Five ways to bolster your finances amid uncertainty

After a period of robust economic expansion, the U.S. is likely to see weaker growth in the months ahead.¹ Fortunately, there are steps you can take as uncertainty rises. Consider these five preemptive strategies that may help shore up your finances.

Keeping close tabs on your budget is a cornerstone of good financial health. When you’re anticipating uncertainty, financial prioritization is key.

Begin by reviewing your budget and identifying essential expenses, such as housing, food, transportation, and debt payments. Then, take a look at your discretionary spending. Would you feel comfortable delaying or cutting back on some of these costs? Take stock of big upcoming expenditures, like a new car, home renovation, or vacation abroad, and decide whether they can wait. 

Although the U.S. personal savings rate has declined sharply from its pandemic peak,² maintaining a healthy emergency fund should remain a top financial priority. Doing so can help you stay afloat in unforeseen personal circumstances, such as a job loss or a family medical emergency.

At a minimum, aim to have three months’ worth of household expenses held in a checking or savings account. If you’re the sole earner in your household or you work in an industry that’s experiencing layoffs, make sure you’re stashing away at least six months’ worth of expenses. If you’re retired, having up to a year’s worth of expenses in highly liquid assets like cash can help you avoid having to sell longer-term investments when markets are down, which can lock in losses and reduce your future income.

If you’re creating a rainy-day account from scratch or rebuilding your emergency savings, start with small weekly or monthly contributions. If you receive additional income, such as a tax refund, bonus, raise, or other windfall, consider putting a portion of that into your emergency fund.

Interest rates have been trending upward recently as the Federal Reserve has been tightening monetary policy to rein in high inflation. Those higher rates may be bad news for borrowers, particularly anyone with revolving debts, such as credit cards.

To start, it’s important to note that not all debt is the same: mortgages and student loans for example, help you invest in yourself and your future. However, credit cards and other sources of high-interest, variable-rate debt can become a drag on your finances, making it harder to meet your other financial goals, such as building an emergency fund, or saving more for retirement. Since those debts are costing you the most on a dollar-for-dollar basis, consider tackling them first.

Selling may feel tempting during times of market turbulence. After all, it can be hard to stand by while your portfolio loses value and not know when it might rebound. But a panicky decision to cash out is often a mistake: When selling in a falling market, you may incur losses—and if you wait years to get back in, your portfolio may need readjusting.

Some of the stock market’s best days in history have come on the heels of its worst days, with little, if any, advance signal to investors.

Instead, staying invested through the market’s highs and the lows is often the right strategy for investors, as market history shows rebounds can return many portfolios to the black in just a few years. Volatility may be the price investors must pay to build wealth, but there are ways to help mitigate the disruption to your portfolio through time-tested strategies like rebalancing and diversification.

In difficult economic times, it can be easy to lose sight of the big picture. Take this as an opportunity to check in on your financial goals and remind yourself what you’re working toward.

Remember, investors have weathered downturns and periods of market volatility before. A long-term financial plan aligned to your goals and risk tolerance can help keep you anchored as you ride out choppy waters.

The source of this article, 5 Ways to Bolster Your Finances in a Recession, was published on March 22, 2023.

1 Morgan Stanley, 2023 Global Macro Outlook: Inflation Peaks, Growth Slows, Nov. 2022

2 Morgan Stanley, GIC Weekly: Focus on the Consumer Not The Fed, Dec. 2022