Some of my favorite advice in life comes from one of the books ever: The Hitchhiker’s Guide to the Galaxy. The advice is simple: Don’t Panic. This holds true for your finances and making a plan for your money in times of financial uncertainty. Whether you’re facing reduced hours at your job, a complete layoff, or are worried about unsteady economic times such as a potential recession, it’s important not to panic. Panicking often leads to over-correcting, which can cost you more in the long run than it can save you now.
A lot of the advice we include below can be useful even when the economy and your income are booming. We’d love for you to not have to worry about news headlines or who is in office because you have a strong enough financial foundation that you control your own destiny, regardless of economic stability. And wouldn’t it be amazing if a downsizing at work could become an opportunity to take time off to spend with your family, or the opportunity for a trip of a lifetime, instead of worrying about how you’re going to pay for groceries next week? Not all advice works for all situations, but we hope the guide below can help you weather the waters in both stormy seas and calmer tides. Without further ado, let’s cast off.
Don’t cyberstalk your money or the economy: focus on what you can control
When we’re looking at broader uncertain financial times such as a potential recession, feeding into the news cycle is a guaranteed way to crash your financial boat into an iceberg. I’ve noticed my friends and family that stress and panic the most are the ones who spend the most time watching TV and/or on social media. Coincidence? I think not.
It’s also important not to cyberstalk your own finances. Unless things are really tight, try to avoid going through your budget every day. You should be checking your 401(k) balance even less, because riding those waves will make you hurl even doped up on Dramamine.
General guidelines based on what we do:
- Do a monthly zero-based budget, a few days before the beginning of the month
- Check in with your budget about once a week to account for unexpected expenses that pop up
- Check in near the end of the month to reconcile the month’s transactions (I do this when paying our monthly bills) to make sure your spending is up to date to catch any expenses that fell through the cracks
- Make an end of month transfer to your savings/investing (or an extra debt payment, depending on your current goal), but do not focus on the balance if investing; make the transfer and then log off
- Reassess your overall investment portfolio to track our retirement progress about twice a year (yes, that’s all!)
Assess your financial foundation to test your footing
I’m the first to panic and scream “abandon ship,” thinking I’m going to end up destitute if one small thing falls out of line. My buddy, Reality, knows better. Since we’ve been mindful (but not too mindful) of our finances, we’re actually doing pretty well. We keep our expenses low and know how to tighten the budget when necessary to live on even less. Even if the stock market takes a dump because some hotshot public figure opens their big mouth, we’re okay.
This is important to know, and I wouldn’t know it unless we ran the numbers. Reviewing our complete financial situation, such as calculating our net worth and plugging our numbers into a retirement planning spreadsheet, is a great way to remind myself I can chill the fuck out. I hope this is the case for you, too. So ring up your buddy Reality and schedule a hot date for your next night off.
Your situation may be different. There might be reason to be concerned, especially in tough economic times. This isn’t great news, but it’s good news to arm yourself with. Knowing can help you stress an appropriate amount so you can focus on what to do to correct the ship. We’ve got some tips below to help, and you can also explore our path to financial freedom, the FIRE ladder.
Audit your spending habits and budget to see where you can cut expenses
If I had a nickel for every time my husband or I heard someone mention inflation and how expensive food has gotten in the past few years, we’d have hit F-U FI status by now. Yet something we’ve noticed is that the people we overhear often have a lot of nonessentials in their carts that can really add up, such as soda, chips, cereal, beer, and bottled water.
Food prices have gone up. Eggs got expensive. So during uncertain economic times, consider not buying eggs and other items that have been hit the hardest. You still need protein, but canned beans didn’t increase as much as eggs, so they might be an alternative until things calm down.
Explore ways to cut down your grocery bill when things get tight.
Groceries aren’t the only budget category to audit. Show no mercy. No mourners, no funerals, friends. Some categories, such as rent and car insurance, are fixed expenses that can be difficult to change, but common culprits to attack include:
- Eating out at restaurants
- Entertainment
- Extracurriculars for kids and adults (including gym memberships)
- Subscription services such as Amazon Prime, Netflix, and Spotify
- Travel and vacations
If you drive a lot and gas prices are on the rise, see if you can walk or ride your bike for local tasks and/or carpool for work, social gatherings, and other events further away. Don’t be afraid to get a little creative. Your friends might question if you’ve contracted scurvy, but you’ll have space in the budget to buy orange juice if so.
We’ve covered 13 ways to cut spending on a tight budget that could help during times of financial uncertainty.
Focus on needs versus wants and limit large purchases
This is not the time to panic buy large or small expenses. If you didn’t need it yesterday, you don’t need it today. And if you needed it yesterday, you might still need it but can live without it until things calm down.
Before making any purchases, ask, “Can this wait?” If it can, then wait.
Pause all major spending, such as:
- A house
- A new vehicle
- Furniture
- Appliances and electronics, including upgrading your cell phone
This also includes avoiding panic shopping such as stockpiling toilet paper (we ran this test, be honest if it was you) or buying a bunch of stuff you “might” need (even canned goods) because you’re worried they’re going to be too expensive in the future or difficult to get.
Imported clothes may go up in price, but you likely have enough in your closet already to survive, or you can browse secondhand shops for cheaper alternatives. Some of my most complimented outfits came from Goodwill.
We like to sleep on purchases like this for at least 24-hours and reassess it after a good night’s sleep with a clearer head. We also aren’t opposed to asking for outside counsel to help us assess if it’s something we really need. By talking it over, someone may offer to lend you what you need until you’re through the rough seas and can afford to make the large purchase.
Reassess your insurance coverages
That car insurance we touched upon? Don’t automatically take it as a given either. We aren’t saying to get rid of coverage you need, but make sure you aren’t over insured.
Skip gimmick insurances like phone insurance, trip insurance, and electronic purchase protections to help reduce your insurance costs, focusing just on the essentials to protect you from disasters you can’t weather financially:
- Homeowners or renters insurance
- Car insurance
- Health insurance
- Term life insurance (not whole life/permanent life)
- Disability insurance (depending on your occupation)
See if you need the more expensive PPO or HMO or LMNOP health plan or if you could benefit from a HDHP with a HSA. This could save you significantly with monthly premiums.
Explore how to choose a health insurance plan during open enrollment.
And speaking of gimmick insurance, you and/or your spouse may need life insurance, but life insurance for your kids? Except in a few specific situations, that’s the definition of gimmick insurance.
Beef up your emergency fund
I like to joke that our emergency fund has an emergency fund. My husband often suggests kindly in passing over dinner that boy, we have a lot of cash sitting around that could be invested. I know, I tell him. I like it that way. Leave it alone Jack, or I won’t even pretend to never let go. I will full on shove you off that headboard. Enjoy the hypothermia, hope it was worth it.
We recommend having 3-6 months of expenses stashed away for your rainy day fund. During uncertain financial times, it’s okay to squirrel away extra cash. We honestly have closer to 9-12 months of expenses in our emergency fund because it helps me sleep. I probably wouldn’t recommend holding more than one year of expenses in cash unless you’re flirting with retirement, but you know what you need to sleep comfortably at night. Just remember not to sacrifice your future by being too afraid to invest in the present, as the vast majority of retirement savings comes from compound interest versus what you actually invest. While we don’t advocate for trying to time the market, dips in the stock market are actually a great time to buy as you get to capitalize on the gains as the market recovers.
Learn more about building an emergency fund and where to keep your cash reserves.
Avoid new debt and consider paying down existing debt to free up your discretionary income
If you’re still docked but worried about getting lost at sea, consider paying down some of your existing debt while times are good. This can help turn your rickety kayak into a metal aircraft carrier, ready to weather the waves when uncertain times arrive.
Which debts you want to focus on are up to you, especially if you have other financial goals, such as saving up for a house (don’t buy a house when you’re finances are rocky) or trying to get your retirement savings started. We recommend paying off high interest debt first. How you define “high interest” can vary, which I know is super helpful. In general, we typically say 8%+ is high-interest because it’s close to average returns (post-taxes) on investment opportunities. This usually includes all credit card debt, personal loans, and many car loans.
When those uncertain economic times arrive, do your best to avoid any new debt. This is like taking new cannonballs into the side of your ship when you’re already chained to your current financial situation and taking on water.
Credit cards may seem like a lifesaver, but they’re the sharks circling around your ship, waiting for any sign of a man overboard (are we tired of this analogy yet? Sorry everyone). When you’re already struggling to make ends meet, 20%+ interest is suicide. You might as well just ask the sharks to take your leg. Try cutting back expenses as suggested above, or looking for any way to grab some extra income until you stabilize.
Keep calm and carry on with your investments
DO NOT PANIC sell. In fact, if you have extra cash sitting around, consider investing more. Warren Buffet has a few different quotes to help weather economic storms. A few you’re welcome to bookmark for when you need them:
- “Do not take yearly results too seriously. Instead, focus on four or five-year averages.”
- “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
- “The best chance to deploy capital is when things are going down.”
Around the time of this writing, the stock market has been bobbing up and down like a buoy. As a response, we have been dollar cost averaging extra investments every week to hedge our bets. Dollar cost averaging is a fancy term that means we put the same amount of money into our investment portfolio at regular intervals, regardless of the dips or increases in our investments’ values. This method worked for us during the last recession, and we’re optimistic it will again now, as history has shown in the long run, this is a far better investing method than trying to time the market.
What we have not done is:
- Rebalanced our assets to a more conservation asset allocation (I already made that mistake in my 20s)
- Sold off investments when high (or low)
- Switched from index funds to stocks or crypto
- Abandoned our long-term financial goals
The final word
Uncertain financial times can be S-T-R-E-S-S-F-U-L, but panicking will only make it worse. Think of it as quicksand. Focus on your needs, cutting any unnecessary expenses for the time being, and shore up your overall financial foundation with a debt management plan, a strong emergency fund, and a side hustle for extra income if needed. Every little forward progress will strengthen your ship and help combat stress and anxiety when the clouds roll in.
If you’re battling a difficult situation and aren’t sure where to start, we’d love to help. Drop us a line on our budgeting and personal finance group or reach out for a one-on-one financial consultation.