aside in your emergency fund to cover 3-6 months of necessary living expenses. This includes mortgage or rent, utilities, groceries, transportation, etc.
With all the uncertainty and expected layoffs, many experts have suggested maintaining a larger emergency fund, closer to 6-12 months of expenses. If you’re single, or your household only has one source of income, consider saving on the higher end of this scale to make sure you’re covered in the event of a job loss or reduction in income.
However much you save, be sure this money is held in a highly liquid account. It needs to be readily available and easily accessible, but it should also be in an account that offers a competitive interest rate so that you don’t lose out on potential growth.
Track Your Expenses and Build a Budget
Many people don’t realize just how much they are spending until they are tasked with writing it down. Once you have a good idea of where you currently spend money, you can begin to build a budget around where you want your money to go. Some expenses will be non-negotiable (like utility bills), while others may have some room for cuts (eating out). Over time, your budget can be modified as needed so that you are better prepared to withstand potential fluctuations in income.
Review Your Risk Management Strategy
Risk management is a great way to safeguard what you’ve already built. Unmanaged risk can mean the difference between maintaining an ample emergency fund or not having enough when you need it the most.
Be sure to review your insurance policies and make sure to bring them up to adequate coverage levels. This should include life, health, auto, and homeowners insurance at a minimum, but disability and long-term care coverage should be considered as well.
These risks are often overlooked and can be devastating to your household finances. Making sure you are adequately covered now will save you time, money, and energy in the future.
Protect Your Investments
It’s common to feel worried when you see your investment values fall during a financial crisis, but should it be inevitable? By subscribing, without consideration, to the mantra of “buy and hold (no matter what),” you relegate your portfolio to the fluctuations of the market. Now, many people make the mistake of selling near the bottom of a market downturn, staying on the sidelines during a good portion of the recovery, and then jumping back in closer to the top of the next upswing. By doing this, you are quite literally selling yourself short. Alternatively, we could turn this on its head by selling near the top, staying in cash as the market searches out the bottom, then jumping in as the market gets ready for the upswing. Does that sound a little like “buy low, sell high”? And please don’t let anyone tell you it can’t be done!
It’s crucial that you maintain a level head and don’t get caught up in emotional investing, especially in times of economic uncertainty. Proper asset allocation and diversification are key factors that will help you along the way along with a dynamic, focused investment strategy that responds to current economic and market conditions.
Rely on a Professional
Sometimes the best thing you can do to prepare is to get a second opinion. Economic downturns are inevitable, but financial stress and uncertainty don’t have to be. At The Rosamond Financial Group, we will work together to assess your needs and take a proactive approach to preparing for the future. Together, we can create growth from uncertainty. Book a free introductory meeting online! See what clients are saying about working with us.
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing firstname.lastname@example.org or schedule a call on his online calendar.