How to Protect Yourself in Today’s Scary Economic Environment

I recently presented a 90-minute webinar for a new client with the same title as this blog post. Below are nine key take-aways about dealing with challenging times and current economic uncertainty:

 

Financial Tornado- There are currently many economic concerns stirring these days: recession fears, high inflation, record high vehicle prices, volatile stock values, increased costs for food/utilities/gas, a challenging housing market for buyers, layoffs, a tightening job market, and record high credit card debt. 

 

Consumer Price Index (CPI)- Inflation, as measured by the CPI, has been above the Federal Reserve’s 2% target for five years and consumer prices are about 25% above where they were five years ago. Not surprisingly, affordability is a top concern for people of all income levels.

 

Control What You Can- This is the best response to scary events. Specific strategies include spending less to offset higher fixed expenses, accelerating debt repayment, diversifying investments, building an adequate emergency fund and a buffer account for retirees to hedge sequence of returns risk, and healthy living habits to avoid costly future medical expenses.

 

Behavioral Finance Biases- Studies show that people feel losses 2 ½ times more intensely as equivalent gains and extrapolate current and short-term events into the future (recency bias). When our sense of control is threatened, we tend to believe whatever information we have is reliable.

 

Knowledge Provides Perspective- Investment history is important to know. Stock market volatility is normal. Studies show that market timing (jumping in and out of equity investments) is futile and that, over time, stocks have outperformed all other asset classes (e.g., bonds and cash equivalents).

 

Laddering is a Risk Hedging Strategy- Laddering is where you divide money across multiple certificates of deposit (or bonds) with staggered maturity dates. It provides access to cash (to spend or reinvest) at regular time intervals and a series of market-based interest rates instead of one.

 

Debt Makes Everything Harder- Income loss is more dangerous with debt as essential living expenses may compete with debt obligations. Also, inflation will raise interest rates on variable rate credit cards and loans. There is also an increased risk of default and collections and emotional stress.

 

Debt Mitigation Strategies- Contact creditors to arrange a comfortable repayment schedule. If this is not enough, consider working with a reputable non-profit credit counseling agency to create a debt management plan (DMP). Chapter 7 or 13 bankruptcy is a final option if debt is overwhelming.

 

Annual Financial Checkup- Keep tabs on your finances by reviewing your net worth statement (assets-debts), cash flow statement (income and expenses), spending plan (budget), credit report and score, income tax withholding, and any changes that affect your personal finances and taxes.

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.