Ways to Strengthen Your Finances, No Matter What Tomorrow Brings
On any given day in the markets, there will always be investors who feel bullish or bearish about tomorrow’s outlook. The good news is: you don’t have to be able to predict the future to have investment success. As long as you are taking the right steps, you can continue to preserve and build your net worth, no matter what the market does.
A strong financial plan is proactive rather than reactive to changes in the business cycle. We know upturns and downturns will occur, even if we don’t know exactly when. Remember that the economy doesn’t dictate your economy. The following steps will help strengthen your finances no matter what tomorrow brings.
Shore up your savings.
No matter what the market climate, having healthy cash reserves provides peace of mind. Your cash reserves should be equivalent to 1 month of your expenses in checking, and 3-5 months of expenses in the savings account. In case of an emergency or job loss, this will allow you to “be your own bank” rather than going into credit card debt. It also gives you a signal—if you are dipping into savings too often, it may be time to review your budget and see if there are ways to be more efficient.
Invest like you earn.
Unless you’re a lottery winner, you didn't get to your current income level by pure chance or luck. It probably took a lot of time, discipline and hard work to get to where you are in your career. The same is true of investments—it’s a long-term, disciplined process that should not depend on factors outside your control (like a certain stock outperforming, or a certain outcome occurring in the markets). So if a particular investment “opportunity” crosses your path that promises the moon and seems way far out of the norm, it’s likely too good to be true. Save gambling for the casino, not your future financial security.
Don’t take on long-term financial commitments based on a short-term windfall.
It is good to be optimistic about the future when you get a big bonus, or a larger-than-normal business distribution. But avoid overextending yourself. If you work in a field where your income is variable from year to year, don’t take on a third car payment or buy a vacation home solely based on your success in one year. Think about your net worth relative to what you earn, and how long have you been earning at that level. A single year’s success cannot sustain an obligation that is 5 to 30 years in duration.
Stack the deck in your favor.
There are some risks inherent to investing, but there are many things you can control. For example, to minimize the risk of any one investment underperforming, we advocate a diversified approach. And while there is always going to be a cost to access the markets, it can be minimized. The majority of investors pay commissions and buy on retail platforms. We avoid both. Are you sensing a theme here? The more money we can save for you—whether it’s by investing in funds at low institutional costs or rebalancing your investments in a tax-efficient way—the more of your money is available to grow.
Know what it means for you if the market has a correction, or large prolonged downturn.
A change in the economy doesn’t necessarily mean you need to change your investment strategy. For our Halpern Financial clients, we regularly strength test the portfolio against hundreds of potential market scenarios. This allows us to know the best and worst case scenario, and prepare accordingly with the right mix of risk and return for each individual (and a sustainable withdrawal strategy for those in retirement).
Try not to make a career move during an economic slowdown.
Most likely your salary will not change much as a result of a recession. But it may be a good idea to stay at your current employer rather than switching jobs. It’s never good to be the new kid on the block when your employer may become financially strained.
Automate as much as possible.
Remove the temptation to spend money you should be saving for a rainy day. Set up auto transfers so that you have no choice but to spend less by deferring your income to savings before you even get a chance to spend it.
Finally--remember your plan.
A successful financial plan accounts for slowdown in the business cycle, AND prepares you for it. Revisit your personal plan, and remember that a strong financial plan is designed to weather many different market climates.