Episode 38: How to Manage Your Money in a Recession
Mar 22, 2023
On this episode, Isaac Wright CFP®, ChFC® and Aaron Reed, RICP® share several tips on how to manage your money during a recession or market correction.
Here are just a handful of the things that we'll discuss:
- The importance of reexamining your budget and cash flow.
- How much to save in your emergency fund.
- What to do if you have a mortgage or debt.
- The benefits of rebalancing your investment and retirement accounts.
Isaac Wright: Well, welcome back to Write Money Tips here in March of 2023, already. I can’t believe we’re three months into the year, but the good news is, we’ve had a lot of great feedback from our program so far in January and February.
As I’ve said, and I’m going to continue to do so. If you have not had a chance to download our financial checklist, please take a second and do that.
Go to our website. It gives you over 34 topics and all of them are concise ways for you to be able to make progress on your financial or retirement goals.
But for today’s program, we’re going to talk about something that obviously we hear about in the news. We’ve heard all the ramblings. When you hear the word recession, what does that really mean? And if we are having an economic slowdown, not just today, but in the future, what are some things to take into consideration during a recession?
So, with that in mind, I want to introduce you to our guest today, Aaron Reed. Aaron is one of our lead advisors here at Financial Dynamics.
And you know, Aaron, of course, we talk about this day in and day out. We’ve had events in our office related to not just recession, but in general, how to take care of yourself in not necessarily the best economic environment. But let’s just jump right in and let’s just talk about what are some things that people can do during a recession that can help them with their finances?
Aaron Reed: I think the best advice you can, you know, that I can give is to make sure that you’re prepared beforehand, really. Once you get into a recession, it may be a little harder to make some changes. Whereas if you make sure you’re positioned in a way that’s going to fit your risk tolerance beforehand, then you’ll have a lot more peace of mind and a lot more confidence moving forward.
Once we’re already in a recession, like we are now, then we just want to look at where we can get interest and dividends and certain types of investments that are going to write a check to our portfolio. Things like that. Obviously, there’s a lot more details around it, but in general.
Isaac Wright: Well, you know when we hear the word recession sometimes it’s scary. Of course, the news likes to make it the end all be all. But of course, there are different definitions of how severe a recession can be. We’re not here to argue where that stands today. But when you say dividends, a portfolio that can withstand a pullback and basically that’s kind of coinciding typically with the recession, even though the market can sometimes look ahead past that.
The main thing is, and this is what I’m hearing you say, is cash flow. Is making sure that if you are going to have a setback maybe to your working hours or if you’re going to have a situation where maybe other income sources get hurt or get stressed, is to not feel overly stressed with how your investments are set up, especially if you do need that cash flow to be able to maintain your lifestyle. Am I saying that correctly?
Aaron Reed: Yeah, absolutely. Boils down to cash flow.
Isaac Wright: Gotcha. Let me ask this. When we talk about cash flow, we’re focused on investments and ways to be able to maintain a lifestyle for somebody, especially when we’re having maybe some stresses with the finances. Is this a good opportunity to look at your emergency fund? You know, we talk a lot about investments, but what about your bank money? What do people need to think about when it comes to their savings, their money market accounts? Let’s talk about that for a minute.
Aaron Reed: Obviously, we want to have that emergency fund. We want to have our bank money. You know, I see some people may take that a little far. We have a general rule of thumb to save three months’ worth of expenses.
A lot of individuals like to have a little bit more cushion like that. But then, you know, given the uncertainty in the market right now, I see a lot of people sitting on maybe a little too much emergency money. And the way interest rates are right now, you can go out and get 3, 4, 5%, keep it liquid without having to tie it up and use government treasuries and things like that. Since interest rates have also come up now, it doesn’t make a whole lot of sense to have a lot of cash sitting there not working for you.
Isaac Wright: I’m sitting here smiling a little bit because I wrote about this at the beginning of the year. It still amazes me that people have money sitting in a bank money market account paying 0.25 or 0.5%.
And the reason for that, and we’ve talked about this, we’ve had basically a 10-year situation where interest rates have been zero. So, people are used to not making any money. But that’s the last thing that you want to do, especially when your groceries are going up 10, 12, 15%, is to at least try to make some interest.
That was something that you and I, we talk about quite often, frankly. But, when you said treasuries and things that we do on our end to keep money conservatively invested, that’s giving a very competitive yield, way better than what banks and credit unions typically pay. That can’t be overlooked, right?
Aaron Reed: Absolutely.
Isaac Wright: So, let me go the other direction. We’re sitting here talking about investments, how to maybe what I would call, grab some low hanging fruit and getting a better interest rate on your cash. What about people that have liabilities, credit card debt, mortgages, fixed or variable rates?
Let’s talk a little bit about what you see right now when it comes to that topic.
Aaron Reed: Obviously, interest rates have come back up now, and you know, they don’t have the cash out refinancing opportunities that you may have had a couple years ago. So, what you have to watch out for is those higher interest credit cards that might be creeping up.
It may make sense to use some of your emergency funds. It may make sense to use some of your investments. Typically, if you’re paying more in interest than you’re going to be able to make on your investments, then it might make sense to go ahead and pay some of that off.
Isaac Wright: Yeah, and I think that’s probably concisely a good way to say it, is if your interest rates on your credit card were 10% and now they’re 15 to 20 because of what interest rates have done. By all means, this is a call to action of where does your other cash and investments stand? It may be good to pay off all these liabilities.
If you have a fixed rate mortgage at 3 or 4%, you’re basically going to have to hold onto that.
Aaron Reed: And that brings up another point a lot of people are asking. One of the questions I get a lot is that somebody’s about to retire, “Should I pay my house off so I don’t have that mortgage?” It really comes down to interest rates.
If you’ve got a three percent, three and a half percent interest rate, keep that thing as long as you can. Don’t take, you know, don’t take money that you are looking to get 4 or 5, 6% on to pay off a 3% interest rate.
Isaac Wright: And you know, it’s crazy because literally, like you said, a year or two ago, interest rates were zero.
Well now, where interest rates are at today far exceeds a 3, 3.5% mortgage. Leverage that money and keep it liquid and let it grow for you. So, again, maybe some things that are somewhat, I wouldn’t say common sense, but sometimes they get lost in the shuffle.
You know, Aaron, let’s say somebody hasn’t, so let’s play devil’s advocate here. Somebody hasn’t had a chance to get their investments in order and a recession has come. What can they do now to possibly put them on a better track when we have the recovery?
Aaron Reed: The biggest thing they can do now, aside from meeting with a professional, is to not panic, not make any short-sided reactions if the market might be off and go in there and move everything to cash. Don’t make any big knee jerk reactions that are going to have an adverse effect down the road. I think that’s the biggest thing.
Isaac Wright: And, and then really, I guess maybe as you say this, I’m thinking to myself, especially with the way stocks have acted and bonds had a horrible year in 2022. This is a good time to rebalance.
Aaron Reed: Sure. If you have, like we’ve talked about, a lot of people are sitting on a lot of cash on the sidelines and things like that. It can be a good time to introduce cash into the market. It’s down, you know, historically, and that would be a good time to get some in.
But really, you just want to make sure you’re acting in accordance with a plan. You don’t want to just make one off moves here and there. You want to make sure you have a plan that you’re working towards that you can measure.
Isaac Wright: Well, listen, let me just say this as we wrap up the program today. It’s been quite a while since we had some stress in the market. Of course, 2022, the entire year was down basically. And, you know, as we go through 2023, we’ll see how it all plays out. But regardless, the economic conditions have been challenging. We may come out of that sooner than later.
We may be in a situation where if you’re going through some of the challenges that we’ve talked about today, uncertain about the investments, how they’re lined up, should you rebalance. should you take your cash into consideration to be better serving you with a higher interest rate, paying down your liabilities?
These are the things that you can control in an uncontrollable situation, and I think it’s always important to have somebody that can look over your shoulder, and that’s where we come in.
So again, if you haven’t had the chance to download our financial checklist, or if you simply want after, if you’ve done this, whether you’ve done it or not, feel free to give us a call here at the office. We have a great team to support you on your way to any financial goals as you’ve learned and hopefully seen by now our tagline: Financial planning to improve your lifestyle…it’s what we do.
Well, that’s what we’re here to do and we appreciate you tuning in. So until next month, we will talk to you soon.
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