Are we headed to a perpetual downturn in the world economy? There is no lack of various opinions on whether we are or are not heading for one. There is enough turbulence though that are causing prudent people to think twice about discretionary spending. The increased cost of items and the frustrating level of inflation are two attributable causes. As a financial life planner, our firm in reviewing peoples’ cash flow and seriously evaluating intended serious spends. I decided to probe this issue and share some insight on spending with potential pending economic changes.
More than half of Canadians are pausing upcoming purchases due to economic uncertainty. In a recent study, 60% of Canadians surveyed said they are postponing plans and purchases. 36% are postponing daily purchases including dining out, buying new clothes and buying tickets for events. 29% said they’re waiting to invest in large purchases or projects. Even major life decisions are on hiatus with 29% of Gen Z postponing changing their jobs. I know Gen what? Gen Z, also known as Zoomers are between the ages of 8 and 23. The post-millennial generation.
67% of Canadian adults surveyed said they expect to enter a recession this year and 78% expect it to have a high or moderate impact on their near-term finances. Out of curiosity, I chatted with a few colleagues to find out which purchases they feel people should defer in an economic downturn.
Kitchen remodel
A kitchen remodel is the kind of purchase that is considered nice to have. Remember the debate between want and need? Purchases, and life moves, during an economic downturn should shift from wants to needs only. If the kitchen remodel is a want, the “need” would be repairing the roof of your house to prevent any damage.
New car
If the purchase of a car isn’t immediately necessary, hold off on buying a new car. One of the biggest incentives to waiting is the price of automobiles typically comes down during a recession. Consider adding more money to your emergency fund in the interim. People should have at least four months’ worth of expenses in your emergency fund and even more if you’re able to set this money aside. Those who don’t have an emergency fund should not plan any purchases.
Homes
Buying a home is being postponed among nearly every generation. People are delaying the purchase of a home at this time. During times of uncertainty, especially for those concerned about potential job loss, it may make sense to delay buying a home until you have a solid financial foundation. Coupled with increasing mortgage rates and the high price of real estate, it makes sense to wait until our economy finds better grounding and these variables settle.
Starting a business
Most Millennials and Post-millennials are pausing any plans to start their own business. Why is this life decision delayed during an economic downturn? It’s much easier for people who dream of starting their own business to take the plunge when the economy is thriving and the risk of entrepreneurship is reduced.
Vacation homes
Today’s mortgage rates have been a surprise to many, especially those who made their investment or vacation home purchase just two years ago when rates were at record lows. Bearing in mind that the mortgage rates for these types of properties are higher than for your primary residence, this is even more pronounced. With interest rates at these levels, the secondary home makes sense to push off for a later date.
Vacations and trips
If you’re planning a nonessential vacation or expensive trip and don’t have your finances in good shape, now may be the time to wait until you have enough money saved to pay for the vacation in full. What if you have paid off your debts, built an emergency fund, saved enough money to pay for the vacation and are currently saving for retirement? You have a solid financial foundation in place and are good to go and enjoy your vacation. It is still okay to proceed as there will always be some uncertainty.
The bottomline
With the possibility of an economic downturn, or the possibility of a recession increasingly likely in 2023, many consumers may be wondering how they can financially protect themselves and their assets from unforeseen circumstances. While people can do little by way of changing inflation, they can take the necessary steps now to protect themselves in the event the economy takes a turn for the worse by watching any serious spending that can be put off until we are better economic footing.
If the funds are already available, all people are doing is deferring their projects. The money, if invested, can generate some growth while you wait. It is better to employ safe spending as opposed to sorry spending. Such a strategy is in Keeping Life Current.
