Get Your Financial House in Order

HOW TO NAVIGATE AN UNCERTAIN ECONOMY

The financial markets have experienced unpredictable swings over the last two years. Grocery, utility and gas prices are escalating. Pay gains are lagging and real estate is flat. After months of negative wage growth, supply chain disruptions and rising inflation, many are frustrated and tired. Rather than despair, now is a good time to review your finances and get your house in order in case of a recession.

Where to start
Everyone should set financial goals. Taking good care of your money is a habit just like eating healthy and exercising. Review your budget, and if you do not have one, it is the time to establish one. Setting a budget and sticking to it may sound punitive, but it can be quite freeing. 

Sound budget techniques are simple: Write down all of your expenses then decide which are necessities and which are luxuries. Reviewing your finances periodically keeps an eye on your spending. Set realistic expenditures and cut extras. Be sure to allocate funds for savings and retirement.

Allison Link, financial advisor, RBC Wealth Management-US explains, “Managing your budget in a recessionary environment, for most people, is not drastically different than managing your budget during bull market years or strong economic environments. Living within your means and maintaining a six-month emergency savings is key in any economic environment and keeping your investments in line with long-term goals and priorities rather than trying to time the market.” 

When you feel your finances tightening, look for expenses in your budget that are optional. Take-out food, specialty coffees, magazine subscriptions, phone apps and gym memberships often eat up large parts of your take-home pay. Maintain a balance — occasional splurges are good. Interestingly, data shows that the 2022 luxury market exploded despite a decline in overall retail sales. People are cutting back on specialty brands at the grocery store, shopping for hygiene necessities in bulk, and buying fewer clothes in order to indulge in one exceptional luxury item, a special evening out or a getaway. Experiences are in high demand. 

Put capital you may need for living expenses or big life purchases in defensive assets such as savings accounts or CDs. You don’t want to be forced to sell your riskier assets when they are at their lows just because you need liquidity. Link suggests, “if you are sitting on excess cash but are reluctant to get it into the market just yet, consider putting the cash to work in shorter term savings options.” 

Keep some “dry powder” in case the recession does materialize. Link notes, “Often times the best days in the market immediately follow or coincide with market corrections or downturns. As the saying goes, ‘It’s time in the market, not timing the market.’” 

What to do in a recession
Don’t obsess over watching the returns in your investment accounts. You should check them periodically, but everyday can cause anxiety. If your investments are causing you to lose sleep, make an adjustment. 

Link suggests, “You want to choose a portfolio allocation that you can stick with for the long-term, no matter what the market is doing on any given day. If you are losing sleep or experiencing disproportionate amounts of stress, your portfolio may be invested in a way that is too aggressive for your personal risk tolerance, and adjusting to a more moderate or less aggressive portfolio allocation will allow you to stay invested when times get tough. Your investments should be aligned with your long-term goals, both financial and non-financial.” 

Whatever the market’s ups or downs, stick to your budget and your plan. Keep an eye on your budget to identify places you overspend. Replace expensive entertainment with low- or no-cost recreation. Be creative and find new hobbies for your free time. Look for alternative forms of enjoyment: Instead of going out to the movies, invite friends over for drinks and a game night. Pack snacks, and take the family to the park for a walk or tennis match. Challenge yourself and your friends to complete a series of hikes or learn a foreign language. 

Remember, the market always wins over time. Look at long-term returns, not short-run returns. The average stock market return has been about 10 percent per year for nearly the last century, as measured by the S&P 500 index. In some years, the market returns more than that, and in other years, it returns less. Allison notes, “Bear markets do end, and the key is staying invested even in down markets with your long-term goals in mind.” ✦ 

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/ SIPC.). Asset allocation and diversification do not assure a profit or protect against loss. 

Quick tips for uncertain times
• Focus on yourself and your family.
• Set goals around things that matter.
• Maintain your health.
• Economize on everyday expenses so you can splurge on what you most want.