5 Ways to Manage your Finances in Times of Economic Turmoil

Negative oil prices, whispers of recession, high unemployment rates, and fluctuating stock markets can all instill fear about a looming recession. While the true economic impacts of the global pandemic are uncertain, it is important to start thinking ahead to how a sustained downturn could impact your finances. Uncertain times induce stress particularly about money, but here are five ways to manage your finances in times of economic turmoil.

1. Stay Informed 

As tempting as it may be to stick your head in the sand, it’s important to have conversations about what an economic downturn may look like for your family. Your current plan is not bullet-proof.  As economies fluctuate, your planning strategy should too.

Think about what your current goals are, what your current spending looks like and how that has or should change as a result of the pandemic. Chances are, in light of social distancing your spending habits have changed. The extra cash in your budget may allow you shore up an emergency fund or put more towards investments.  Conversely, your income level may have changed as a result of COVID’s impact on businesses.  That means it may be time to tighten up your budget and start cutting out the excess spending.

Regardless of your circumstances, pretending nothing has changed will only hurt you in the long run. Stay engaged on how your personal finances have changed and discuss with your advisor ways your strategy should as well.

2. Prioritize Your Emergency Fund

An emergency fund should be able to cover 3-6 months of regular expenses but during a financial crisis, it’s possible you may need to cover a full year. If you anticipate a change to your current income level or your business is heavily impacted by social distancing requirements, saving extra in an emergency fund may be prudent.

What if you see a great buying opportunity? Should you use the cash in your emergency fund to capture it? If this thought has crossed your mind lately, it’s probably the emotional side of your brain talking, not the logical one.  I recommend that you hit the pause button and run the numbers.  A detailed cash flow and Monte Carlo analysis is the best tool to understand the pros and cons.  If you don’t have those tools available to you, here is some quick math to keep in mind: a 10% loss in year 1 requires an 11.11% gain in year 2 just to break even.

Your emergency fund is not there to make you money.  The fund is there to help you stick to Buffet’s famous 2 rules: 1) Don’t lose money and 2) Never forget rule #1.

3. Leave your Retirement Accounts Alone

Your first instinct may be to tap into your retirement fund, especially if you are feeling strained for cash. However, you will benefit in the long term from resisting temptations. Not only do you lose potential capital appreciation when dipping into your 401(k), doing so can cause you hefty losses from withdrawal fees and additional taxes. Generally, people who withdraw from retirement funds before age 59-½ are subject to a penalty of 10 percent of the withdrawal amount. The CARES act does provide special tax and withdrawal provisions, however, these provisions only apply to individuals in special circumstances.

If you absolutely have to make changes to your retirement plan, it might be a better idea to cut back on how much you are contributing rather than taking a loan or withdrawal. Just don’t drop below your employer matching requirements. That is essentially free money your employer is offering you. It would be a shame not to take it.

Leaving your retirement fund alone could allow you to see record gains as the market recovers. If you are feeling an absolute necessity for cash from your savings funds, first consult your financial advisor about potential alternatives.

4. Consider Dollar-Cost Averaging

So what happens when lifestyle changes due to COVID have lowered your spending, and you still have maintained a steady income throughout the pandemic, allowing you to maintain a surplus cash flow? First off, congratulations- you’re one of the lucky ones! Second, you may want to consider implementing a dollar-cost averaging strategy with your extra change.

Dollar-cost averaging spreads out your stock or fund purchases at regular interviews in equal amounts. The purpose is to reduce the volatility created by purchasing lump-sums of investments at a potentially high price point. It essentially smooths out your purchase price over time, balancing high purchase prices with lower ones. Bear markets make for great opportunities for dollar-cost averaging as you are purchasing stocks in times other investors are too afraid to buy, taking advantage of the subsequent lower prices.

As with all financial strategies, this is highly dependent on your financial circumstance and risk tolerance. This strategy might not be best suited for someone who feels panic when markets flash red, and that’s okay! Your financial advisor can help you assess if this strategy is right for you.

5. Resist the Urge to Make Radical Adjustments

As tempting as it may be to withdraw funds at the sign of a potential recession, it is important to stick to your current financial plan and trust that these downturns are in fact, temporary. While the effects of COVID-19 are very real for both individuals and businesses, historically economies rebound and will do so faster than they depleted.

While short-term risk is nerve-racking, its important to remember that your current investment  situation was constructed to handle these changes so that long-term, you still come out on top.

 Emotional investing can harm you more than it can help you. If you find yourself feeling additional  stress at negative volatility, it could be valuable to have a conversation about adjusting your  investment strategy. Before making any decisions, always consult your financial advisor.