With prices high and recession fears swirling, Americans are nervous. Instead of feeling helpless, now is a good time to highlight six potential benefits of a downturn in both the economy and financial markets.
1. Emergency reserve funds are cool again. A self-funded safety net can be the difference between spinning and a good night’s sleep.
So while the economy is still growing, make sure your emergency reserve fund can cover 6-12 months of living expenses. If you’re already retired, increase it to 1-2 years’ worth to avoid having to sell assets at lower levels just to pay the bills.
Keep that money in an affordable savings, checking or money market account. It should be a little easier to make the leap to safety now that the Federal Reserve has raised short-term interest rates.
2. Reducing your credit card debt (or any other high-interest debt) could be the best investment of 2022. The idea of paying off a 15-20% credit card balance is even more compelling when the financial markets are in turmoil .
Instead of being tricked into thinking you’ll earn more by investing than by paying off debt, you’ll find that the guaranteed (and risk-free) return that paying off debt provides is not only good for your balance sheet, but will likely turn out to be , that your best investment of the year.
3. Dollar cost averaging makes you bold. It’s hard to be bold in investing amid a market crash. That’s why putting a certain amount of money into a portfolio (dollar cost averaging), like you do when you contribute to an employer-based retirement plan, can help you sock away your hard-earned dollars even when you’d really rather hide your money under the proverbial mattress.
4. Roth conversions are more compelling. If you have a traditional (pre-tax) retirement account, market losses may make converting to a Roth a little less onerous. As an example, if the account was worth $10,000 at the beginning of the year and is now worth $7,500, the conversion today would add less to your taxable income.
Ideally, whatever you convert keeps you in a reasonable tax bracket and for this to work you need to have non-pension funds to pay the tax due.
Roth assets grow tax-free, and when you retire and withdraw the money, you’ll owe no tax. Because Roth plans are not subject to required minimum distributions (RMDs), you can use them to control the future taxation of Social Security benefits and/or increased means-tested Medicare costs.
5. Your job can be a ballast against uncertainty. The current job market remains strong, despite reports of some former growth companies cutting back on hiring.
In fact, there are still more than 11 million job vacancies, and in many industries bosses are making concessions to keep existing workers happy.
However, if there’s a delay, consider upskilling through free platforms or see if your company will foot the bill for a certificate program. Be sure to spend time on your network so it can be activated if your situation changes.
6. Side noises can be helpful. During the pandemic, many people found time to create another stream of income – on the side. These side hustles became a way to make a little money while also being a way to channel creative energy. Many who have been idle on these projects should consider igniting their side businesses to bring in extra income and exercise some control over their financial lives.
Jill Schlesinger, CFP, is a business analyst for CBS News. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at firstname.lastname@example.org. Check out her website at www.jillonmoney.com.