Recessions are inevitable. Take care of your financial health and well-being.
Economic slowdowns or recessions are inevitable, we’ve had four recessions in Canada over the last 40 years and looking like we are entering into another. While you personally cannot control the economic cycle, you can prepare and ensure your family’s financial health and well-being.
Here are four essential tips to help you weather tough economic times.
#1 Remain calm and start by focussing on your physical and mental well-being
When it comes to significant changes that are out of your control, it’s reasonable to go through a period of many emotions. You must prioritize your and your family’s physical and mental well-being. Together you have the resilience to move forward, access your current financial health, and carry-out a sound plan of action to achieve financial well-being.
Accept that some fear and anxiety is normal and build your capability to navigate through it. Staying physically active and adopting or maintaining positive lifestyle choices and behaviours are critical. Regular exercise, proper sleep, eating healthily, moderating caffeine, and minimize or avoid substances such as alcohol will all help you maintain your mental well-being during these trying times. Also, seek out professional help when needed, many people do.
#2 Revisit your lifestyles expenses and live within your means
An economic downturn can last from 6-to-18 months. Generally, the deeper it is, the longer it lasts. Before making a plan to move forward, it’s essential to access your current financial situation – your financial health. Take a look at all your sources of income, expenses, and employ strategies to reduce expenses and boost savings.
Determine your monthly income. Look at all your sources of income; salary, business income, rental property, investment income, etc. Consider the possible implications a downturn may have on different sources.
Get a handle on your monthly expenses. Make a list of all expenses clearly labeling “needs” versus “wants” - AKA discretionary expenses. Look at your spending patterns and figure out the discretionary expenses that can be decreased or eliminated now or in the future. The idea is to know where you are going to cut.
Create a monthly budget to ensure you are living with your means and not overspending. I often recommend creating a plan-B budget in case your monthly income decreases, and you have to make further cuts. Many find it helpful to have a list of your top priorities when deciding what discretionary expenses to cut.
#3 Ensure your liquidity or financial position is sound enough
Debt is always a problem, especially during economic downturns, when your job or business income may be impacted. Consider putting off any major discretionary purchases, such as buying another car or vacation property. You may need that cash.
The more debt you can eliminate, the fewer payments you will have. If you can’t pay off all your debts, prioritize the highest interest rate debt such as credit cards then turn to other types. If you need to, consider consolidating your debts and using less expensive credits solutions such as a line-of-credit.
The less debt you have, the more you’re able to put aside for saving in case of an emergency. Beefing up your emergency fund will ensure you have a cash reserve for necessary expenses, should you find yourself looking for a new job. Everyone needs a cash cushion, so do both - pay down debt while building a cash reserve or emergency fund.
#4 Have a sound financial plan based on your goals and not on the market's behavior
The thought of a downturn and the potential impact on your investments may make you feel uneasy. Some are tempted to make changes. Changing your investments or stopping your contributions, especially if you have a long-term plan, maybe the worst thing. You mustn’t jeopardize your long-term financial goals based on short-term economic events. There are great buying opportunities during economic downturns, don’t miss out.
If you don’t already have a written financial plan that’s focussed on the long-term, then get one. Having a long-term view makes it easier to tune out the daily news and stick to a plan designed for all types of market conditions. Have a financial plan, a written one, and trust it! This stands for all, regardless if you’re in your 30s, 40s, 50s, nearing or in Retirement.
If you are planning on retiring in the next few years, it might make sense to have the first few years of cash needs on hand. You’ll still want a portion in equities as Retirement lasts 25-30 years, and you will need to keep up with inflation.
If you’re feeling uneasy about your financial plan and/or investment portfolio, talk to your financial professional. Your plan and investments need to be reviewed regularly. It’s also a good idea to revisit your risk tolerance, how much risk you can handle and withstand. Sometimes people feel they can handle the market ups-and-downs. Still, given their situation, their portfolio can’t withstand the risk while working towards their goals.
You’ve worked hard to amass your wealth, growing it is important, but so is protect it. Reviewing your Portfolio allocations and regularly rebalancing it is a must. You want to be well-positioned to benefit from the eventual market rebound. The world is continually changing - old ideas, and market positionings may no longer work. Coming out of recession, we often see new industry leaders emerge, and former stars fall.
Bottom line – regardless of the economic conditions on the horizon, it’s always a good idea to monitor your financial health and have a plan that guides your financial well-being. Down markets can be a challenging time and eventually get out of a bear market and reach new highs.
I help Canadian families building a solid foundation for life and potentially the next generation. I’m their financial partner and coach, helping them prepare and get through life’s events.