Today, people’s financial anxiety is palpable. Two-thirds of American adults (67%) expect the economy will enter a recession later this year.
As Warren Buffett once said, “Only when the tide goes out do you learn who has been swimming naked.” It appears increasingly likely that the economic tide is going out. Alongside worries about a downturn, inflation and high gas prices continue to comprise people’s top financial concerns.
These are some of the key findings of Northwestern Mutual’s 2023 Planning & Progress Study, which were announced earlier this month.
In response to the uncertainty, many Americans are taking positive steps to prepare for whatever economic season may come. Nearly two in three (64%) are cutting costs, half are building up savings and four in 10 (41%) are postponing large expenses until the economy is on a more stable footing.
As consumers grapple with these fears of what the future may bring, let’s all remember that periods of uncertainty provide opportunities to stress-test a financial strategy. Now is an ideal time for people to audit their financial position and weigh opportunities to build financial flexibility and resilience. These seven steps can help Americans enter a potential recession from a position of strength and opportunity.
1. Tap the brakes.
In a downturn, most people’s gut reaction is to pull back on expenses. Spending cuts can certainly help anyone build up short-term financial reserves — but that’s not the only tool in a financial resilience toolkit.
People can also pay down high-interest debts, shift their timelines, mitigate other financial risks and take advantage of higher yields that come with higher interest rates. It’s generally a good idea for people to save about 20% of their income, but this may be a time to push to raise that percentage a bit and funnel the additional dollars toward an emergency fund.
2. Don’t over-rotate.
Live for now, too. If you have built up emergency savings and improved your financial habits over the last few years — as many have — recognize those accomplishments. Don’t oversacrifice if you don’t have to. If a cup of coffee matters to you, buy it.
That doesn’t mean throwing caution to the wind. It means making data-driven decisions based on an honest assessment of your financial plan.
3. Watch your debt.
Manage debt strategically and make sure healthy debt doesn’t slip into something more debilitating.
4. Find flexibility.
Everyone knows they can tap a bank savings account in an emergency. Fewer people know that they can tap the cash values built up in a permanent life insurance policy. These policyowners can tap cash value funds at any time for any reason.
Repayment terms are flexible, and the process to access the funds is typically quick and easy. Just keep in mind that the death benefit will be reduced by the loan amount until it is repaid.
5. Remember that down markets can have long-term upside.
People tend to think market and investment declines hurt everyone equally. But if you have the benefit of time and stick to your financial plan, down cycles can be buying opportunities.
Remember the old market maxim: Buy low, sell high!
6. Work with an adviser to create a plan, maintain discipline and build confidence.
Many people rely on fitness trainers to develop a custom exercise plan, monitor progress, celebrate successes and ensure accountability. Financial advisers offer the same expertise and empathy for anyone seeking to improve their financial strength.
7. Maintain perspective.
The road to financial security doesn’t move in a straight line. Market cycles move up and down, and economic eras come and go. Keep a long-term perspective while making sure your plan enables you to enjoy the journey.
The bottom line is this: The best financial decisions are always made as part of a long-term, comprehensive financial plan. The best antidote for financial anxiety is information, custom context and understanding.
Now is a good time for anyone to take stock of their financial situation and determine if any adjustments are appropriate. And if anyone is feeling uncertainty about the answer, an adviser can help free people from financial fears by helping them to build financial security.
Christian Mitchell is executive vice president and chief customer officer at Northwestern Mutual. He leads strategic ideation necessary to elevate the client experience and deliver bold solutions to launch Northwestern Mutual ahead of its competitors. Mitchell oversees initiatives and deliverables to build the most powerful digital engine in financial services, including engineering solutions, data analytics, digital products and consumer insights.
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