The economy has taken a thrashing. Earlier in the year, unemployment rose at an unprecedented pace, and while it has been recovering rapidly, there are still millions out of work whose jobs have permanently disappeared. These are tough economic times, and there’s still a lot of uncertainty in the air.
In times of uncertainty, you want to make sure that your finances are healthy enough to cope. You want to be able to survive a period of job loss or reduced income, make sure your savings are intact despite macroeconomic trends, and keep up with (or at least not fall behind) on your financial goals.
Dreaming about financial health is one thing, but there are a few concrete goals you can achieve that will put you in a better position with your money long-term, no matter what’s going on in the rest of the world.
1) Get Out of Debt
The first step toward financial resiliency is getting out of debt. A mortgage is one thing, but if you’re carrying credit card balances, owe money on a line of credit, or have other unsecured, high-interest loans hanging over your head, you’re living precariously.
Before you start thinking about saving or investing, you need to clear those debts. This is a big challenge for a lot of people, not least in part because many people think it’s a point of pride to do it all on their own. That can leave them paying a lot more interest than they need to.
One option for financial debt help is a Debt Consolidation Program. How does debt consolidation work? You can do it with a certified Credit Counsellor from a non-profit credit counselling agency. The Credit Counsellor negotiates lower interest rates with your creditors and bundles all your payments into one. It’s a fast, effective way of putting debt behind you at a lower cost.
2) Start an Emergency Fund
Once you’re debt-free, it’s time to start making yourself more resilient. The first step is building up an emergency fund. Depending on who you talk to (and where you are in life), there are different suggestions for how big it should be. One commonly quoted number is 3 to 6 months of your expenses, but only if you’re completely out of non-mortgage debt. That can seem like a lot at first, but any money is better than nothing.
That number should be higher if you don’t have much in the way of employment protections or don’t qualify for unemployment insurance.
3) Invest According to Risk Tolerance
How soon do you want to use the money you earn investing? If it’s within the next five years, you’re likely a risk-averse investor, someone who would prefer low returns in exchange for low risk. You certainly don’t want to lose any principal.
The problem is that in uncertain economic times, it’s tough to find investments that fit the bill. Interest rates are so low at the moment that safe assets like bonds are increasingly producing negative yields. Another conservative asset is usually real estate, but in some markets, real estate prices are out of control, with no real guarantee that the economy is poised to keep them up.
If you can stomach greater risk tolerance, and you’re not worried about momentary losses (which can be steep, keep in mind), you can take on riskier investments, like stocks, but you have to be prepared to see losses.
Financial stability is possible. It starts with getting out of debt quickly, moves onto savings, and finally investing.