Recession is on many people’s minds, and the World Bank is warning of the risk of both stagnation and inflation. However, before losing sleep about going into a recession, it’s time to step back and push the thought of recession aside.
Instead, it’s time to look at some of the facts on how money is spent and what you should be doing now, whether or not a recession is looming.
Facts About Spending Whether or Not We’re Going Into a Recession
Consumer Spending Habit Facts
Consumers often spend a certain percentage of their income on certain activities. In 2022, we see consumers spending:
- 14% on grocery stores
- 12% on travel
- 11% on home expenses
- 11% at major retailers
- 9% on fuel, parts and services
- 8% on telecom and cable
- 7% at restaurants
- 7% on retail apparel
- 6% for software and electronics
- Etc.
However, as you dig deeper into spending habits, you’ll find that higher-income households typically begin to segment their spending. This behavioral habit may break expenses down even further. For example, when people set money aside, they tend to put it into:
- Hobbies
- Entertainment
- Travel
- Savings
- Retirement
- Etc.
Responsible individuals will also begin to create “buckets” for their savings. These buckets go into multiple funds and may be even more segmented. The goal is to give you more control over your savings and ensure that you’re saving enough for each activity or future goal.
Fund Segmenting for Your Retirement
Do you know how much to save for retirement? Many people over-save in their tax-advantaged retirement accounts. Diversity is key here because you should be investing in other investment vehicles and taking on more risk when it’s possible.
We recommend that you do two things:
- Create buckets for retirement
- Segment buckets into smaller buckets
For example, if you place all of your funds into a 401k, you won’t be able to touch those funds without a penalty until you reach 59 ½ (with a few exceptions). Instead, you should have savings in multiple accounts, with each account being a bucket.
For example, you may want to have accounts in:
- 401(k)
- Roth IRA
- HSAs
- CDs
- Brokerage
- Etc.
These are savings accounts, but many of the above lack the liquidity necessary to use them in an emergency. So, you also likely want to open up a savings account.
Of course, these saving account funds are often more for emergency savings rather than retirement, as the interest rates can be much lower. However, they’re all part of your savings strategy and overall bucket. Since 56% of Americans do not have the savings to pay for a $1,000 emergency, it makes sense to have some of your savings go into an emergency account, too.
In this case, you’re saving for retirement and growing your money while saving some of your money for emergencies or random needs. For example, you may have the funds in your emergency account to replace your hot water heater rather than finance the expense.
Buckets and segmenting are such crucial financial tools that we recommend using them always. Even if a recession comes along, you should still use buckets and adjust them as necessary.
However, you don’t want to blindly put money into buckets without asking yourself a few questions.
Questions to Consider When Creating Your Own Buckets
Creating buckets should also come with a few questions on your end. We recommend you review the entire bucket strategy to consider the following:
- Why are you putting THAT amount into a bucket? You should justify your spending to yourself to better understand why you’re spending a certain amount. For example, why are you spending 15% of your money at restaurants? Would cooking at home allow you to put more money into retirement accounts? If you have a massive entertainment budget, review your entertainment list to see if you really need seven streaming services. Maybe you value going out to eat all the time, having the seven streaming services, and are okay with the impact it makes on your long-term goals.
- How much should I put in a bucket? Unfortunately, there’s no one-size-fits-all approach to managing buckets. High-income individuals may be fine putting 10% of their earnings into retirement, while others may need to put 20% of their earnings into these accounts. Look over what’s important for you. Perhaps you can justify a massive entertainment budget because you have multiple kids, and movie nights are something that brings a lot of value to your life.
Buckets should be part of your overall monthly budgeting to help you control your money in and out of a recession.
If you’re stuck and don’t know what your savings and investing strategy should look like in order to reach your goals, a financial advisor can help.
The right financial advisor will:
- Ask you the hard questions that no one else will
- Create a plan for your retirement, if savings, and current lifestyle
- Offer brutally honest advice and recommendations
- Help you reach your goals
Often, individuals aren’t sure how much they’ll need to save for retirement and will put too much of their savings into tax-advantaged retirement accounts. Diversifying your retirement accounts, using buckets, allows you to take on more risk and potentially grow your money further.
Creating systems and using buckets are two things that you’ll need to do now and if a recession does hit.
Final Thoughts
If a recession hits, life will continue – it has in the past. When you use the strategy above, you’re preparing yourself to make the right changes if the worst happens. However, there’s a lot to cover about going into a recession that we’ve yet to discuss.
In the second part of this article, we’re going to talk about what to do if we do go into a recession.
We’re going to discuss cost-of-living, emotions, how a financial planner can help, inflation, and what happens if we tone down our retirement spending. If you’ve come this far, you definitely want to read the next part: If We Are Going Into A Recession, What Should You Do?
To learn more about how KPN Enterprises can help you with creating buckets, finances and emotions, schedule a call, contact us here.
