They say the best time to plant a tree was 20-years ago but the second best time is now.
The same goes for financial planning. The best time to build a plan is before a crisis/recession/depression but the second best time is today. A good financial plan will help ensure that you’re prepared for a recession or financial emergency.
Having a financial plan provides an incredible amount of peace of mind. A good financial plan will already have anticipated a scenario like this and will ensure you’re still successful. It will highlight how to prepare for a recession and what changes you need to make to ensure you are successful over the long-term.
There are a few best practices that can help improve the ‘robustness’ of a financial plan. These are practices you can start using right away, even if they weren’t previously part of your plan.
Some of these best practices focus on behavior. They help manage your financial routine during emotional periods like this. Some focus on flexibility. They ensure that you have room in your plan to absorb the unexpected, whether that be changes in income, changes in expenses, or changes in investment returns.
It doesn’t matter if you’re in retirement, starting a family, or just starting to save and invest, there are a number of ways that you can prepare for a recession that will help you feel better about your finances and your long-term plan.
This post will touch on many of these best practices. These are best practices that we’ve covered in previous posts, so we’ll cover the basics here and link to past posts for more detail.
Low risk investments are an important part of every financial plan. There are certain reasons we want to use low risk investments in a plan and there are different types of low risk investments that we may want to consider.
Often we can become too focused on increasing investment return to appreciate the usefulness of a low risk investment. When used appropriately, a low risk investment provides an important source of funds in an emergency, or provides less volatility in our investment portfolio, or provides a psychological advantage that may help us avoid making a behavioural mistake during a downturn.
There are a few places that low risk investments will show up in a typical financial plan. If you haven’t considered these uses for low risk investments then it might be time to get a second opinion on your financial plan…
1. Emergency fund
2. Saving for infrequent expenses
3. Saving for a down payment (Or other short term financial goal)
4. Fixed income portion of an investment portfolio
These are some of the typical uses for low risk investments but what are some good low risk investments to use and which of these uses would they be appropriate for?
Managing money is an important life skill. Whether you’re a few years into your first job, or a few years away from retirement, do it well and your financial stress will disappear. Do it poorly and you’ll probably find yourself in a difficult situation more often than not.
The problem is we were never taught how to do this! We were never told how to manage our money. We were never told how to budget, how to pay bills, how to invest, or how to save.
We were never taught about best practices like emergency funds or automated investment plans.
Some of us may have been lucky enough to have a parent or older sibling who was good with money. We were able to learn by watching them manage their money. But because money is so secretive, its often hard to see what they were actually doing on a day-to-day basis.
This post will cover a few of the best practices, the best money management tips, and the best ways to manage your money.
If you’re reading this post my guess is that you’re probably already doing some of these things, or maybe all of them! But you might find something new to add to your financial routine. Something to make it stronger and easier to manage in the future.
Emergency funds are great. There are lots of reasons why you should have an emergency fund. Financial emergencies happen all the time. It could be an unexpected car repair, the deductible on your home insurance, or something really terrible, like dropping your iPhone and it shattering into a million pieces.
The common recommendation is to have between 3 and 6 months of living expenses in your e-fund (more if you have variable income or work in an industry known for layoffs).
But saving 3 to 6 months of expenses can seem daunting. Even saving up just one month of expenses in your emergency fund can take a very long time if you’re just making ends meet.
Don’t get discouraged, emergency funds are great, even small ones. Having just $100 in a savings account can make a huge difference.
If it seems like it’s taking forever to reach your e-fund goal, and you want to build your emergency fund faster, then try one, two, or all eight of these ideas to help boost your e-fund quickly.
Remember when you were a kid and you didn’t have a care in the world? No responsibilities, nothing to worry about, nothing to stress over. Well you can get that feeling again, or close to it, by having an emergency fund.
An emergency fund, or “e-fund”, is amazing! An emergency fund is like a big financial blanket. It helps you stay warm and cozy during a rough financial storm.
You can also think of an emergency fund like a seat belt. Most of the time it’s just there doing nothing… but when an emergency happens your e-fund jumps into action to prevent serious financial harm.
An emergency fund is a pile of money you keep tucked away in a safe place in case of a financial emergency. Your pile of emergency savings should be equivalent to 3-6 months of living expenses, but it can be much smaller to start.
Emergency funds can be smaller if you have high interest debt (which should be a priority), or if you have a strong safety net (ie. parents, friends, relatives that can help provide support or help reduce expenses in an emergency).
Building an emergency fund takes time. It’s something you should contribute to regularly with each paycheck.
Emergency’s happen from time to time so your budget should include monthly savings to replenish your e-fund.
To be honest, e-funds are boring. An emergency fund should be invested in a high-interest savings account earning 1-2% interest. This protects the principal but it can also feel very boring. In this case though, boring is good. Boring means that your money will definitely be there when you need it most.
It can be tempting to invest your emergency fund in the stock market…
When you’re on a tight budget the fear of the unknown is very real. Any little bump can cause major issues. Things like an emergency fund are key to help avoid those issues. An emergency fund helps bridge the gap when cash flow is tight. More importantly however is that an emergency fund helps you worry less about the unknown.
Emergency funds aren’t the only thing that can help you worry less.
There are many things you can do to increase your financial flexibility and worry less about those unknown problems that come up from time to time.
One thing you can do is have a high savings rate. Having a high (+20%) savings rate will give you room breathe.
Another thing you can do is have more than one income stream. Having income from your job, plus investments, plus rentals/AirBnB, plus side gigs will help increase your financial flexibility.
Lastly, and this is what I want to share with you now, having an emergency budget will help you prepare for the bad times and worry less during the good times.