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The economy moves in cycles. There are periods of economic growth and then times when the economic growth slows. While you can’t change the economic picture, you can change the way you manage your own money to adapt.
With costs going up, thanks to Trump Administration tariffs and the job market teetering, people are rightly concerned. In a slowing economy, many people consider delaying discretionary expenses until things feel more stable or they have more cash on hand. But delaying purchases isn’t the only thing you can do. Here are some tips meant to help you prepare your finances for an economic slowdown.
- Review your financial goals. The economy changes – and so do you and your financial goals. When was the last time you thought about the things you’re saving for and what you want your money to do for you?
What you can do now: Review both your short- and long-term goals. Do they still make sense in the current environment? You may want to delay the timeline for a major purchase. But don’t stop there. Reconsider your overall financial plan. If you don’t have a financial plan, now’s the time to create one. It doesn’t have to be costly or complicated. You can work with a financial advisor or create a DIY financial plan. If your portfolio has taken a hit, avoid panic selling. Stick to your investment plan and consider strategies you can use in a down market, like a Roth conversion or tax-loss harvesting.
- Look for ways to spend less and earn more. Get a better handle on monthly spending. Be honest with yourself about what you earn and where your money goes.
What you can do now: First, take a close look at your expenses and identify the nonessentials. What can be reduced or paused? Next, use the “needs, wants, wishes” framework to prioritize the things you spend money on to create a realistic plan. Does your income cover all your needs – those items critical for everyday living? Does it give you extra for your wants, the things that improve your quality of life? Is there some left over for your wishes – those things that may be out of reach right now? If your income is falling short, you may need to make some changes. You might also consider exploring a side gig to bring in more money.
- Beef up your emergency fund. Having emergency cash on hand gives you more options. Whether you’re faced with an unexpected personal situation or a slump in the economy, having cash available can help you avoid overusing credit cards, tapping into retirement funds, or selling investments in a down market.
What you can do now: Make a list of essential living expenses, focusing on the bare necessities. Exclude things like cable TV or entertainment. If you haven’t already, strive to build an emergency fund to cover at least three to six months of essential expenses. Then, decide where to keep that money. It’s preferable to keep emergency cash somewhere safe andliquid. Remember, the more cash you have, the less you’ll be forced to react in an economic downturn, but too much cash can cost you potential growth in an investment.
- Pay down high-interest debt. Credit can be a powerful tool if used wisely. But it can get out of hand and cost you hundreds of dollars or more in interest each year if you maintain high balances on your credit cards.
What you can do now: Stop giving so much to credit card companies, create a plan to start reducing credit card debt right away. Try to negotiate a lower interest rate with your credit card company. Also, try to pay more than the minimum on your balance each month. Pay as much as you can afford – and pay on time – to avoid interest charges and late fees. If you have more than one credit card at different interest rates, pay off the one with the highest rate first, then tackle the next one.
Turn uncertainty into opportunity
An economic slowdown can create uncertainty, but it can also be an opportunity to make positive changes. Taking these steps to refocus on your goals, adjust your spending, and refine your overall financial plan could help put you in a better place financially if things take a dip. No retirement plan? Consider opening an IRA so you can take advantage of tax-deferred growth. If you open a Roth IRA, your IRA earnings could be tax free.
Source: Charles Schwab
