How Financial Planners Deal with Inflation, Uncertainty, and Recession Risk
By The Brooklyn FI Planning Team
While we spend most of our time helping clients build their financial plans and prepare for uncertainty, we also plan for ourselves. Recent volatility in the stock market and increased inflation has created a level of uncertainty we haven’t seen for a couple of years. So we gathered our collective brain trust to see how they’re handling it. Here’s what we had to say:
John Owens CFP®, EA, ECA, CPWA® - Director of Financial Planning
If you’ve read some of my other articles, you’ll remember that I’m a bit of a cash hoarder and like to keep a 24-30 month emergency fund on standby. But with the stock market now well off its all-time highs, and inflation higher than it’s been in my lifetime, it’s time to reevaluate that strategy.
I’ve done a few things with this in mind: first, I loaded up on I Bonds that give my protection against inflation - the one investment (besides commodities) that’s done well in 2022. They’re currently earning 9.62% currently!
Then I took a hard look at my cash situation and decided to reduce my emergency fund to closer to 24 months and take advantage of the market being down about 20% year-to-date. I’m not trying to call the bottom, but with everything at the supermarket getting more expensive, it’s nice to buy in the stock market that’s getting cheaper.
From a spending perspective, I’ve tried to be much more deliberate about my gas consumption. I’m lucky enough to have a job where I work from home, a grocery store within walking distance, and two parks with trails where I can run and walk right by my apartment. Instead of visiting the farmers market a few times a week, going to the grocery store that’s further away, or taking a joyride on a Sunday afternoon, I’ve opted to cut back on shorter, unnecessary trips.
At the grocery store, I’ve focused on buying smaller quantities of produce to avoid the likelihood of spoilage and buying meat and poultry in bulk when I can get it on sale. I’d rather make a few more, smaller, walking trips to the store than let things go to waste.
Finally, rising energy costs have also had me reevaluate what level I want to keep the temperature in my apartment (although my preference is to feel like I’m in an igloo). And unlike in my adolescence, I’ve gotten really good at turning off the lights and appliances that I’m not using (I think my parents wish I learned this about 25 years ago).
I don’t expect any of this advice to be life-changing, but rather just some perspective on how a millennial financial planner plans for uncertainty and controls what he can control when so much of it escapes our control.
Kate Murray CFP®, FBS®, CFT-1™ - Senior Financial Planner
To me, one of the most powerful tools in dealing with uncertainty in the markets is good planning. Of course, a financial planner would say that, right? But it’s true! I planned for this, and I helped my clients plan for this. We didn’t do fair-weather planning, making wild assumptions that the market would continue blasting off into the stratosphere. No… we planned for trench warfare. We planned for rainy days and tough times in the market. And we took that into account when evaluating risk as a very real and present concept in our planning. Now, it looks like that bet might be called, and we’ll have to endure a bear market. But what we don’t have to do is be afraid, because this is exactly what we planned for.
Instead of embracing the fear being peddled by the media harping on buzzwords like inflation and shrinkflation, I like to focus on something more productive and make lemonade out of lemons by investing excess cash. As the price of other commodities rises, stocks are actually one thing that I can still get a bargain on! So any excess cash that I have sitting around (outside of my emergency fund, that is) gets invested so I can “buy the dip” (and I’m not talking about Hellmann’s French Onion here).
The prospect of a recession also serves as a good enough motivator to seek out fun and exciting things to do that don’t necessarily involve spending moolah. An important caveat: I do not focus on cutting back expenses from a place of fear, worry, or anxiety over the market or having enough money. Instead, it’s more about challenging myself to think creatively to discover fun and (mostly) free things to do that I might not otherwise think about. It’s about breaking out of the usual dinner and drinks rut. So far, I’ve picked up hiking, had a few outdoor picnics, lounged around at the pool, started gardening, gone outdoor roller skating, and picked my own produce at local farms. I even did a movie screening at my place to watch some classic films with friends (Young Frankenstein, anybody?). The fact that it’s summer right now is also a huge upside, since the weather makes staying outside more enjoyable. And all the while, I’m saving money by embracing lower-cost activities, and also enjoying the challenge of planning creative and engaging hang-outs.
Lastly, I try to remember the same thing I’ve always told my clients: pain is inevitable, but suffering is a choice. Markets are inherently cyclical– they go up and, unfortunately, down. And we’ve been looong overdue for a market correction. Don’t get me wrong– I’m not any happier than you are about it– no one likes to see the numbers go down, not even financial planners. But knowing the facts, why punish yourself? Do not check your accounts every day in a down market. Don’t do the mental math on where you were vs. where you are now. This is a marathon, not a sprint. In times like this, I limit my exposure to the news and check my accounts, at most, once per quarter, if that. Trust the plan, Stan. This too shall pass.
Caitlin Fastiggi CFP®, CPWA® - Senior Financial Planner
As with many people I’ve watched my monthly spending slowly creep up the last few months without any real changes on my end. Since so many of the cost increases are out of my control I have tried to focus on what I can control. For me, that's been groceries. I’ve always tried to meal plan and buy based on sales but with prices creeping up I’m being even more diligent. At the same time if an item I know we love is on sale and has a decent shelf life I’ll buy two or three to take advantage of the discount. Like next month I know my grocery store should be having its semi-annual can-can sale so I’ll use that as an opportunity to stock up on our pantry staples at hopefully a better price. I also recently went back to ordering my groceries online for pickup to help control those unnecessary impulse purchases and keep the overall bill down.
To ease the pain of higher credit card bills I’ve been making sure to cash in any cash back rewards sitting in my accounts and put them towards the upcoming bill. This is something I try to do every couple of months but it easily gets forgotten so I’ve made it more of a priority. At the same time, I’m trying to maximize the cashback offers from credit cards. For instance, starting July 1st all gas will be going on my Chase Freedom card as one of the rotating 5% back categories will be gas stations.
When it comes to investing you may not be surprised to hear that I’m following the same advice I’m giving you. I’ve been deploying any cash I have available for investing into our diversified portfolio. At the same time, I’ve used the down market to sell some investments at a loss to take advantage of the tax benefit while also being able to rebalance my accounts to meet my current needs. If at the end of the month my emergency fund is funded and I have a surplus of cash it goes right to investing, prioritizing our Roth and 529 accounts.
At the same time, I do sometimes just avoid looking at my account balances, especially on days the markets are down. Investing can be a mind game but at the same time, I know these short-term market movements aren’t going to change my strategy. So I find it best to avoid looking if I don’t need to log into my account that day.
Jason Hoffman CFP® - Senior Financial Planner
Whenever the word “recession” comes up, there is always an underlying sense of panic, almost as if the world is ending. Rather than keep this underlying sense of panic, I like to use a recession, or potential recession, as a time to check in on my finances at a high level and ensure I am actively practicing healthy financial habits. Here is what I focus on:
Monthly spending - this is usually a great time to go in and do some loose spending categorization. Sometimes I find I can easily cut back on spending in a certain category simply because I wasn’t aware of how much I was spending. Occasionally, I’ll also find I need to increase spending in another area. From there, I can fine-tune the percentage of income I allocate between discretionary spending, non-discretionary spending, and savings (long-term and to my sinking funds).
Emergency fund - is it properly funded and still on par with my current spending habits? I choose to have approximately six months' worth of expenses saved in my emergency fund. This is arguably one of the most important pieces of your financial life to have properly set up during a recession or any period of uncertainty.
Investing - even when headlines can make it seem like a scary time to invest, I still make sure I continually invest each month. Investing in my 401(k) and taxable investment accounts are some of the most important components of my long-term financial plan, and I don’t want to let a recession move me off track.
If I ever find myself sitting with an underlying sense of panic, I take a step back and focus on what I can control, such as maintaining good financial habits. Oftentimes doing just that puts me in a good position for the long-term while also easing my short-term panic.
Mark Stancato, CFP®, EA, CRPS® - Senior Financial Planner
No doubt about it, the current state of the economy and financial markets does look quite different than it did just a couple of years ago. The general price uptick for goods and services has increased a whopping 8.6% for the 12 months ending May of ‘22. To put this in perspective the Federal Reserve, currently led by Jerome Powell, attempts to target inflation at 2% per year. How they came up with 2% is a topic for another blog. That’s essentially a four multiple off its target. In other words, inflation is running hot and we’re all feeling the effects of our decreased purchasing power i.e. shit is expensive!
So, how am I dealing with an uncertain economic environment with heated inflation and a possible recession on the horizon? I look to history for some answers. Also, it’s important to take a breath, step back, and look at the big picture. If I may…
This is nothing new, it’s just new to you. Yes, inflation is running hot however we’ve seen this movie before. In 1980 inflation peaked at 13.55% and by ‘83 it settled back down to 3.21%. Btw, 1980 was the same year “Call Me” by Blondie was number one on Billboard. The Fed Chairman at the time was Paul Volcker, not a big Blondie fan, and he argued that the only way to fight inflation was to throw the economy into a sharp recession. He targeted the Fed Funds rate by jacking up interest rates. The Fed Funds Rate is the overnight interest rate that the Federal Open Market Committee (FOMC) suggests commercial banks borrow and lend their excess reserves to each other. In fact, he raised them to over 19%. These intra-bank borrowing rates are passed on to the consumer credit markets - {insert your bank here}. Now, imagine applying for that new mortgage at 19% or a car loan at 12%. You with think not twice, not thrice but you probably wouldn’t buy it. And that was the point. By targeting these short-term rates, consumers would feel the effects of much higher borrowing costs thus slowing down spending. By putting downward pressure on overall consumer demand, prices would drop while the supply-side catches up. The end goal was to put the Demand and Supply curve back into equilibrium thus reducing inflation. And it worked. Yes, it took a few years however that’s just a blip of time when you’re age 35 and planning for the next 60 years of your life. So, if you want to help move things along, starve demand by holding off on that purchase. Better yet, you could re-allocate the dollars for that purchase into your investment portfolio. Did you know that stocks are on sale?
This is the same playbook the Fed is currently utilizing to suppress inflationary pressures. It’s a push, pull system that could potentially lead the economy into a recession however in the long run will place the economy and the financial markets back on track. In the meantime, now is an opportune time to revisit your “Long-Term” Financial Plan and discuss any concerns with your Advisor. That’s me! I’m only a click away.
Ryan Furlong CFP® - Senior Financial Planner
In unprecedented times like these, I’m a huge fan of keeping things simple and bringing my focus back to the basics. When inflation is low and the stock market is buzzing, it’s easy to forget things like budgeting, cash savings, and sticking to your long-term investment plan. I nerd out on investing, so let’s start there. When it comes to investing, it’s simple, don’t change and keep saving for financial independence! How could that be the case when the market looks entirely different today than it was just one year ago?! Unless your goals or personal situation have changed drastically, remember you planned for this! If you love a sale, now is not the time to stop investing in the market - take advantage of the “on-sale” prices as much as you can afford.
Regarding budgeting and cash flow savings, I reevaluated “investing in my convenience” or buying back my time. It’s easy to stick to covid habits like instacarting your groceries, Amazoning basic needs, or doordashing a quick meal or dessert if you have a sweet tooth like me. However, I strongly encourage you to reconsider which are genuinely a time and energy suck for you and which you can commit to handling on your own. Eliminating some or of those conveniences can save you significant time and cash!
With remaining cash flow, look to stash cash away in your emergency fund (interest rates are going up, which means the interest rate you receive on those accounts is too!) or Ibonds if your cash bucket is full and you have room to spare. While an emergency fund isn’t the most exciting vehicle, consider this savings bucket investing in your peace of mind. With 6-12 months or more of cash on hand, you’re more prepared than the average American for worst-case scenarios.
Topping off your emergency fund, lean spending, and continuing to invest for your future will pay off tenfold on the other side of this high inflation and stock market volatility we’re seeing! Always remember, control what you can control and the rest will work itself out.
Conclusion
Well there you have it. How 6 different financial planners would approach the current uncertainty. Each response is unique but also highlights many of the strategies we use to keep our clients on track. Simply put, we try to eat our own cooking and follow our own advice. While there may be scary days on the horizon, they’re days that we’ve planned for. Our team is with you on this journey.