When it comes to the economy, no one can ever really know what’s going to happen next. But lately, you’ve probably started hearing that old bogeyman of a word, the one no one wants to face: recession.
It’s only natural to worry about the financial future, especially in times like these — and to search for something to do about all of it. While the fundamentals of smart money management don’t change during uncertainty (or recessions), there are a few things you might do to fortify your finances and help you feel a little more in control.
Here’s our best advice.
How to adjust your spending
This is probably the first thing you thought of, right? Whether you’re worried about bear markets, potential layoffs, or a full-blown recession, now might be the time to start scaling back on unnecessary spending, just in case. How much or how fast you do it will depend on your situation — how your budget and income are doing now, how much debt you have, how healthy your savings are, and so on.
If you think your income is at risk, you might want to start making more drastic cuts to your budget for the near future. Review your fixed costs and see if they’re all as low as you can get them right now. (For example, it’s probably not a good time to upgrade to a more expensive apartment — if you can help it in this market, lolsob.) Should things take an even more serious turn, fixed costs are the hardest to cut out or trim down. Streamlining them is the best way to keep your budget as flexible as possible, even in hard times.
But if you’re still in a good place, “scaling back” your spending might just mean starting to make some smaller trade-offs, which you can identify using your core values (hopefully, you also used those to build your budget in the first place). Don’t feel like you need to cut all the way back to rice and beans unless it’s absolutely essential, though — there’s a difference between budgeting smart and budgeting so hard you feel miserable, burn out, and end up chucking the budget out the window.
With that extra room you’ve carved out of your budget, you’ve got two next steps: paying down as much credit card debt as you can to avoid those high interest rates (especially if they get even higher in the future!), and / or squirreling away a bit more savings than usual (but more on that in a minute). If you’re wondering which to do first, we’ve got some thoughts on that.
How to adjust your savings
If you’re new around here, you should know at Ellevest, we’re big fans of emergency funds. As in, you should have one. Our general suggestion is to save up three to six months’ worth of take-home pay — maybe even more like nine if you’re self-employed.
We recognize that can be a huge (anxiety-inducing) chunk of change. So if you’re just starting, aim for one month’s worth of take-home pay — if you’re paid biweekly, that’s just two paychecks’ worth. Then keep going until you have that full rainy day fund built up.
If you already have an emergency fund squared away, first of all: Heck yeah. Now think: Is the amount you have saved enough to make you feel secure, given current economic conditions? If not, how much extra you should save depends on you, but here are some starting points. (And here’s some help thinking through what might qualify as a financial emergency.)
Then there’s the question of where to save. The bad news first: Inflation essentially cancels out (or swallows) any interest you may accrue on a savings account balance — in fact (and especially if things continue like they have been), you’re likely losing purchasing power on any funds you keep in cash. Still, for emergency funds, the priority is to make sure that cash is there for you when you need it, not to maximize interest. So look for the highest interest rate available, but no matter what, we strongly recommend using an FDIC- or NCUA-insured savings account.
Beyond your emergency fund and the money you’ll need to pay your bills, you should also use a savings account for money you think you might need in the next two years. Otherwise, our general advice is to minimize the amount of excess liquid cash you have on hand — anything further out than two years can be invested (for that advice, keep reading 👇).
How to adjust your investing (or not!)
First and foremost: Unless you literally cannot pay your bills or need to use the money within two years, Do. Not. Pull. Your. Money. Out. OK? Don’t do it! Here’s why: Any investment you think you’ve “lost” isn’t permanently lost until you sell that asset (aka “realize” the loss). Same goes for moving your money out of stocks and into a different type of investment.
If you leave your money where it is, you still have the opportunity to recover if the market goes back up (which it has done, eventually, in the past). But if you take it out? Bye-bye, possible future gains! The key thing to remember is that your investment account “balance” is really just a record of the changing prices of what you have, should you choose to sell (withdraw) right now. But those prices change all the time — and historically, the stock market has averaged 10% gains since 1928.
Another thing to consider, specifically about your retirement accounts: If you withdraw money before age 59½, you’ll be subject to a ton of penaltie$ — it’ll be counted as income when tax time rolls around, plus it’ll come with a 10% additional penalty for early withdrawal. When all is said and done, that could mean you’re paying as much as half of your account value in taxes alone.
That’s why our best advice throughout periods of volatility — yes, even recessions — is to trust the process and keep investing. Especially for retirement. Don’t try to time the market — there’s no way to know if we’ve hit the bottom until we’re already past it! Plus, when markets are down, you might hear people refer to stocks as being “on sale” because prices are low. (Yes, as in, “buy low, sell high.”) That said, if you need to slow down your deposits for disposable-income reasons, it may make sense to take a look at your investing goals’ timelines and push them out a bit, if possible.
If you have a lump sum that you can do without for two or more years, just investing it might be the way to go. But again, there’s simply no way to know what will happen next in the markets. If you’re nervous, or if markets are simply too volatile, dollar-cost averaging — that is, investing consistent amounts of money over consistent intervals of time — is one strategy you might opt for to help manage that risk.
Finally, the smartest kind of investing, in our opinion, is portfolio diversification — spreading your investments across multiple asset classes to mitigate risk. What affects one part of the market(s) may not affect the others (or at least, not as much, as we’ve seen with bonds lately), and diversification ensures that you’re not betting everything on one proverbial horse. A good investment advisor — cough, like Ellevest, cough — will do this for you.
Stay steady, stay ready
Uncertainty in volatile times often creates even more volatility, be it on a market level (see: when everyone panics and sells, causing markets to dip) or an individual level (see: when you buy $250 worth of groceries to “hunker down” through a storm that lasts exactly one day — and can’t afford those Beyoncé tickets later that month). That’s a key thing to keep in mind as the economic waves get choppier out here — panicking about scary times can make things a lot worse.
So let us stress once more, with feeling: No one knows for sure what will happen in the future. And while things feel rocky, panicking will only make it worse. Stick to your smart money moves, and take comfort in the fact that you’re doing everything in your power to stay afloat. We see you — you got this.
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The practice of investing a fixed dollar amount on a regular basis does not ensure a profit and does not protect against loss in declining markets. It involves continuous investing regardless of fluctuating price levels. Investors should consider their ability to continue investing through periods of fluctuating market conditions.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
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