How to Protect Yourself in Today’s Scary Economic Environment

I recently taught a class with the same title as this post. It began with a summary of recent “scary” economic events: recession fears, rising interest rates, bank failures, volatile stock prices, increased costs of basic expenses due to inflation, layoffs, low savings rates, increasing credit card APRs and household debt, housing unaffordability, and more. 

The remainder of the class described ways for people to protect themselves during uncertain financial times. Below are some key take-aways:

 

Self-Assess Your Fears- Admit that you are nervous. Then write down your biggest financial fears (e.g., unemployment, homelessness). Next, ask yourself how realistic they are. Also, tune out market “noise” (e.g., daily financial reports on television) if this triggers financial anxiety.

 

Understand Historical Investment Returns- Avoid market timing, which is generally futile. When people jump in and out of stock investments, they tend to miss key “up days” when markets (and stock prices) rebound. Investment volatility is normal and to be expected.

 

Control What You Can- Spend less on discretionary expenses to offset higher fixed expenses due to inflation, accelerate debt repayment (snowball or avalanche method), get estate planning documents in order, diversify investments, and develop healthy living habits (e.g., exercise).

 

Earn More on Your Money- Take advantage of the higher returns from online bank savings and money market accounts and money market mutual funds available through investment companies. To hedge uncertainty about future interest rates, purchase a laddered portfolio of certificates of deposit (CDs) with staggered maturity dates and different interest rates.

 

Rebalance Your Portfolio- Set target percentage weights for asset classes (e.g., stocks, bonds, cash equivalents) and rebalance periodically by selling over-weighted assets and buying what is underweighted. Sign up for free automatic investment rebalancing services, if available.

 

Annual Financial Check-Up- Keep tabs on your finances with the following check-up metrics: net worth statement, cash flow statement, spending plan (budget), credit report and score, consumer debt-to-income ratio, and income tax withholding review.

 

Learn From Your Tax Return- Review your latest tax return and identify changes from previous years. Change withholding and/or quarterly estimated payments if changes are needed. Do a mock-up 2023 tax return each Fall to identify tax-saving opportunities before year-end.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.