Editor’s Note: This story is from Wealthramp.
You can expect your latest quarterly 401(k) statement from your employer any day, showing the current value of your life savings, and you probably assume that the stock and mutual fund portions of your savings have declined in value since your last statement.
With inflation much higher than normal, interest rates rising and the economy possibly headed for recession, it’s no surprise that your investments would be affected.
But for the first time, in addition to your current 401(k) balance, companies are showing projections that illustrate what your flat-rate savings as monthly income might look like after you retire. These numbers may be lower than you thought.
What’s next? As the Fed tightens in a slowing economy, the risk of a recession is high, and even a modest slowdown in economic growth could last for months or years.
Telltale signs of a recession include when retail sales fall, manufacturing slows, companies stop hiring, and more people either lose their jobs or are laid off.
As alarming as the news may seem, recessions are part of the normal business cycle. Instead of reacting, this is a good time to reconsider your financial plan in order to position yourself for success.
Whether you manage your finances yourself, or work with a trusted financial advisor to help you manage some or all of your portfolio, here are some key steps you should take now to help protect your finances during tough economic times to keep order.
1) Keep your credit score high
In a time of high inflation, it costs more for everyone to borrow money, regardless of their credit rating. However, people with lower credit scores will suffer even more. Lenders charge fewer fees to borrowers who have demonstrated they will repay loans on time as agreed.
Banks use your credit score as a handy way to see what kind of borrower you are. If you’ve shown a pattern of late paying your debts over time, lenders will be wary of lending you money.
The shorthand way of measuring credit history is your credit score — a low one means lenders are worried you won’t repay them. To accommodate this risk, lenders charge more for lending to dubious borrowers in the form of higher interest rates.
This is not the time to let your credit rating falter. If you need to borrow money, you should do so at the lowest possible interest rate, reserved for those with a strong credit score of over 700. If you have credit card balances year after year, have you looked at the interest rate you’re paying? A typical credit card charges you over 25% in annual interest.
For example, imagine you bought 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, that’s like adding $2,500 to what you paid for the table and chairs.
2) Maintain your cash reserves
It’s important to get to the point where you know that ideally you have six to 12 months of cash in an accessible account for emergencies and unexpected expenses.
In a recession, this reserve fund becomes even more important in case you lose your job or a major unexpected event happens to you and your family. If you have enough savings cushion, you sleep better.
The downside is that banks don’t pay much into their savings or money market accounts, but the upside is that you can access money instantly without having to sell potentially losing stocks to raise money when the market falls.
It also gives you the freedom of knowing that you don’t need to borrow when interest rates rise. It seems unfair that banks are raising lending rates quickly and interest rates on savings accounts much more slowly, but the financial security that comes with liquid cash reserves is worth it.
The best way to put extra money aside is to make lifestyle choices 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 saw inflation hit 8.6% – it means you pay more but get nothing in return. An inflation rate of almost 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, as stocks tend to grow faster than inflation over time.
If you are unsure how to construct a diversified portfolio designed to protect and grow your money, this is where an established, independent and 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 interests can be overwhelming.
This is 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 will not receive pushy sales calls from them. If you’re ready to watch your best advisors play, start now.
Take From The Experts – Investing is the tortoise, not the rabbit. Vanguard Group’s John Bogle said investing should be boring; Investment guru Ben Stein asks what’s wrong with the average; Billionaire Warren Buffett never gambled.
Buffett made his billions through diligent, consistent value investing. He missed the best moment to join Apple (AAPL). To date, he has not yet invested in Tesla (TSLA). He doesn’t understand Bitcoin and doesn’t want to learn it. In his entire investing career, he has rarely had a blockbuster win. So how did he amass so much wealth? Aside from investing carefully, an often-overlooked reason is that Buffett, 92, has lived a very long life.
4) Find inflation hedges
Another tactic used during a recession is to choose assets that act as inflation hedges for long periods of time. Gold and commodities are the short-term investments of choice 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 hedging only about 5% to 10% of your portfolio. When trying to beat inflation, one of your best tactics is to fully diversify your portfolio.
That doesn’t mean randomly picking exchange-traded funds in 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 consult a financial advisor who can look at your portfolio and help you ensure it is diversified.
5) Refresh your CV and increase your skills
Unemployment in the US is currently at an all-time low. Whether superficial or deep, a recession often results in companies laying off employees. The best way to protect yourself from losing your job and to ensure that you manage to find a new job if you should, is to make yourself as valuable as an employee as possible.
If your current company offers an apprenticeship pay, take advantage of that benefit and work towards a degree or certification that can increase your future income. There are also low-cost or free training courses that you can pay for yourself to improve your resume.
Document your accomplishments at work to turn a standard resume and cover letter into a resume that will help you stand out and get the right attention. And stay closely connected to your professional and personal network.
Actions to be taken today
As you take defensive measures to protect yourself and your family from a recession, decide whether you want to do it yourself using digital tools or work with a rigorously vetted, fee-based fiduciary financial advisor who works just for you and not as a brokerage agent or insurance company. If you are about to retire, choose a trustee who has the expertise and specializes in retirement income planning. They can help you:
- Create a tax-oriented plan yourself or with their advice.
- Develop an investment strategy that you can stick to over the long term.
- Develop ways to pay off high-interest debt.
- Top up cash accounts.
Before making any major financial decisions, consult a professional who can help you.