Five tips to protect your finances during market uncertainty

Highlights

• The economic and financial impacts of the pandemic shook markets to their core, raising the need for sound financial planning.
• Fluctuations are a regular part of financial markets and must be accounted for even when the tide is low.
• Budgeting, saving early on in life and maintaining an emergency fund are some of the ways to ensure financial security in uncertain times.

Ever since the world was introduced to the COVID-19 pandemic, uncertainty has become an inseparable part of the economy. The economic and financial impacts of the pandemic shook markets to their core, creating shockwaves that can be felt across the globe. Most prominent is the shock to global supply chains that have resulted after over a year of a shutdown of overseas trade.

While some loopholes had existed in the international supply-chain framework, the pandemic merely brought these issues to light by forcing nations to enter into full gear after months of closure. Despite the reopening of borders, uncertainties have continued to rule the global financial markets amidst the Russia-Ukraine war.

The past week has especially been a volatile ride for the equity markets across the globe, which observed a huge market sell-off. Australia was no different in experiencing the stock market sell-off, with investors fretting over interest rate hikes, COVID-19 lockdowns in China and elevated inflation. Fears of recession also took centre stage as lockdown restrictions emerged as a risk to China's economic outlook.

At a time when the world is experiencing a range of challenges, investors should understand that fluctuations are a common nature of financial markets and must be accounted for even when the tide is low. As the need for financial planning increases among individuals, five tips can help them sail through market uncertainty.

1.    Budgeting

A good idea is to keep the monthly expenses in check and limit them to a set budget. The easiest way to ensure financial security is to cut down unnecessary expenses from one’s list. Uncertain times call for lifestyle changes and unique budgeting solutions from individuals.

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While some expenses form a crucial part of daily life, many others are simply frivolous in nature and can be compromised upon for a short period. Being thoughtful of energy usage, efficient meal planning and buying in bulk are simple yet effective solutions under budgeting.

2.    Start saving early

Although investor markets are filled with the rhetoric of starting investment early, it is also essential to start saving in advance. Individuals can save a much larger proportion of their income during their early years than in the later years when their daily expenses are non-negotiable.

As every person passes through different stages of life, expenses related to healthcare, household, entertainment, and leisure only rise with time. Additionally, a longer time frame allows one’s savings to multiply much more quickly through the power of compounding. When a person re-invests earnings over previous periods, they grow quickly.

3.    Maintaining an emergency fund

An emergency fund is just what an individual needs in times of uncertainty. Many individuals lost their jobs during the pandemic and relied on their savings and emergency fund to help them push through tough times.

Image description: Saving for uncertain times is essential.

It is crucial to hold an emergency fund that is otherwise not dug into during economic adversities. Individuals can save through the sunny days and hold the money in an emergency fund, which can be used only when there is no other alternative. The money in the emergency funds can be increased for uncertain periods. Once the uncertainty is over, individuals can utilise the additional reserves and seed money for other investments.

4.    Keeping a low debt level

It is best to stay low on debt during uncertain times as the borrowed amount can quickly spiral into an unbearably large sum of money. It is best to hold off any large purchases that require a loan to be financed. For instance, if one loses their job due to a bad economy, they can find it increasingly hard to repay their loan.

Thus, it is best to stay close to the previous goal of saving and budgeting to ensure individuals do not take on a debt that they cannot repay.

5.    Diversifying investments

Rule 101 of protecting one’s assets against uncertainty is diversifying the existing investments. It is best to divide one’s wealth across multiple channels instead of exposing all of it to one area. Diversifying across stocks, bonds, mutual funds, and other investment products helps avoid a financial catastrophe in uncertain times.

When one market loses, it is highly probable that another market incurs gains. Thus, it is possible to gauge maximum returns even during uncertain times by being aware and cautious of one’s investment choices.