The economy moves in cycles. There are periods of economic growth and then times when the economic growth slows. While you can't change the economic picture, you can change the way you manage your own money to adapt.
For example, my nephew got married this year after a two-year engagement. He and his fiancée wanted to get married sooner, but at the time there was a lot of financial uncertainty. They decided that with costs going up, they needed more time to save for the wedding of their dreams. They're not unusual. In a slowing economy, many people consider delaying discretionary expenses until things feel more stable or until they have more cash on hand. But delaying purchases isn't the only thing you can do. Here are six steps you could consider to help prepare your finances for an economic slowdown.
1. Review your financial goals
The economy changes—and so do you and your financial goals. When was the last time you thought about the things you're saving for and what you want your money to do for you?
What you can do now: Review both your short- and long-term goals. Do they still make sense in the current environment? You may want to delay the timeline for a major purchase. But don't stop there. Reconsider your overall financial plan. If you don't have a financial plan, now's the time to consider creating one. It doesn't have to be complicated or costly. You can work with a financial advisor or even create a DIY financial plan. If your portfolio has taken a hit, avoid panic selling. Stick to your investment plan, and consider asking your financial advisor about strategies you can use in a down market, like a Roth conversion or tax-loss harvesting.
2. Look for ways to spend less and earn more
This means getting a handle on your monthly spending and being honest about what you earn and where your money goes.
What you can do now: First, take a close look at your expenses and identify the nonessentials. What can be reduced or paused? Next, use the "needs, wants, wishes" framework to prioritize the things you spend money on. This is how you create a realistic spending plan.
Does your income cover all your needs, those items that are critical for everyday living? Does it give you extra for your wants, the things that improve your quality of life? Is there some left over to save for your wishes, those things that may be out of reach right now? If your income is falling short, you may need to make some changes. You might also consider exploring a side gig to bring in more money.
3. Beef up your emergency fund
Having emergency cash on hand gives you more options. Whether you're faced with an unexpected personal situation or a slump in the economy, having cash available can help you avoid overusing credit cards, tapping into retirement funds, or selling investments in a down market.
What you can do now: Make a list of your essential living expenses, focusing on the bare necessities. For example, exclude things like cable TV or entertainment. If you haven't already, strive to build an emergency fund to cover at least three to six months of those essential expenses. Then, decide where to keep it. It's preferable to keep your emergency cash somewhere safe and liquid.
Remember, the more cash you have, the less you'll be forced to react in an economic downturn, but too much cash can cost you potential growth in an investment.
4. Don't leave money on the table
If you have a company retirement plan that includes a match, contributing to the plan could mean free money. Are you taking advantage of it?
What you can do now: Review your current contribution amount to your company retirement plan. If you're not contributing enough to get the full match, consider increasing your contribution right away. The match is free money that can help you save more and build wealth for retirement. No retirement plan? Consider opening an IRA so you can take advantage of tax-deferred growth. If you open a Roth IRA, your IRA earnings could be tax free.
5. Pay down high-interest debt
Credit can be a powerful tool if it's used wisely. But it can get out of hand and cost you hundreds of dollars or more in interest each year if you maintain high balances on your credit cards. Here's an example: Let's say you buy a $3,000 TV on a credit card with an annual interest rate of 14%, make a $100 payment each month, and don't use the card for additional purchases. It will take over three years to pay off your balance. And you'll end up paying more than $700 in interest—almost a quarter of the original purchase amount.
What you can do now: Stop giving so much to credit card companies by creating a plan to start reducing your credit card debt right away. Try to negotiate a lower interest rate with your credit card company. Also try to pay more than the minimum payment on your balance each month. In fact, pay as much as you can afford—and pay on time—to avoid high interest charges and late fees. If you have more than one credit card with debt at different interest rates, consider paying off the one with the highest rate first, then tackle the next one.
6. Sharpen your job-search skills
Hopefully your job will be just fine during a recession, but downturns do have a way of destabilizing a wide range of industries. Have a plan just in case.
What you can do now: Update your resume, and make sure it includes all your most recent job experience. Start or ramp up your networking. Keeping your industry contacts fresh could help boost your chances of finding a new job more quickly if needed. And as industries and job opportunities change, don't sit still. Whatever your field of expertise, learning new job skills could open new doors.
Turn uncertainty into opportunity
An economic slowdown can create uncertainty, but it can also be an opportunity to make positive changes. By taking these six steps to refocus on your goals, adjust your spending, and refine your overall financial plan, it could help you be in a better place financially if things take a dip. These steps can help you feel more confident and more in control of your finances, whatever the future may bring.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.