6 strategies to manage economic uncertainty

Consider these actions to help reduce risk when the economic landscape feels challenging.

Periods of economic uncertainty — whether a difficult job market, increased inflation or high interest rates — can make investors feel uneasy. And while it’s impossible to predict the exact direction of economic activity, there are steps you can take to help reduce risk and hedge against events that are outside your control.

Talk with us about actions that can help you feel more financially secure when economic uncertainty persists. Here are a few strategies to consider:

In this article:

If you’re concerned about the job market…

A softening job market may translate to uncertainty around your income. To guard against this:

1. Increase your cash reserve

One way to prepare yourself for unexpected events, whether a job loss or a temporary dip in wages, is to reevaluate whether your cash reserve is sufficient. While each person’s cash reserve needs are unique, a general rule is to set aside three to six months of liquid assets for daily essentials and unforeseen expenses. During times of uncertainty, it may give you a sense of security to add to your emergency fund to cover a longer time horizon.

2. Manage expenses

During periods of ambiguity, it’s wise to focus on tightly managing today's expenses so that you don’t have to compromise tomorrow's savings. Consider tracking your expenses and scrutinizing your discretionary spending to identify cost-saving opportunities. Delaying large purchases can also be an effective strategy to reduce spending in the near-term.

3. Pay down high-interest debt

When used wisely, debt can be an effective tool to building wealth. However, it’s also a financial risk. When there’s uncertainty around your future income, it’s worth considering a more aggressive approach to tackling high-interest debt, such as a credit card balance or personal loan. Debt payments, after all, are a fixed cost in your budget that must be repaid, even if an unforeseen event arises.

Advice spotlight

Avoid tapping into retirement savings to benefit from the power of compound interest. Having a healthy cash reserve and minimal debt burden can help you avoid early withdrawals from your retirement plan should an unexpected economic event occur, such as job loss. 

If high interest rates and inflation have you worried…

High interest rates and inflation can constrict your cash flow today and make it harder to save for your financial goals. To guard against this:

4. Take advantage of higher yields, while you can

Higher interest rates can offer investment opportunities, particularly for short- and medium-term financial goals. In a high-rate environment, financial institutions typically offer higher yields on cash and cash equivalents to align with the prevailing central bank rates. Consider how you may take advantage of more competitive returns offered by high-interest savings accounts, Treasury bills, certificates of deposit (CDs) and other investment solutions.

5. Consider the impact of higher borrowing costs

Higher interest rates generally translate to higher borrowing costs, making it more expensive to get a new house or start a new business. Interest rates can also increase payments on credit card debt, home equity lines of credit and private student loans. If possible, it may be beneficial to hold off on large purchases that require credit until interest rates fall.

6. Stocks can help hedge inflation over the long term

Even a modest rise in the cost of living can diminish the purchasing power of your retirement portfolio over time. To protect against the eroding effect of inflation, long-term investors may want to consider the efficacy of stocks. Since 1871, stocks have historically outperformed inflation and have done so more consistently than other asset classes, such as bonds and commodities.1 Bottom line: A diversified portfolio that includes stocks, bonds and other assets can help you maintain purchasing power while managing investment risk.

We’re here to help you manage through economic uncertainty

We are here to help you prepare for the unexpected — whether it’s with the economy, markets or your personal situation — so that you can stay on track to achieve your financial goals.

Questions to discuss with us

  • What steps can I take to prepare for unexpected events?
  • How large of a cash reserve should I have?
  • How does my investment portfolio account for inflation?