Volatility is a word that we have heard a lot this year. Here are 5 Tips to help you survive & thrive in any financial environment.
Although we're hearing more about it these days, uncertainty is a constant in our world. As financial advisor I have learned that we have to focus on the things we can control. Here are my top 5 tips to help you survive - and even thrive - in all financial environments!
1. Have Sufficient Safe Money
It's important to build up funds that you can access when you need to. The amount should be appropriate for your situation, but the rule of thumb is between 3-6 months of expenses. If you are a single-income home with a family lean towards 6 months. If you are a business owner a year. If you are in retirement, you should have more safe money to access.
Having safe money means you won’t need to access your long-term invested dollars and can weather short-term volatility. Some safe money examples would be: High Yield Savings accounts, Money Markets, Free withdrawal Fixed Indexed Annuities. Work with your financial advisor to evaluate your current safe money situation and adjust as appropriate.
2. Pay Down Debt
Take a look at your credit cards, car loans, or personal loans. If you have debt with rates above 6% you should actively work towards eliminating it. As of October 12, 2022, the average credit card rate was an astounding 18.79%.1 By simply paying these cards off you are effectively locking in a return on those dollars at 18.79%.
Paying off debt gives cash flow freedom. The ability to deploy those dollars where you want is invaluable. You can save it in a safe money fund, invest, cover changing expenses, or set it aside for dreams like buying a new car or a fun vacation. If you need assistance with this, work with a financial planner to create a repayment plan.
3. Review Your Cash-Flow
Having certainty about your monthly income and expenses is an easy way to be confident about your financial situation. Reviewing your cash flow ensures you are saving and spending appropriately for your income. In times of volatility it's important to evaluate if you’re spending money on things you do not use or if you have expenses that could be cut if needed. Additionally, knowing exactly how much money you need to cover expenses gives clarity that what you have saved will cover your needs.
I deeply track my cashflows by reviewing my budget expenses once a year and doing an overview once a quarter. I calculate my savings rate (money going to savings/income) each quarter. For more on savings rates check out CWA Elements!
4. Keep Putting Money Away
During volatility - especially for those in the accumulation phase of your financial journey, you want to keep saving money. Napoleon believed the best individuals in the military were those who did the average thing when everyone else lost their mind. This is true with finances.
If the market is average you leave your money in and continue to save. Be average by maintaining your average savings rate.
If you want to achieve above-average results do what you would in an above-average market. Save more. The goal is to dollar cost average (DCA), which helps you save when it is ideal. In a research article by Michael Rozeff, it was found that DCA outperforms lump sum investments ⅔ of the time.2 It outperforms pulling out of the market 100% of the time. Keep your head, do the average thing, and stick to your plan.
5. Review and Stick To Your Plan
At Creekmur Wealth Advisors we create one-page financial plans. You can refer to the plan when you're not sure what to do next. Reviewing your plan reminds you that the plan was made when you were thinking clearly and making data-driven - not emotional - decisions. This way when the market declines we remind ourselves that historically it will come back and your financial plan was prepared to accounted for this.
Consider adjusting your plan when YOUR specific situation changes. Changes specific to you should be influenced by what happens in your life. Your plan should change for your benefit if it needs to. Contacting your financial planner to review your plan and life changes will allow you to be confident that your plan is up to date and has changed for YOUR needs not because of what is happening in the market or the news.
Bonus Tip: Avoid Financial Debates
“A lot of financial debates are just people with different time horizons talking over each other”3. -Morgan Housel Your plan is specialized to you. Avoiding financial debates is one of the best ways for your plan to thrive.
Connor Creekmur, MBA