It's a special time in the world - and not in a good way. As we trudge through a cold and icy January facing political uncertainty both in Canada and the US it’s hard not to think about the very real consequences of what the US president's plans are for the world over the next four years.
It’s really hard to ignore the fact that there are risks to the Canadian economy in the coming years. The possibility of tariffs leading to job loss, inflation and a stagnating economy is real. I was somewhat soothed by the outlook from TD Economics, which highlights that although tariffs could hit our economy hard, there are mitigating factors that can soften the blow and a recession isn’t a given.
So what are we to do with our money in this kind of environment? How can we feel more safe, more secure, and more confident?
The key is to focus on what we can control; interest rates, inflation, and employment are factors imposed on us, but our spending, savings, and investing are powerful tools available to us.
Know where you stand financially
The most foundational action is to figure out where you stand financially. This might seem like a really basic suggestion, but the truth is a lot of people put this task at the bottom of the to-do list. It can be uncomfortable to take a close look at how do you spend your money, how much you are putting away in savings, and how much you’re carrying on your credit card or your line of credit.
Trust me when I say that once you sit down and put your numbers on paper, you will feel better. Even if you don’t like what you see, you will no longer be in the dark and wondering whether you’re ok or not. I remember distinctly the first time I did my spending tracker back in 2016 and pressed enter on the “sum” formula that added up all my expenses. I felt a bit nauseous. I couldn’t believe how much my life cost. But shortly after that – minutes actually – I felt empowered: now that I know how much I spend, I can put a plan in place. The spending tracker changed how I understand my cash flow.
Build in a buffer
Second, build a buffer into your finances. The good old emergency fund is your best friend and will soothe your anxiety. Job one is having some money set aside for those months when your expenses are higher than normal. This could be due to a car repair, replacing a broken appliance, having to take an unexpected plane trip, replacing your kid’s shattered cell phone, needing a root canal, planning a special birthday celebration or a myriad of other life’s happenings. Your savings will help you pay off the credit card instead of keeping a balance on which you will pay a steep rate of interest in the 20% range. You should also work on building a job loss emergency fund. This could be money you need if you were laid off or if you became sick or injured and couldn’t work for a few months. (This is more common than you might think, by the way, especially as we age.)
Invest in line with your risk tolerance
Third, take a close look at your investments. Do you know what you own? Do you understand the level of risk you are taking? Have you figured out – account by account – how much you should have in lower-risk investments like bonds, money market funds and GICs? Stock markets have been booming the last couple of years so investing feels glorious right now. If you’re over-invested in the market, a steep decline will be painful.
I’m not suggesting you alter your asset allocation because of market conditions. If you have a plan, stick to it. But do ask yourself whether you are appropriately invested given your situation. For money that you need to access within three years, make sure it’s not in the stock market. If we hit a market decline the last think you want is have to cash in your investments at the worst time. (Your RESP is particularly vulnerable if your kids are heading off to school within the next few years.) Your long-term money can stay in the market but make sure you aren’t holding just a few individual stocks, which increases your risk.
Many people who don’t invest their own money find this intimidating or overwhelming. Set up a call with your financial advisor and ask them to explain what you own and why you own it. Make sure your portfolio is lined up with the risk level your advisor has on file for you – they would have set this up when you first signed on as a client. And review your risk tolerance with them – it changes over time as your situation changes so it’s important to update it every few years.
For DIY investors, go through the checklist: Am I diversified by region? (Many people are over-invested in the US right now.) Do I have broad market exposure? Do I have money in safe investments for my short-term needs?
Having these foundational elements in place can soothe an anxious mind in times of economic uncertainty. Best to get yourself sorted out so you can focus on more enjoyable things.
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