Are we in for a “hard” or “soft landing”...or “no landing” at all? While we can never control the timing of more challenging economic times, there may be ways to better survive...and even thrive.
This was the conclusion of a Harvard study that looked at the performance of 4,700 public companies through three recent recessions. While 17 percent fared particularly badly, almost 10 percent did the opposite: they flourished, outperforming competitors by at least 10 percent in sales and profit growth.1 What made the difference? Preparation. When a downturn eventually hit, companies with contingency plans that had thought through alternative scenarios could switch to survival mode and react defensively.
This may be equally applicable to our personal financial positions. How we survive — and possibly thrive — through a downturn may come down to how well we prepare. In this regard, here are some personal finance ideas that may be valuable regardless of the prevailing economic conditions:
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 high net-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. A personal cash flow statement provides 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 instance, some set goals like the “50/30/20 Rule,” which budgets 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 we can all reduce expenses, 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 non-essential add-ons. Or, you may be unknowingly paying for unused subscriptions, especially if you signed up for a free trial that has since been 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 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 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 to see how you are tracking to your goals. Wealth management can consist of many elements, not just your investments. Tax strategies, insurance planning, risk management/contingency planning, retirement planning, business succession planning and estate planning can all contribute to building wealth. Remember that we are here to assist.