5 Ways to Bolster Your Finances in a Recession

Investors may see new economic and market turbulence in 2023. These financial strategies can help you weather the storm.

Key Takeaways

• Keeping close tabs on your budget is a cornerstone of good financial health, especially when inflation is high.
• At a minimum, aim to have three months’ worth of household expenses held in a checking or savings account.
• Staying invested through the market’s highs and the lows is often the right strategy for investors.
  

After a period of robust economic expansion, the U.S. is likely to see weaker growth in the year ahead. 1 Even if the U.S. narrowly misses a recession, you may still be understandably concerned.

Fortunately, there are steps you can take as uncertainty rises. Consider these five preemptive strategies that may help protect your finances in a recession.

Keeping close tabs on your budget is a cornerstone of good financial health, especially when inflation is high. When anticipating a recession, priorities are key. Begin by reviewing your budget and differentiate essential expenses, such as housing, food, transportation, and debt payments, from discretionary spending. Then, identify whether there are opportunities to curtail or delay your discretionary spending. How significant would the impact on your quality of life be? Sometimes delaying or downsizing big expenditures, like a new car or vacation abroad, won’t feel frightful and can significantly improve your near-term savings. Morgan Stanley’s Spending and Budgeting Tool can help you monitor incoming and outgoing cash, gain insights on your spending habits and create custom budgets no matter where your money is held—both at Morgan Stanley and externally.

Although the U.S. personal savings rate has declined sharply from its pandemic peak, 2 maintaining a healthy emergency fund should remain a top financial priority. Doing so may help you stay afloat in unforeseen personal circumstances, such as a job loss or a family medical emergency. At a minimum, aim to have three months’ worth of household expenses held in a checking or savings account. If you’re the sole earner in your household or you work in an industry that’s experiencing layoffs, make sure you’re stashing away at least six months’ worth of expenses. If you’re retired, having up to a year’s worth of expenses in highly liquid assets like cash can help you avoid having to sell longer-term investments when markets are down, which can lock in losses and reduce your future income. If you’re creating a rainy-day account from scratch or rebuilding your emergency savings, start with small weekly or monthly contributions. If you receive additional income, such as a tax refund, bonus, raise or other windfall, consider putting a portion of that into your emergency fund.

Interest rates have been trending upward recently as the Federal Reserve has been tightening monetary policy to rein in high inflation. Those higher rates may be bad news for borrowers, particularly anyone with revolving debts, such as credit cards. If you have multiple debt balances, consider a debt consolidation strategy: You can take out a single, fixed-rate loan and use the proceeds to pay off various other, higher-interest balances. This can have the dual benefit of helping streamline your payments and potentially reducing interest costs.

Selling may feel tempting during times of market turbulence. After all, it can be hard to stand by while your portfolio loses value and not know when it might rebound. But a panicky decision to cash out is often a mistake: When selling in a falling market, you may incur losses—and if you wait years to get back in, your portfolio may need readjusting. Investors who decide to sell assets and wait out the volatility will likely find it very challenging to accurately predict the right time to re-enter the market. Some of the stock market’s best days in history have come on the heels of its worst days, with little, if any, advance signal to investors. Instead, staying invested through the market’s highs and the lows is often the right strategy for investors, as market history shows rebounds can return many portfolios to the black in just a few years. Volatility may be the price investors must pay to build wealth, but there are ways to help mitigate the disruption to your portfolio through time-tested strategies like rebalancing and diversification.

In difficult economic times, a financial plan can help you weather the storm and keep you focused on your goals. When constructing a financial plan, it is generally a good idea to build in “what if” scenarios, to take a peak around the corner, and give you some sense of the implications of a market move for your finances, so that you can react more calmly if things do eventually take that turn. Often, the best moves to make amid uncertainty are small and calculated. But if you lack a financial plan, identifying the best course of action can be challenging.

You can create a financial plan, or make adjustments to your current plan, by working with a Morgan Stanley Financial Advisor, who can help you maintain a steady focus on the financial goal at hand and avoid getting sidetracked by market noise.

Wealth Management Protecting Your Retirement From Market Volatility The unpredictability of financial markets can disrupt even the best-laid retirement plans. These five strategies may help investors stay on track.

Wealth Management Simplify Your Financial Life with Debt Consolidation Debt consolidation may be able to help lower your interest payments, your financial stress load and help you gain a more streamlined view of your finances.

Wealth Management Are You a Rational Investor? When it comes to investing, even the most savvy of us fall prey to bias and emotional trades. So what triggers should you watch for?

Discover More

Explore additional insights from Morgan Stanley:

Footnotes:

1 Morgan Stanley, 2023 Global Macro Outlook: Inflation Peaks, Growth Slows, Nov. 2022, https://www.morganstanley.com/ideas/global-macro-economy-outlook-2023

Disclosures:

This material has been prepared for informational purposes only. This material is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Information contained herein has been obtained from sources considered to be reliable. Morgan Stanley Smith Barney LLC does not guarantee their accuracy or completeness.

It is important that Financial Advisors and Private Wealth Advisors adhere to all Morgan Stanley Wealth Management solicitation policies and procedures.

Asset allocation, diversification and rebalancing do not assure a profit or protect against loss. There may be a potential tax implication with a rebalancing strategy. Please consult your tax advisor before implementing such a strategy.

Past performance is not a guarantee and/or indicative of future results.

You should understand the differences between a brokerage and advisory relationship. When providing you brokerage services, our legal obligations to you are governed by the Securities Act of 1933, the Securities Exchange Act of 1934, Federal statutes and regulations relating to retirement accounts, the rules of self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA), and state securities laws, where applicable. When providing you advisory services, our legal obligations to you are governed by the Investment Advisers Act, Federal statutes and regulations relating to retirement accounts, and applicable state securities laws. These latter advisory and retirement account obligations govern our conduct and disclosure requirements, creating a legal standard which is referred to as a "fiduciary" duty to you.

Please speak with your Financial Advisor if you have questions about your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. For additional answers to questions about the differences between our advisory and brokerage services, please consult with your Financial Advisor or review our Understanding Your Brokerage and Investment Advisory Relationships brochure available at https://www.morganstanley.com/wealth-relationshipwithms/pdfs/understandingyourrelationship.pdf

© 2023 Morgan Stanley Smith Barney LLC. Member SIPC.