For me, financial advice should stand the test of time. That said, the advice I give during a down market is markedly similar to what I'd give if the market is doing well. My recommendation to maintain an emergency fund in a bank is boring and is better received during a market downturn and seen by some as optional during a roaring bull market.
That said, I was reminded that not all of you are my clients and you could use some direction! Here's where I'd focus my efforts if we were going to work together to build a Recession Plan:
- Review your current Cash Flow. Where in your spending could you make adjustments? What subscriptions have you been meaning to cut? You've likely been spending more on gas & groceries lately. Are you still meeting your savings obligations?
- Pay off debt. Especially if it's high interest. I consider high interest over 6%. Often the best return on your money, even over your 401k can be found in paying off your credit card that has a 17% APR.
- Establish or Bolster your Emergency Fund. When your cash flow is good and the market is roaring, it might have seemed like you didn't need an emergency fund. Now you might be seeing that as more of a priority. Your emergency fund should help you whether 3-6 months without your income, depending on your situation. Set up a re-occurring monthly deposit to a savings account that you've established as your emergency fund. It's a great idea to have your savings in a High Yield Savings account. It's a bad idea to have it invested in the markets. If you have money in the market that you consider your emergency fund, I might recommend you re-allocate those funds to cash and transfer it to the boring old bank. The key here is safety. that's how your emergency fund "works" for you.
- Re-Assess your Risk Tolerance. Whenever I bring on a new investment client, I always assess how much risk they should be taking in their portfolio. I'm considering a few things, their investment experience, what they say their tolerance is, what their attitude toward investing is, and also how long the money will be invested before it's needed by the client (known as time horizon). For clients with multiple accounts, the accounts may each have different risk profiles, based on when the money will be needed. If you're finding that you're less comfortable with risk than you thought, or your time horizon is much closer than when you originally selected your strategy (or if it's been a few years since you had a conversation with your advisor), you may want to re-assess. That said, usually, I don't recommend a change. Accounts that perform best overall are owned by those investors who stay the course and continue to make their systematic contributions. Keep in mind that the #1 factor in the growth of your account is your contribution.
- Lean into your Plan & Keep Calm. A good financial plan took into account contingencies and down markets. We knew this day would come, we expected it, and now it's here. Sky-high inflation hasn't spread to all areas of life and won't last forever so keep your chin up and have faith!
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Kristin Afelumo is the LPL Financial Planner & Owner of HerPlanning. In her web-based Financial Planning practice, she focuses her efforts on Female Primary Income Earners and women who are the money managers of their households. She’s passionate about helping her clients achieve greatness. Her mission is to support clients in the area of Financial Planning so they can be great where it matters, without apology.
You can connect with Kristin on her Financial Planning website, www.herplanning.com, or directly by email: email@example.com
Photo by Karolina Grabowska: https://www.pexels.com/photo/composition-of-calculator-with-paper-money-and-notebook-with-pen-4386341/