Address Economic Uncertainty with Defensive Financial Planning

As the impacts of inflation continue to ripple across the economy, more and more financial analysts are increasing the odds of a recession.  With some of the classic signs of recession including lower home values, lower corporate profitability and higher unemployment, it is important for Americans to have a defensive plan for addressing the possible impacts of a sputtering economy on their financial life.  Do you have a plan B to help you to withstand unforeseen financial strain?

The reality is that there is a myriad of financial curve balls that can be thrown our way at any given time. Unfortunately, few Americans are financially prepared to withstand the financial stress that high levels of inflation and a possible recession could bring.  In fact, according to a recent survey, 60 percent of Americans have less an $1,000 saved for an emergency and nearly 50 percent are saving less due to inflation.  A lack of savings tends to lead to an increase in debt as those dealing with financial hardships look toward credit cards, home equity loans and 401(k) loans to fill the gap.  With interest rates climbing higher, these stopgaps become more expensive, making it difficult to dig out from under this debt in the future.

The first line of defense against financial uncertainty is the cash reserve.  The financial world, (myself included) continually preach about the importance of maintaining at least 3-6 months of expenses in emergency funds.  (Certain one-income families may even consider 9 months of cash reserves.)  While an emergency reserve can help, it is often insufficient for certain circumstances.  Instead of relying solely on reserves, it is often advisable to develop a worst-case scenario budget.

The concept is simple – develop an emergency plan for your budget and expenses if something goes wrong.  Rather than struggle to determine how you will handle a job loss, business downturn, health emergency, long term care need, financial needs of dependents or parents, or even death, consider creating a budget that strips out unnecessary discretionary spending, curbs savings and ultimately reduces the financial short falls until things can stabilize.  Keep this playbook in your back pocket for when serious financial issues arise in the future.

Too often, individuals, families and business owners deal with hardships by simply draining savings accounts, retirement accounts and even education funds when the solution may have been to make more meaningful changes.  Rather than make your financial position worse by prolonging the financial shortfall, implementing your emergency playbook budget can help ensure that you protect assets instead of spending them down.  While this process is easier said than done, making changes can help ensure that you get back on a sustainable path for the future.  This may include downsizing/rightsizing, selling vacation homes and relocating as well as slashing “nice-to-haves” like eating out, entertainment, vacations, subscription services and expensive automobiles until things improve.

Implementing a defensive budget is certainly not easy and it may require major adjustments.  However, if you are going to have to make these changes eventually anyway, why not do so before irreversible damage has been done through the depletion of assets or accumulation of debt.  Consider creating two budgets, a budget A for “Good times” and budget B for “Challenging Times” so that you know exactly how you might need to react if life throws a financial curve ball your way. Hopefully the budget for more challenging times isn’t needed but it is helpful to have your contingency plan ready.

This may be especially critical because of where we are in the economic cycle. While no one can predict the future, it is clear that there may be rough economic waters ahead. Consider a pro-active approach that addresses what-ifs before they happen.   Since everyone’s situation is unique, consider speaking to your financial adviser to determine the most appropriate approach for your unique circumstances.


Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNER & Wealth Advisor.  He can be reached for questions at 732-280-7550,, & LPL Financial Member FINRA/SIPC.


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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.