Jill On Money: The upside of a downturn
With prices high and recession fears swirling, Americans are nervous. Instead of feeling helpless, now is a good time to highlight six potential upsides 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 tossing and turning and getting a good night’s sleep.
So, while the economy is still growing, make sure that your emergency reserve fund can cover 6-12 months of living expenses. If you’re already retired, increase it to 1-2 years’ worth of expenses, to avoid being forced to sell assets at lower levels just to pay the bills.
Keep this money in an accessible savings, checking, or money market account. It should be a little easier to make the leap into safe stuff now that the Federal Reserve has increased short-term interest rates.
2. Reducing credit card (or any high interest) debt may be the best investment of 2022. The idea of paying down a 15-20% credit card balance is even more compelling when financial markets are in disarray.
Instead of being lured into thinking that you will make more by investing than paying down debt, you will find that the guaranteed (and risk free) return that debt pay down delivers is not just good for your balance sheet, it will likely end up being your best investment of the year.
3. Dollar cost averaging makes you bold. It’s tough to be brave about investing amid a market collapse. That’s why putting a set 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 would really prefer to stash your cash under the proverbial mattress.
4. Roth conversions are more compelling. If you have a traditional (pre-tax) retirement account, market losses may make a conversion into a Roth a little less burdensome. As an example, if the account was worth $10,000 at the beginning of the year and is now worth $7,500, a 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-retirement funds available to pay the tax due.
Roth assets grow tax-free and when you retire and withdraw the money, there will be no tax due. Because Roth plans are not subject to Required Minimum Distributions (RMDs), you can use them to help control future taxation of Social Security benefits and/or increased costs of Medicare, which are income tested.
5. Your job may be a ballast against uncertainty. The current labor market remains strong, despite reports of some former growth companies pulling back on hiring.
In fact, there are still more than 11 million job openings and in many industries, bosses are making concessions to keep existing workers happy.
That said, if a slowdown is coming, consider up-skilling yourself, either through free platforms, or see if your company will foot the bill for a certificate program. Don’t forget to spend time on your network so that it can be activated if your situation changes.
6. Side hustles could come in handy. 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 bit of money, while also being a way to channel creative energy. Many who idled these projects should consider firing up their side hustles to bring in extra income and to exert some control over their financial lives.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected] Check her website at www.jillonmoney.com.