The first six months of the year brought us a volatile equity market alongside climbing interest rates, and despite the Federal Reserve’s recent pause, we will likely see more of the same over the next six months. With inflation remaining elevated and the Fed clearly articulating its intent to keep putting the brakes on the economy, the threat of a recession is back in the headlines.

How can you ensure your investments stay on track, and is the rest of your financial plan in good enough shape to survive a potential downturn? The good news is that you have more control than you might realize, and there is a lot you can do to keep everything moving toward your goals. The mid-year mark is an excellent time to take stock of your situation and then take decisive action.

Start With the Basics: Your Budget

• If you haven’t updated your budget recently, it might be time for a quick reality check.
• Everything is more expensive right now, and that is not likely to change anytime soon.
• Take a hard look to see if you are overspending in any particular area.
• You may need to adjust your budget to account for the reality of increased prices, trimming expenses elsewhere to keep things even.
• Did any big-ticket expenses come up in the last six months, or is anything looming in the next six months?
• Managing these major purchases by adjusting your other spending can help keep your emergency fund intact and your long-term savings goals on track.
• Additionally, evaluate whether your day-to-day expenses have remained the same, as changes to your daily routines often have a bigger financial impact than you realize.
• Starting a new exercise plan, changing your diet, or taking up a new hobby can all significantly change your spending habits.

Maximize Your Tax-Advantaged Saving

While inflation is making daily life more expensive, it is also increasing the amount you are allowed to save in tax-advantaged accounts like 401(k)s and health savings accounts. Because the annual contribution limit to these types of accounts is explicitly linked to inflation, it increased for 2023. Are you currently on track to hit the maximum?

If you are over 50, the catch-up provision allows you to boost those savings even more. Best of all, because these contributions are made with pre-tax dollars, they effectively lower your taxable income in the year they are made.

What Are You Doing With Your Cash?

If you are currently keeping your rainy day fund in a standard savings account, you may want to consider other options. Shifting your cash from a traditional savings account to a money market fund or a short- or long-term certificate of deposit (CD) can help you take full advantage of the high-interest-rate environment we are likely to remain in throughout the balance of the year. If you have the flexibility to lock up your money for six months or more, a CD can be a highly effective option for some of these funds, but be careful not to lock up money you may suddenly need.

Are Your Investment Accounts Keeping Up with Volatility?

Markets have been extremely volatile, which can mean that your portfolio has drifted away from your desired asset allocation. As asset values go up and down, some of your positions may have grown and increased beyond your set risk levels. Rebalancing your portfolio to keep your risk tolerance intact and improve portfolio diversification can help smooth out some of the harsher impacts of these volatile markets.

We are in a new phase of the economic cycle, with the Fed clearly articulating that combating inflation is its highest priority and that rate increases will likely continue. As businesses grapple with the increased cost of funds, and consumers adjust to higher interest costs alongside still-high inflation, the broader economy is likely to slow. Given this landscape, tuning up your portfolio to be more defensive can make a lot of sense.

The Bottom Line

Taking the time to check in on your finances during the precious, fleeting days of summer may not be at the top of your to-do list, but it makes perfect sense to devote some time to keeping everything in shape. Doing so can help you create the financial flexibility you want in your life.