Preparing your Finances for an Uncertain Future
Preparing your Finances for an Uncertain Future
In the wake of the 2024 election, comments about uncertainty – financial, social, and political—come up fairly regularly when speaking with clients and friends. “Things are just so uncertain right now,” is a phrase often followed by a fairly lengthy list of very specific items that the person feels like are now pretty certain to happen in the future.
Things just feel so uncertain right now, I think, is a magnification of the underlying feeling that this isn’t the way half of the country hoped or expected the election to go, and any outcome unexpected and/or unwanted is a stark reminder of that which we cannot control or predict.
It’s also a novel uncertainty… and therefore it feels very pressing to attend to. The list of specific fears (which can feel at times like certainties that we must attend to), in part simply comes from entertaining ideas about possibilities for the future that many weren’t entertaining 15 years ago.
But what does this uncertainty mean for your personal financial decision-making? Does it merit changes, and to what extent?
Maybe, but not in the ways you are probably thinking about. Because the reality is, ‘uncertain’ is always how we should feel about the future, and that’s no more true now than it was a year ago. The future is an inherently unpredictable thing. As financial advisors, our advice is almost unilaterally about trying to get our clients to understand and accept the uncertainty of the future, and to prepare for it accordingly.
But since there’s a lot of fear circulating about our current uncertain future, now is probably a great opportunity to revisit some general guidelines about financial decision-making when feelings of uncertainty or fear start to make us wonder if we should be acting in certain ways.
Intellectual humility (the ability to entertain the notion that we might be wrong about what we think) is extraordinarily important in rational financial decision making. Because so much of our financial decision-making is oriented around some moment in the future, it’s actually quite likely that we will be wrong, and therefore need to engage in a thorough investigation of the consequences of our choices if we are wrong.
If you, feeling certain that the market is headed for a major downturn in 2025, pull all of your money out of the stock market now and put it in your savings account or under your mattress, that’s not a risk-free decision. It may feel safe, but that feeling is an illusion. You may be jeopardizing your retirement by missing out on the potential investment growth. And it’s not just the opportunity lost if the market continues to go up, it’s also the risk of inflation running hot and the cash under your pillow or your bank account losing purchasing power. It can actually be quite a big risk to pull all of your money out of the stock market, even though it feels like it is a safer move.
When times feel uncertain, it’s easy to want to take everything you have and put it into something that feels safe, but the reality is, those decisions have consequences of their own that are extremely important to acknowledge.
One of the most important questions you can ask yourself in times where you feel fearful about the economy and tempted to act in a way that deviates from your financial plan is: What will the consequences of this decision be if I am wrong and the opposite happens?
One of the better strategies to deal with an uncertain future is simply to not hold all our eggs in one basket. And though this is an important component of asset allocation in investing, diversification goes well beyond portfolio building.
For example, if tomorrow remains uncertain, you might be tempted to say, “Why save for retirement? Live for today!” But that’s a poorly diversified strategy. Because the uncertainty of tomorrow isn’t just that you might die tomorrow, it’s also that you might live to be 103. And you probably don’t want to put your eggs entirely in the die tomorrow or live until 103 basket.
A well-diversified approach to tomorrow being uncertain says, I’ll save some for retirement, some for things I may want 3-5 years down the road, some for situations I don’t see coming (your emergency fund), and spend some on things that really bring me joy and add value to my life today. You’ve prepared for as many of the outcomes as you can foresee, in a way that allows you to be okay in each of them.
Anytime you concentrate your financial choices around a single outcome, you add risk because the consequences of your predictions being incorrect become more extreme. So, when considering the first question – What will the consequences of this decision be if I am wrong and the opposite happens? A logical next question to ask is, How could I add diversification to this choice so that if I’m right, I’m protected, and if I’m wrong, I am also protected?
If the question weighing heavily on your mind right now is, “what should I do about the uncertainty of what the economy will look like in 2025?” but you haven’t done each and every level of smart financial risk-mitigation related to the parts of your personal financial plan that you can control, then you’re acting a bit like a bicyclist who is worried that the removal of a bike lane on a heavily trafficked road may negatively impact his safety when he rides to work in the future while he simultaneously rides around without a helmet.
Risk mitigation in personal finance isn’t just about asset allocation in your portfolio. If you’re putting off building up a proper emergency fund, writing your estate planning documents, or getting the right insurance coverages in place for life, disability, liability and the things you own, stop focusing on how you might be impacted by something you can’t control in the future and start doing the things you can to get your own personal financial risk mitigation in order.
Getting your own risk-management house in order has the added benefit of putting you back in the driver’s seat, where you can actively make a real difference in an important element of your life. You may not be able to change a thing about what happens in the economy or the White House in 2025, but don’t allow that to distract you from all of the important ways that you can mitigate very real risks to you and your family’s financial health and well-being.
Buying an electric car right now because you are worried that the rebate is going to go away in 2025 or 2026 and maybe also are worried about inflation (and I want to be clear, I’m not saying either or both of these things won’t happen), is a terrible financial decision if:
You don’t really need a new car and hadn’t been contemplating the purchase of a new car before the election,
It would force you to take on payments that you can’t really afford, or
It would force you to take on payments that you could afford, but you are fearful about losing your job under the new administration.
And it’s probably only a good decision if you already had the money set aside for it and it’s been on your mind, but you just haven’t gotten around to doing it yet. For you, small subset of folks in this category, I would say yes, sooner rather than later makes sense based on what we know about some of the agenda items of our new administration.
For anyone else, don’t let fear of rising prices or disappearing rebates convince you to do something that’s going to put your financial health in jeopardy.
Yes – of course, there are small things we may all want to consider doing with the potential for tariffs that may increase prices on some consumer goods. But by all means, don’t make bad financial decisions (go into credit card debt, dip into your emergency savings fund, etc.) to get out ahead of this thing. Because while Trump’s tariffs, what and how they are implemented, and the resulting costs that get passed on to consumers, remain to be seen, we can say with certainty that spending your emergency fund on a discretionary purchase or going into credit card debt for something you don’t need and can’t afford is a bad personal financial decision.
Although the title of this article suggests there is something needed from you right now, the conclusion is quite the opposite. More than anything, what is needed in times of uncertainty that also create fear or anxiety is a reminder of the importance of sound, mindful decision making about your finances. When you find yourself worried about something you can’t control (and never could) or fixated on outcomes that may or may not come to be, practice humility about your ability to predict the future and consider the consequences if you are wrong, diversify your choices for a variety of possible outcomes, and give your effort and energy to what you can control – mitigating the very real (though admittedly boring) financial risks we all face, and remaining diligent in your own calm, cool, and collected sound personal financial decision making.