With central banks raising rates in the hopes of lowering inflation, RBC Economics has warned that we may be headed towards a recession. While the general belief is that this will be a “softer” downturn, characterized by a more moderate and short-lived market impact compared to historical recession standards, it can still be a daunting experience for young workers and new investors. In these times, being extra careful with your finances is more important than ever. Here are some tips to help you stay on course.
Re-evaluate Spending and Investing Habits
- Review your spending patterns and reflect on whether there are any expenses that you could or should moderate. This can be done by making a budget and committing to it. By tracking and listing out all your monthly expenses, it may surprise you how quickly small amounts add up. Some expenses may be deemed unnecessary, and forgoing these excesses can help increase your monthly savings.
- In combination with the point above, additional savings can be invested in a disciplined manner. ‘Dollar cost averaging’ is one such discipline. This entails adding to investments in a fixed frequency (i.e. weekly or monthly) which removes the need to time the markets as their purchase price will be averaged out over time. For new investors and young adults, we feel purchasing ETF indexes and mutual funds is a great place to start.
- Invest according to your risk tolerance and understand what you own. New investors can at times be seduced by investment themes and ideas that are trending on social media. Rightfully or wrongfully, this has become one way to invest, and some have profited greatly. However, should a trend abruptly fade, some investors are left wondering why they purchased the investment in the first place. Recessions provide great opportunities for new investors to buy into high-quality investments at discounted prices. One doesn’t necessarily need to reach for new ideas when quality is already on sale.
- Try not to rack up too much debt during these times. With interest rates rising, the cost of carrying that debt will balloon quickly. Outstanding credit card debt tends to carry the highest interest rates and should be avoided at all costs. Consolidating higher interest rate debt into lower interest rate lines of credit can help save you money. As interest rates grind higher, even consider selling low-yielding investments and using surplus cash to pay down debt. Although paying down the debt is not increasing your net worth through growth, it does reduce your expenses which is another way to net more money into your pockets.
Renting vs. Owning a Property
- Owning a property is a milestone for many, but it is also a long-lasting financial responsibility that some may have prematurely entered, given the new reality of higher interest rates. Having a mortgage that eats up most of your budget can quickly become stressful. On the other hand, renting a property has a predictable monthly expense with the added flexibility to end or renew a lease as your financial circumstances change.
- Should an economic pullback result in personal financial strain, it may be worth re-evaluating your living expenses. Looking for more affordable housing, splitting rent with a roommate, or moving back into the family home may be financially prudent options to consider. As the government has indicated the desire to keep interest rates higher for longer, reducing your living expenses to help accumulate savings for a bigger downpayment will help you be better prepared for carrying debt at a higher interest rate.
During tumultuous times, there is a need to stay prudent with your finances. Recessions can last for quarters or even years, but staying disciplined and budget-conscious will help you weather these storms. Speak to your advisor if you need additional tips or assistance creating a personal budget.