The market declined again last week on increasing fears of an economic slowdown. The Federal Reserve Bank increased interest rates by ¾ of a percent, a hike not seen since 1994. We saw a bit of a bounce that day and again on Friday, but we are still in bear territory, meaning at least a 20% decrease in the market. And if you took the hike I suggested last week, you might have seen that bears charge with their heads down, an easy way to remember the difference between a bear and a bull.
The risk of a recession is looming larger. The bigger immediate worry comes from two recent studies. One showed that 34% of workers who earn between $50 and $100,000 are living paycheck to paycheck. The other reported that 36% of those making over $100,000 are also living paycheck to paycheck. [1]
As interest rates and the cost-of-living rise, it is more important than ever to become conscious of our spending, and to reduce debt. Some of what we view as necessities are really luxuries. As a financial planner, I have no problem with people enjoying their morning coffee or buying expensive items, so long as they have taken care of necessary things first: emergency savings, good insurance coverage, and on track for retirement or other goals. Whatever is left after that, by all means, enjoy it.
On the other hand, if you’re not on track, or you don’t have emergency savings, or you are carrying a balance on your credit card, some changes may be in order. A great example I often see is manicures. A nice gel manicure done every other week is about $40, including tip. Which adds up to $1,000 a year. If your credit card interest rate just went up to 16%, and you have chosen to get your nails done instead of paying that money towards your credit card, a year from now you’ll owe an extra $160 – the interest you paid to carry that $1,000 you spent on manicures on your credit card. Carry it for another year, and it’s an additional $185. Ouch. It's the same thing with eating out regularly, multiple streaming or electronic subscriptions, or other luxuries.
If you’re in debt, or if you have a big savings goal, you can game your way into this. First, cut expenses. Put that money towards the debt or savings goal. I love visual reminders, so print something out that you can color in as you take each step towards your goal. Skip the latte? Transfer the money to your trip fund and color in a palm tree. Cook spaghetti at home instead of eating out? Make a payment to your credit card and color in part of your picture.
The second step is to look for a side hustle. You don’t need to work seven days a week. But baby or pet sitting, mowing lawns, or even picking up a part-time job for a few days a month can add up. Walking dogs twice a week for $20 each time is $2,000 a year. When you think about the interest adding up on a credit card, that could really mean a $2,320 change in a year – the $2,000 you paid off, and the $320 in interest you didn’t incur.
Most of us who are living paycheck to paycheck have not purposely gotten ourselves into that position. We nickel-and-dime our way there, with numerous small things that are, individually, affordable. The trick is to become conscious of our spending and decide what’s more important with each purchase: the fast casual meal, or going to Paris.
Your action item this week is update your balance sheet. A balance sheet is just a list of assets, or what you own, and debts, or what you owe. Include on the sheet the interest rate for each of your debts.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.
[1] Amid Record Inflation, 36% of employees earning $100,000 or more say they aer living paycheck to paycheck; CNBC News, Greg Lacurci, 6/16/22