How Families Can Better Prepare for Economic Uncertainty

As reported, the state of our economy has evolved from “everything’s fine, and there’s no inflation” to “ok, there is inflation, but it’s just transitory,” to “well, yeah, of course, inflation is here, and it’s going to be here for a while,” most Americans are starting to wake up to the fact that we’re already facing a dire economic situation. It’s about to get a lot worse.

In the coming years, we will see a dramatic uptick in economic uncertainty, driven by growing inflation and interest rates and declining employment, credit, and consumer confidence. You may have already seen some of the effects of this, either firsthand or in the news. Over the last year, numerous large companies have laid off tens of thousands of employees, lenders have tightened underwriting requirements, and a factor that’s at the top of most people’s minds—inflation has caused the price of virtually everything to skyrocket. Unsurprisingly, this has created tremendous chaos in our economy. 

Economic uncertainty is always bad, but it’s even worse today because personal, corporate, and government debt are all at an all-time high, while savings are at a historic low, leaving little margin for error. 

It’s not all doom and gloom, though. Yes, things will be challenging in the coming years, but there are some things families can do to protect their financial well-being. And it doesn’t require a Ph.D. in economics, a government bail-out, or the winning lottery numbers—just some discipline. 

Become more financially literate

Americans think they’re financially savvy, but the reality is that a majority are not. According to a study by the Milking Institute, a shocking 57% of Americans today lack a basic understanding of financial literacy. This, unfortunately, is a number that’s been growing rapidly for decades. Some states have started working to fix this by teaching the topic in public schools. I had a role in the development of the Florida Department of Education's new financial literacy curriculum—but the impact of this won’t be felt for many more years as these kids grow up and enter the workforce.

In the meantime, the data and several economic indicators tell us that most adults can benefit from additional financial literacy education. So how can you get that?

Many communities have nonprofit organizations that provide assistance with financial best practices. help with this kind of thing. Most libraries will also have at least a few books on the topic. Information can also be found online, but you must be careful whose advice you take because not everyone acting as an expert is one. A few names I would recommend include:

Dave Ramsey—Dave is great for beginners and people with difficulty managing their money. But I don’t agree with everything he says, especially regarding real estate investing. His personal budgeting advice is solid, though. 

Kim Kiyosaki—If you’ve ever heard of the book Rich Dad, Poor Dad, then you know precisely who Kim is. For the few who may not, she co-founded The Rich Dad Company. This financial literacy education company has transformed more lives, financially speaking, than probably any other company in the world.

Charles Payne—Charles hosts Making Money with Charles Payne on Fox Business. He has a unique gift for explaining the stock market and the broader economy in a way that ordinary people can understand and benefit from.

Carol Roth—As a self-described “recovering investment banker,” Carol understands financial topics at a level few others can claim. She has built her career around bringing that information to the masses in a novel perspective anyone can understand.

Maximize your savings

I mentioned earlier that savings are at an all-time low, and if you don’t have substantial savings, that’s one of the first things you should work to create more safety for your family. 

This is easier said than done, especially when your budget seems stretched to the limit. Still, it’s critical because a well-stocked emergency fund can mean the difference between surviving a financial downturn or being forced into bankruptcy. Ideally, you’ll want to build a reserve covering at least six months of your living expenses.

If you’re not already saving money, you’ll need to make some changes to your budget by cutting certain expenses to free up some money. You can start by reviewing your bank and credit card statements with a fine-toothed comb to identify precisely where your money is going. Then, you’ll separate your necessities, like rent or mortgage, food, insurance, and professional dues, from your wants, like entertainment, travel, and eating out.

Don’t get the wrong idea here—you probably don’t need to become a monk who works, eats, and sleeps. You’ll likely find room in your budget to save more by removing some unnecessary expenses. I recommend looking at what to cut based on its impact as a percentage of your budget. For example, a $12/month Netflix bill won’t make much difference, but that 3X per week Uber Eats habit probably will.

Unfortunately, there are some people who don’t make enough even to have extras to cut. If that’s you, don’t lose hope—there’s a way to solve that, which I’ll get into later in the article. 

Reduce or eliminate debt

We always talk about eliminating debt, and I generally agree; although I’m not the “all debt is bad” guy, I approach this topic with more nuance because I live in the real world. 

First of all, debt isn’t inherently good or bad. It’s just a tool; its effect on your financial well-being comes down to how you use it. 

That said, debt to finance a home is usually fine as long as you can afford the monthly payments because a mortgage is used to purchase an appreciating asset. Real estate investments get trickier because many investors max out their properties' loan-to-value or LTV ratio. This means they can technically afford the mortgage today, but if anything goes wrong tomorrow, like a major repair or a tenant leaving, that can change instantly. 

Auto loans are another type of debt that isn’t so black and white. Borrowing money for a depreciating asset is usually a poor choice, but if you already have a loan at a low rate—I’m talking sub-4%, it might make more sense not to pay it off early. That’s because as inflation grows, and it always does, your future dollars become less valuable. By continuing with your regular payment plan, you can use more of your budget today for saving and investing. And remember—the longer your money has to work for you, the more growth you’ll earn. 

One type of debt that is almost always universally bad is credit card debt, and for two key reasons. The first is that the interest rates are often absurd, bordering on usury, particularly for people with poor credit. The second is that most carry a balance and pay just the minimum payment, so even if they cut that card up today, it would still take upwards of eight years to pay off, and the total amount could be up to three times what they initially charged! So my advice is to pay off all credit card debt as quickly as possible and then, going forward, pay the balance in full each month. 

Note: I generally treat all revolving debt, including HELOCs, personal lines of credit, and any other non-fixed debt, the same as credit cards. I also recommend eliminating or refinancing any variable-rate debt into fixed debt.

Find ways to supplement your income

If you feel like your budget is too tight and you’ve genuinely cut everything that’s unnecessary, then you have two choices: either accept your circumstances or find a way to supplement your income.

When I was young, it was a very different world. In the 1970s and 80s, if we wanted to make some extra money, we’d have to go to the local pizza shop and pick up a night job or maybe deliver newspapers before the crack of dawn. Today, you can fire up your computer and sell your old clothes on eBay, offer graphic design for clients worldwide on Fiverr, or monetize a hobby like video games by streaming on Twitch. And the crazy thing is these are just a few, out of potentially millions of ways you can make money these days, and often from the comfort of your home.

But it’s important to remember that even if you approach this as just a side hustle, treating it like a business is still essential, carefully tracking profit and loss to ensure it’s worth your continued time and energy. As time goes on, it may make sense to turn it into an actual business, too, because that then provides numerous tax benefits that can help you save even more money. A word of advice on this—talk to a tax professional. The last thing you want is that 900-pound gorilla known as the IRS beating on your door. 

Be prepared to capitalize on opportunities

Everyone always focuses on the negative aspects of an uncertain economy, and that shouldn’t surprise you, but I don’t want you to get the idea that it’s all doom and gloom. 

The truth is that while there is undoubtedly a lot of suffering during economic hardship, this is also precisely when you’ll find some of the most significant opportunities. Some of the world’s largest fortunes were built during some of the worst economic periods. 

That may sound counterintuitive, but it helps to think of the economy like a forest. Sometimes, that forest becomes overgrown with brush and weeds, which can choke out the stable and sturdy trees essential to a healthy forest. The natural outcome of this scenario is that vegetation starts to die off and dry out, creating a giant tinderbox. Eventually, a forest fire will wipe out the brush and weeds and even char many healthy trees. But in that process, the ashes will enrich the soil, and the trees will recover, coming back stronger than before. 

It’s the same with the economy. Both weak and strong companies will be burned as it declines, but the weak companies will be consumed, creating opportunities for others. 

In some cases, this might be as simple as buying a failed company’s assets, like office furniture, for pennies on the dollar and then reselling it to other companies below retail, but still at a healthy profit. Or it could be more complex, like buying a book of accounts from a service business or a commercial building from a manufacturing company. 

There are countless opportunities out there, especially in a downturn. You just have to be on the lookout for them constantly. 

Build and nurture community

Returning to some of the worst economic periods in our history, you’ll see a common trend—people coming together to work through the challenges.

You might have heard the old saying, No man is an island,” and I believe that wholeheartedly. It’s a core principle in my own business, where we all come together in a mastermind setting to learn and collaborate so we all can achieve more. 

A strong network you can lean on in tough times is a priceless asset because it gives you additional leverage. This might come in referrals, advice, capital, JV opportunities, or even someone to vent to. But it’s not going to appear magically. The kind of network that can help you thrive through economic uncertainty has to be built and nurtured intentionally. 

You can start with family, but be careful here, particularly if you’re an entrepreneur, because it’s easy to follow bad advice from a family member who had the best intentions but simply wasn’t qualified. Plus, borrowing money from family can destroy a relationship if things go south and you can’t repay them. 

Next, you have business associates and friends. This could include clients, vendors, and anyone you’ve connected with. And you should also go outside your current circle to expand your community. Networking groups, trade organizations, and mastermind groups are great places to find the right people and build and nurture relationships with them. 

This is such a powerful yet underrated strategy that it is almost a superpower. 

The key here is to focus on bringing value to each interaction. People won’t want you around for long if you're always taking. On the other hand, be careful not to turn this into your full-time job because it’s easy to go overboard. I’ve seen more than a few eager entrepreneurs give so much that it detracted from their business. 

You must find a healthy balance and develop some processes to build and nurture your network. 

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.