By Bryan Lee, CFP®, MBA
As a nation still in the midst of a global pandemic, we’ve had many stark reminders of just how unpredictable life can be. When that unpredictability gains steam, we start seeing shocks to the stock market’s stability and the economy, as evidenced by increasing inflation, unemployment woes, supply chain issues, and plenty of volatility in the market. If all these ups and downs have you feeling anxious, you’re not alone. As we navigate continually uncertain times, here are 4 money moves you can make to feel a little more prepared for whatever comes next.
1. Ensure Your Emergency Reserves Are Appropriate
As the old proverb says: “Prepare the umbrella before it rains.” Building a reserve of liquid funds is the same as preparing the umbrella—it is the foundation of financial preparedness. Conventional wisdom says that you should have enough liquid funds to cover 3-6 months of basic living expenses (mortgage, utilities, groceries, etc.). However, this is simply a ‘rule of thumb’ and should be customized to your particular situation.
This money should be held in a highly liquid account so that it is readily available should an emergency occur. These funds could be located in a variety of different types of accounts: a high-yield savings account that offers a competitive interest rate, a non-retirement investment account, and even a line of credit (although these last two options carry risk).
While a high-yield savings account offers the greatest amount of safety, in today’s interest rate environment it probably won’t yield much return. Conversely, a properly-managed taxable investment account offers better long-term expected returns, but it could experience short-term declines when the funds are needed, resulting in losses.
The final option would be to temporarily borrow from the portfolio using margin or drawing from your line of credit, which could then be repaid from the portfolio once some of the short-term volatility has passed and the investments have recovered. A multi-faceted approach could make sense, depending on your situation.
2. Watch Your Spending
If the emergency fund is the umbrella, then building a spending plan and tracking expenses are the sturdy rain boots you wear when the storm clouds come rolling in. Tracking spending habits can be difficult, especially in trying times, but thankfully there are several apps that do it for you once you link your various bank and credit card accounts.
Once you have a good idea of where you currently spend money, you can begin to build a spending plan around where you want your money to go. This can be modified as needed as time goes by and life changes so that you are better prepared to withstand potential fluctuations in income.
3. Manage Risk
Risk management is a great way to safeguard what you’ve already built. Unmanaged risk can mean the difference between maintaining an ample emergency fund or not having enough when you need it most. Using insurance is one way to transfer the risk of big losses to an insurance company by paying premiums.
Be sure to review your insurance policies, taking care to bring them up to adequate coverage levels. This should include life, health, auto, and homeowners insurance at a minimum, and disability, umbrella liability, and long-term care coverage should be considered as well.
Over the past few years, home values across the country have increased, and your home may be insured below its actual replacement cost. Similarly, if your income has increased, your company-provided disability policy (if you have one) may no longer provide adequate coverage and should be reviewed. Finally, having at least $1 million of umbrella liability insurance on top of your auto and homeowner’s insurance is essential to protect your family if you are involved in an automobile accident that causes bodily injury to another party.
These risks are often overlooked and can be devastating to a financial plan. Making sure you are adequately covered now will save you time, money, and energy in the future.
4. Evaluate Your Investment Allocation
Investment allocation and risk tolerance are important factors to consider when assessing financial preparedness. If your investment allocation does not align with your risk tolerance, it can lead to unwise investment decisions.
It’s common for people to feel worried when they see their investment values fall during a stock market correction, but a properly diversified investment allocation specifically tailored to your level of risk tolerance can alleviate quite a bit of the stress surrounding market volatility. This helps keep you invested through the downturns so that you can benefit from the eventual growth when the market recovers.
In this case, “stay the course” is tried-and-true advice, especially if you have a long timeframe before financial independence and a sufficient emergency fund to get you through difficult times.
Partner With a Financial Advisor!
Making smart financial decisions doesn’t have to be difficult or overwhelming, and we at Strategic Financial Planning are here to help you along the way. Whenever you’re ready to take the next step in your financial journey, we’ll be here to walk with you through all of life’s most unexpected hurdles. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!
Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ professional.Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.