5 Things to Do If You’re Worried About a Recession
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When stocks are dropping and even the president won’t rule out a recession, it’s hard not to feel a pit in your stomach. Your investments are one thing, but what about your job, your spouse’s job, or the future of your business or customers?
While none of us know what the future holds, it’s good to be prepared for anything. The best defense is a good offense, as they say. Here are five things to do to protect yourself and make the best of a possible recession.
1. Shore up your financial cushion. One of the most important financial safety nets is readily accessible emergency savings. As a general rule of thumb, you’ll want to have enough to cover at least three to six months of living expenses. This will be your financial buffer if you or someone else in your household loses a job.
One major exception: If you have high-interest credit card debt, consider using your savings to pay that off first. This way you’re not vulnerable to a mounting credit card balance if your income changes. (Depending on how much you owe, you might want to look into a debt consolidation loan or a credit card that features a 0% APR offer on balance transfers. The extra interest-free time might be worth a 4%-5% balance transfer fee.)
If you do have high-interest credit card debt, it’s still a good idea to keep enough on hand to cover one month of expenses. Then, once you’ve paid off your credit cards, you can work on building up that emergency fund. A tax refund is a great way to give this effort a kickstart.
2. Take charge of the parts of your finances you can actually control. You don’t usually have a lot of control over your job security, but you can get your financial house in order ahead of any possible changes in income. It’s a great way to put your nervous energy to good use.
Spending is the biggie. Set a lower monthly spending target to cut back on non-essentials. (SoFi members can use Relay to set targets and track spending right in the SoFi app.) To help you avoid impulse buys, shop with a list. And use loyalty programs, digital coupons and sales to save on necessities. These steps can help you build that emergency savings faster and avoid taking on any new credit card debt.
3. Stick with the long game for your retirement savings. When it comes to 401(k)s, IRAs or other retirement accounts, don’t let market volatility keep you from making your regularly scheduled contributions.
Staying the course is usually the best option for building wealth over the long-term. In the past five years, multiple big market downturns were followed by new record highs, including after COVID-19 emerged in 2020.
And over the past several decades, despite big swings from one year to the next, the S&P 500 Index — the nation’s broadest stock benchmark — has had an average annual return of about 6%, adjusting for inflation.
4. Use market downturns to your advantage. There are a few silver linings to downturns in the stock market.
• There are more tax-loss harvesting opportunities. By selling investments that have lost value, you can offset capital gains taxes on better-performing investments, reducing your overall tax liability.
• It can be an ideal time to convert a traditional IRA or 401(k) to a Roth IRA. With a Roth IRA, you pay taxes on your retirement money now, rather than later, to set yourself up for tax-free growth and withdrawals in the future. Since the tax you pay is dependent on your income and the value of your account, converting during a down market or a lower-income year could potentially mean you pay less in taxes.
• Depending on your risk tolerance, you might want to look for bargains when stock prices are lower. Just remember there are no guarantees that prices will recover.
5. Plan ahead. If you have financial security right now, don’t take it for granted. Capitalize on it. If you’ve been meaning to replace the brake pads on your car or get that mole checked out by the doctor, do it now, while you have a steady income and health insurance. If there’s a great sale on non-perishable essentials like toilet paper or paper towels, stock up. And if your resume isn’t up-to-date or you haven’t kept in touch with old work connections, get yourself ready in case you need to start job hunting. Hopefully you won’t need to, but you’ll feel better being prepared.
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