Any day now, you can expect your latest quarterly 401(k) statement from your employer that shows the current value of your savings, and you’re probably anticipating that the stock and fund portion of your savings has gone down in value. since your last statement. Knowing that inflation is much higher than normal, interest rates are rising and the economy could enter a recession, it is not surprising that your investments will be affected. But for the first time, in addition to your current 401(k) balance, companies are showing projections that illustrate what your lump sum savings might look like as monthly income after you retire. These numbers may be lower than you thought.
Finding a financial advisor you can trust, who has the expertise you need, and who is committed to working in your best interest can be a daunting task. That’s why you should consider Wealthramp’s free financial advisor matching service. Every advisor in the Wealthramp network is rigorously vetted. Answer a few quick questions, review your advisor matches, and schedule a free meeting with any or all of your matched advisors. Wealthramp will never sell your data. You won’t get pushy sales calls from them. If you’re ready to see your best advisor matches, start now.
So what’s the next step? As the Fed tightens in a slowing economy, the risk of a recession is high, and even a slight contraction in economic growth can last for months or years. Telltale signs of a recession, among others, are when retail sales plummet, manufacturing slows, businesses stop hiring, and more people lose their jobs or are laid off. As alarming as the news may sound, recession is part of the normal business cycle. Instead of reacting, now is a good time to review your financial plan to position yourself to thrive.
Whether you manage your finances on your own or work with a trusted financial advisor to help you manage some or all of your portfolio, here’s five important actions you should take now to keep your finances in balance during tough economic times.
1) Keep your credit score high
In times of high inflation, it is more expensive for everyone to borrow money, regardless of their credit rating. However, people with lower credit scores will suffer even more. Lenders charge less to borrowers who have shown they will repay loans on time, as agreed. Banks use your credit score as a convenient way to see what type of borrower you are. If, over time, you tend to pay your debts late, lenders will be reluctant to lend you money. The shorthand metric used to measure borrowing behavior is your credit score – a low score means lenders are worried you won’t pay them back. To account for this risk, lenders charge more to lend to bad borrowers in the form of higher interest rates.
Now is not the time to drop your credit rating. If you need to borrow money, you’ll want to do so at the lowest possible interest rate, which is reserved for those with high credit scores above 700. If you have credit card balances credit from year to year, have you looked at the interest rate you are paying? A typical credit card charges you over 25% annual interest. For example, imagine you purchased a set of summer patio furniture on sale for $10,000. If you have an outstanding balance of $10,000 on your credit cards and you don’t pay it off, that’s like adding $2,500 on top of what you paid for the table and chairs.
2) Maintain your cash reserves
It’s important to get to the point where you know you ideally have six to 12 months of money available in an accessible account for emergencies and unexpected expenses. During a recession, this reserve fund becomes even more essential in case you lose your job or a major unforeseen event happens to you and your family. If you have a sufficient savings cushion, you will sleep better. The downside is that the banks don’t pay much into their savings or money market accounts, but the upside is that you’ll be able to access the money immediately without having to sell potentially losing stocks to raise cash when the market is down. It also gives you the freedom to know that you won’t need to take out a loan when interest rates rise. It seems unfair that banks are quick to raise borrowing rates and much slower to raise rates on savings accounts, but the financial security that comes with having cash reserves is worth it. The best way to save extra dollars is to make the choice to live within your means.
3) Invest, but don’t gamble
Long-term inflation eats away at your savings and investment returns. When inflation is high – and recently we’ve seen inflation hit 8.6% – it means you’re paying more but getting nothing more in return. An inflation rate close to 9% is four times higher than the norm. And over the years, even at lower rates, inflation takes its toll. The best way to stay ahead of inflation is to stay invested in a diversified portfolio of stocks, because over time stocks tend to grow faster than inflation.
If you’re unsure how to build a diversified portfolio designed to protect and grow your money, that’s where an established, independent and carefully vetted financial advisor can help. Finding a financial advisor you can trust, who has the expertise to meet your financial needs, and who is committed to working in your best interest can be a daunting task. That’s why you might want to consider Wealthramp’s free financial advisor matching service. Every advisor in the Wealthramp network is rigorously vetted. Answer a few quick questions, review your advisor matches, and schedule a free meeting with any or all of your matched advisors. Wealthramp will never sell your data. You won’t get pushy sales calls from them. If you’re ready to see your best advisor matches, start now.
Take experts – investing is the turtle, not the hare. Vanguard Group’s John Bogle says investing is supposed to be boring – investment guru Ben Stein asks what’s wrong with the average? — Billionaire investor Warren Buffett never gambled. Buffett earned his billions by prudently and consistently investing in value. He missed the best time to enter Apple (AAPL). To date, he is still not invested in Tesla (TSLA). He doesn’t understand bitcoin and doesn’t want to learn. In his entire career as an investor, he has rarely won a blockbuster. So how did he accumulate so much wealth? Besides investing cautiously, an often overlooked reason is that he lived a very long life.
4) Find inflation hedges
Another tactic during a recession is to choose investments that act as inflation hedges over long periods of time. Gold and commodities are the go-to short-term investments to protect your portfolio from stock market shocks, as commodities like gold tend to move in the opposite direction to stocks. However, gold is a poor long-term investment, which is why many fiduciary financial advisors recommend only hedging about 5-10% of your portfolio. When looking to fight inflation, one of your best tactics is to fully diversify your portfolio. This does not mean randomly picking exchange-traded funds from different sectors. Diversification requires you to create a plan that you stick to and revise when market indicators tell you it’s time. Your best bet is to contact a financial adviser who can review your portfolio and help you ensure that it is diversified.
5) Improve your CV and improve your skills
Currently, unemployment is at a historic low in the United States. Whether superficial or deep, recession often leads companies to lay off employees. The best way to protect yourself from losing your job and ensure your success in finding a new job if needed is to make yourself as valuable an employee as possible. If your current company offers education reimbursement, skip that perk and work on a degree or certification that can boost your future earnings. There are also low cost or free courses that you can pay for yourself to boost your CV. Keep track of your accomplishments at work to turn a standard resume and cover letter into one that helps you stand out and get the right attention. And stay closely connected to your professional and personal network.
Actions to take today
As you take defensive action to protect yourself and your family from the recession, decide whether to do it yourself using digital tools or partner with a rigorously vetted, fee-based fiduciary financial advisor who only works only for you, and not as an agent of a brokerage firm. or insurance company. If you are approaching retirement, choose a trustee who has the expertise and specializes in retirement income planning. They can help you:
- Build a tax-focused plan on your own or with their advice
- Develop an investment strategy that you can follow over time
- Find ways to pay off high interest debt
- Consolidate cash accounts
Finding the right financial advisor can be difficult. Let Wealthramp help you find the right advisor to help you with your personal financial needs and situation.
Pam Krueger is a recognized investor advocate, award-winning personal finance journalist, and the founder and CEO of Wealthramp, a free advisor-matching platform that connects people with carefully screened, paid-for financial advisors. She is also the creator and co-host of MoneyTrack, which aired on PBS from 2005-2019, and the Friends Talk Money podcast for PBS Next Avenue, currently in its 7th season.