How to Manage Your Finances Through Volatile Times

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When the market takes a dive, protecting your investments seems like a single-focused strategy. However, there are other important financial moves you need to make in order to protect your entire portfolio, assets and finances. It's easier to deal with a downturn in the market, but how do you successfully handle volatile times when it comes to your overall well-being?

What are volatile times? They could involve international disturbances, unstable employment/rising unemployment, collapsing financial markets, and frozen credit markets.

This roughly describes what happened in Greece and what was the situation here at home during the financial meltdown a few years back. Violent times also include personal emergencies like losing your job, a death in the family or a medical emergency.

What can you do to prepare your finances for The Great Recession Part 2?

Prepare Your Income

It's unfortunate but true that no matter how much you think it won't or can't happen, eventually volatility has an effect on your income. And it's usually negative. Complicating the matter is the fact that your income is the bedrock of your entire financial situation.

How can you manage your income through volatile times?

Hold on to your current job for as long as you can. The “last hired/first fired” doctrine usually kicks into high gear in volatile times. Translated into practical terms, volatile times are usually a very bad time to make a job change. From a standpoint of financial survival, the best strategy is usually to hold on to your current job for as long as you can.

Develop a backup plan. If volatile times last long enough, your income will take a hit. Recognize this and keep your resume up to date, freshen strategic contacts regularly, and continually work to improve your skill set. You may need to make a major move in a very competitive job market, on very short notice.

Start a side business. If you have skills that lend themselves well to direct sales to businesses or the general public, you could consider putting them to work through a side business venture. Not only will that provide you with extra income, but it can represent the core of your backup plan in the event your current income situation should fail.

Strengthen your networks. Many people do this only when they are hunting for a new job. But the risk of volatile times should make this a continual effort. You should reach out to anyone in your industry and even people around the periphery of it. You never know where the next opportunity will come from — and you never can unless you keep your feelers out.

Modify Your Investments and Savings

There are all kinds of advice explaining how to manage your money (and even make a profit) during a volatile market or unsettled economic times. Think in terms of making modifications to your existing plan.

Avoid wholesale changes in your investment allocation. It's very likely the asset allocation plan you have now will also serve you well in a less stable environment. There's probably no need to take an ax to your current portfolio and rearrange the entire allocation.

Reduce, but don’t eliminate, your equity exposure. No matter what anyone says about holding through a downturn, volatile times are not kind to stocks. This doesn't mean you should sell off all of your equity holdings. But at the same time, a little bit of trimming is likely in order, particularly if your equity allocation has been exaggerated by the recent bull market. Sell off losing positions (before they lose even more) and direct new investment capital into non-equity investments, particularly cash equivalents.

Emphasize and build liquidity. Cash is king during volatile times. Sure you might miss an opportunity here and there, but the main thing cash does — that no other asset can — is preserve options, and options are one of the best things to have during times of volatility. You can use cash and cash equivalents to provide a cushion against the loss of a job, pay for contingencies, or to have available to invest when the financial universe shows definite signs of settling down.

Tune out the noise. If you remember back to the financial meltdown, you probably remember there was a lot of noise from the investment community. And so it will be again when the next bout of volatility hits. Your best strategy is to ignore it. No one knows what the future holds or what the best way to deal with it will be — not even the talking heads and the self-styled experts.

Evaluate Debt and Credit Needs

The deeper in debt and the more credit dependent you are, the worse things will go for you during times of volatility. Try implementing these strategies now, while the situation is still quiet.

Don’t take on new debt. It's usually best to avoid taking on new debt this late in an economic recovery. Debt is intimately tied to the good times, but if you will be required to pay it back during volatile times, it can be an unbearable burden.

Pay down existing debt.This is an excellent time to begin reducing any debt you already have. Any debt you can reduce or eliminate will lighten your load if and when things start to get ugly.

Convert your mortgage to fixed rate. If you already have a fixed-rate mortgage, you can ignore this one. But if you are carrying an adjustable-rate loan, you’re living with the very real risk that the rate can go higher — maybe much higher — when the financial markets turn ugly.

Convert any other loans you have to fixed rate. This is especially true of credit card debt. Many credit cards have a default rate that goes as high as 30 percent, which can kick in just from making one late payment. Maybe you’ve never made a late payment in your life, but if times get bad enough, you will — sooner or later.

Do your best to become self-financing. Accessing credit quickly and easily is a practice you might want to eliminate. Volatile times often bring about freezes in the credit markets, meaning you won’t be able to borrow money at any price. You should begin preparing now for that possibility.

Watch Your Lifestyle

Your lifestyle represents the demand side of your financial situation. This is because how you live plays a central role in how you spend your money. You can make changes in your lifestyle that will help prepare you to have an easier time when volatility arrives.

Wean yourself from high-cost habits and hobbies. There are a lot of low-cost ways to entertain yourself, but that never stops people from going the other route. If you have high-cost habits and hobbies, you can start now to transition over to those that are not nearly so expensive.

Avoid the urge to trade up. It’s something of a cultural norm in America for people to trade up every few years. Whether it’s a house, a car, a computer, a TV or a smartphone, people are ready to trade up after just a few short years. But while trading up not only costs money when you do it, it usually also leaves you with higher recurring costs. Trading up will not serve you well in times of volatility.

Become more self-reliant. You can do this in a number of small ways that can have a big impact on your life and your finances. For example, you can learn to do simple repairs around the house or on your car. You can also become more proactive in managing your health, or even learn how to grow some of your own food. The impact of these efforts will not only lower your living expenses, but they can also give you a greater sense of confidence and independence. That always comes in handy during volatile times.

Emphasize relationships over stuff. Good times are often when people spend much of their time and money accumulating stuff. But when times get tough, people become much more important than stuff. If you think you might be addicted to stuff, now is the time to begin making the transition over to building stronger relationships.

Adjust Your Attitude

When times get tough, attitude is everything. It’s easy to be a glass-half-full type of person when times are stable, but maintaining that outlook during volatile times is a true exercise in self-discipline. Your perspective will make all of the difference.

Accept that, yes, an emergency can happen and it can happen now. If there is one trait that leaves people completely unprepared for hard times, it’s denial. There is nothing in the cosmos that insulates us from hard times, no matter who we are or where we are. Hard times are no less a part of life than good times are. But if you accept them, it will be much easier to navigate through them.

Lower your expectations. You’re making $75,000 this year and you expect to make $100,000 next year — but it doesn’t happen. So be it. Another year at $75,000 isn’t a bad thing, and there’s always the year after the next to make a big move forward. It’ll be OK — really!

Develop patience. Good things just take longer to happen during volatile times. Make peace with that concept. Dreams and expectations do get crushed by volatility, so you just have to develop a longer timeframe. That will require a lot of patience. If you’ve never had much patience, it’s truly something worth working on.

Embrace the long-term perspective. Life never moves in straight lines, whether up or down, though it often seems as if that’s the case during good times. But when times turn turbulent, the short run is almost never predictable or settled. In virtually every area of your finances, you’ll have to embrace the long-term perspective. You may not retire in 10 years, but maybe you can in 15. You might not be able get out of debt next year, so you’ll have to be prepared for it to take three years, or even five. This long-term perspective is a critical perspective during volatile times. It will help you get through the bumps and bruises that are sure to hit in the near-term.

Being prepared for volatile times in the economy involves a lot of steps. But if you can adopt as many as fit your circumstances, you will be better prepared for the ups and downs that are sure to come.

Have you thought about what you will do if something like the financial meltdown returns? Have you considered any strategies you'll implement?

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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