Regardless of the differing views — whether there will be a “hard,” “soft” or “no landing” at all — we have entered a more challenging economic period. While we will never be able to control the timing of an economic slowdown, what we can control is how we prepare for more challenging financial times.
1. Maintain an Emergency Fund — This typically consists of the equivalent of three to six months of living expenses set aside in the event of an unforeseen financial situation, such as job loss, illness or damage to your home. While the obvious benefit is to help buffer against financial hardship, it can help to avoid taking on debt. For highnet-worth individuals, an emergency fund may be useful to prevent the need to liquidate investments on short notice.
2. Take Stock of Your Cash Flows — Having visibility over your cash inflows and outflows can help better plan your finances. For many, a personal cash flow statement may be a valuable exercise to provide a snapshot of your sources of income, as well as what you’re spending and saving. Many of us have good visibility over our income, but we may not have as clear a picture of where our funds are going. Often, when our clients undertake this exercise, they discover their expenses aren’t exactly what they thought. Once you determine how much you are spending, you can incorporate different rules for managing money. For example, some investors consider setting goals like the “50/30/20 Rule,” which focuses on budgeting 50 percent of inflows for needs, 30 percent for wants and 20 percent for saving and investing
3. Prioritize Your Spending — There may be an opportunity to increase savings by cutting back on non-essential spending. Debt-relief experts suggest that there are common ways to reduce expenditures, such as focusing on insurance, unused memberships or subscriptions and “unconscious spending.”2 For instance, consider revisiting insurance coverage to negotiate better rates through bundling (i.e., home and auto insurance), raising a deductible or dropping nonessential add-ons. Or, you may be unknowingly paying for unused subscriptions, especially if you signed up for a free trial that you have since forgotten. There may be areas to reduce unconscious spending: thoughtless purchases made out of convenience, such as one-click online purchases, expensive coffees, or food delivery that can add up over time.
4. Pay Down Debt — Historically low interest rates made it easy and affordable to assume debt. With rising rates, the cost of debt has substantially increased. If you hold debt, it may be beneficial to focus on paying it down. Consider prioritizing debt subject to the highest interest rates first, such as credit card debt, to reduce the interest paid and allow the principal to be paid down. If you hold a mortgage that will be renewing, shop around to get the best rate possible.
5. Review Your Goals — One way to help keep on track is to review your wealth plan periodically to see how you are tracking to your goals. It acts as a personalized roadmap and can consist of many elements — not just your investments — such as tax strategies, insurance planning, risk management/contingency planning, retirement planning, business succession planning and estate planning. Remember that we are always here to assist.
