The Best Way To Defend Your Savings
We are living through an economic crisis that will earn an entire chapter in introductory economics textbooks in the future…
Just a few of the many “highlights” this year:
Right now, many Americans are struggling with economic hardship, thanks especially to higher inflation.
In fact, 63% of Americans are living paycheck to paycheck, and that includes some six-figure earners, according to a recent report:
Anuj Nayar, LendingClub’s financial health officer, put his finger right on the major issue:
Even the more affluent savers are cutting back on their holiday spending:
This isn’t promising, simply because consumer spending is the major driver of economic growth. Pullbacks in spending are often leading indicators of an incoming recession…
The good news is there is a way to avoid, or at least mitigate, some of the potential chaos that is likely affecting many people who are saving for their retirement (or retired and living on a fixed income).
Financial security starts with proper planning
Since it’s fairly obvious that Americans are struggling financially, and President Biden’s “Inflation Reduction Act” won’t do much to curb red-hot inflation, we’re left looking for answers.
One place to start might involve planning for financial hardship in advance, before it’s necessary. Building an emergency fund in anticipation of future need is one piece of common-sense advice that’s often neglected. (In fact, more than half of Americans couldn’t pay a $1,000 emergency expense with savings – that’s shocking.)
According to recent advice from U.S. News & World Report, here’s how to approach a financial hardship:
Note that Sheehan is encouraging folks to take on more risk in their investments, in pursuit of higher returns. That’s not an optimal choice for many families, especially in response to financial hardship…
Marc Odo of Swan Global Investments warns of the downside of chasing yield with the “safe” portion of your savings. Essentially, investing too conservatively risks loss from inflation (especially relevant today, when inflation is over 8% while savings accounts at best pay less than half as much). Investing too aggressively risks loss from – well, from just about everything…
Needless to say, I’m not a fan of increasing risk with my “safe money.” I believe that proper diversification includes assets that you can count on to at least retain their value.
But that’s just me – your particular financial situation and goals should inform your personal decision.
Back to U.S. News:
Ideally, you want to build a sustainable emergency fund – not something you’re going to deplete and never refill. The specific amount in your personal emergency fund has to meet your own needs. And we can’t forget that lower-risk investments suitable for emergency funds aren’t guaranteed to even keep up with inflation.
The last piece of advice:
A 401(k) loan is one of the few methods available to us that enables us to use our own money (rather than credit extended by a bank or lender) to settle our economic hardships. It’s not an ideal plan by any means – but when the alternatives are worse, it’s good to know it’s a possibility for many American families.
Writing for Meratas, Anna Kalwitter points out there are some situations where you might want to have even more saved in your emergency fund:
Of course, there aren’t any magic solutions to the problem of economic hardship. “Just avoid them” isn’t useful guidance…
However, there is one thing you can do to increase your chances of avoiding a financial emergency.
Give your savings a more stable foundation
Often, financial distress is caused by inadequate planning.
For example, younger Americans who’ve never been invested during a bear market simply don’t know what to expect – how long it might last, how bad it might get.
It’s essential to understand history to get an idea of the kinds of things that sometimes happen – to nations as well as to individuals – so we can plan and prepare accordingly.
I’ve said it before, and it bears repeating:
“Hope for the best, and prepare for the worst.”
To help you build a sustainable savings plan that you can rely on as an emergency fund, even during periods of high inflation, make sure your savings are on a stable foundation.
When I say “stable,” I mean two things:
Consider learning about inflation-resistant investments. Diversifying your savings across different types of assets helps reduce overall volatility. Finally, one of the most stable “safe haven” assets to consider is physical gold and silver. In fact, physical precious metals have been an ideal choice for tens of thousands of American families in search of a stable foundation for their hard-earned savings.
From a historical perspective, gold and silver make sense. After all, both gold and silver were money before there was such a thing as a U.S. dollar – and I’m confident they’ll continue to function as a store of value regardless of what the future holds.
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