With inflation stubbornly high, the labor market losing steam, and stock market returns still volatile, now may be the time to fortify your financial plan against uncertainty ahead.
Indeed, the Conference Board forecasts that U.S. economic growth will buckle under the weight of rising consumer debt and high interest rates, leading to a “very short and shallow recession” in early 2024 before rebounding in the second half of the year.1
- Create an emergency fund
- Pay off debt
- Rebalance your portfolio
- Get permanent life insurance
- Look at recession-proof jobs
Here’s a closer look at each of these moves.
Create an emergency fund
An emergency fund is essential to financial stability. Without it, you might be forced to rely on high-interest credit cards or liquidate assets in unfavorable market conditions in the event of a job loss or unexpected expense (think medical bills or a car repair).
That’s a lesson many Americans learned the hard way during the COVID-19 pandemic. Yet, the savings shortfall persists.
A 2023 Bankrate.com survey found that 60 percent of Americans) said they’re behind on their emergency savings, and 38 percent of them said they feel significantly behind.ll.2 (Related: 5 financial moves if you lose your job)
Financial professionals, including Jared Morgenstern with Coastal Wealth in Boca Raton, Florida, recommend having at least three to six months’ worth of living expenses set aside in a liquid, interest-bearing account, such as a savings account. Those with income instability, significant debt, or relying on a single income should have more — up to a year’s worth of living expenses. (Learn more: Don’t have an emergency fund? Get one)
Your financial professional can help you determine what size financial safety net is appropriate for you.
Pay off debt
Debt creates financial drag, which prevents borrowers from reaching other financial goals, like saving for emergencies, their retirement, or a down payment on a house. High-interest credit card debt, which often carries interest fees of 18 percent or more, also forces borrowers to overpay for consumer goods.
For example, that $5,000 vacation you paid for with plastic would take four years (50 months) to pay off and cost an additional $2,360 in interest if you made only the minimum monthly payment ($150), assuming a 20 percent interest rate, according to the payoff calculator on CreditCards.com
The average credit card balance was $5,910 in 2022, up 13 percent from $5,221 in 2021, due largely to rising interest rates.3 (Learn more: How interest rates work and affect you)
As you create a plan to rid yourself of debt, financial experts suggest a triage system. Pay down your highest-interest credit card first, while making minimum payments on your other debt obligations. After the first card is paid off, apply those extra payments toward the next highest-interest debt and continue until your balance is zero.
You can eliminate debt faster if you increase your income through a part-time job, reduce your expenses (consider taking on a roommate or canceling your gym membership), and stop making new purchases on credit.
Keep in mind that not all debt is bad, especially debt tied to a potentially appreciating asset. For example, student loans can boost your earnings potential and a mortgage loan on a house can potentially help you build wealth. (Learn more: Good debt versus bad debt)
Rebalance your portfolio
If you work with a financial professional, chances are you’ve already created a portfolio that aligns with your financial goals and risk tolerance.
But the markets ebb and flow and, over time, certain asset classes outperform (or underperform) their peers. To maintain your original asset allocation or make changes to your investing style, it is necessary to review your portfolio regularly and rebalance as needed. (Related: Understanding your risk profile)
Either be done by selling some of your high-performing investments that have become overweighted in your portfolio and buying more conservative securities, such as Treasury or municipal bonds, that may help reduce risk in your portfolio. It can also be done by allocating additional funds to stocks or bonds to bring your investment strategy back in line. (Learn more: Fix your mix: Asset allocation)
Morgenstern said age plays an important role in asset allocation.
“Younger clients have more time to recover from downturns in the market than older clients,” he said, noting that they can typically assume greater risk with a higher percentage of equities (stocks) in their portfolio. “For older clients, we typically recommend investments with some sort of downside protection (such as Treasury bonds or conservative stocks), or a guaranteed income annuity when the market is turbulent. They don’t have as much time to make up for market downturns.”
For retirees, said Morgenstern, these types of protected investments are typically paired with actively managed equity accounts to ensure that they maintain growth potential.
Diversification in your portfolio can help reduce performance swings because some of your assets will zig while the others zag. Generally, that requires an age-appropriate mix of domestic and international large-cap, mid-cap, and small-cap stocks. Exposure to different industries and asset classes (bonds, stocks, real estate) can also potentially help balance your risk profile.
Another important perk: A portfolio that is properly allocated and diversified may also help you avoid the costly impulse to buy high when the markets are up and sell low when Wall Street suffers a slide. (Related: http://Winning with a steady investment strategy)
Permanent life insurance
Financial protection comes in many forms, including permanent life insurance.
Such policies, which may be either whole, variable, or universal life insurance, serve the primary purpose of providing a death benefit to your loved ones in the event that you should pass away prematurely. But they also build cash value as premiums get paid.
That cash value grows over time and can be used for any purpose during your lifetime, like paying college tuition, supplementing your retirement savings, or covering an emergency expense.
Whole life policyowners who own a participating policy are also eligible to receive dividends, which can be used to increase the size of their death benefit or to grow their cash value. But dividends are not guaranteed and are based on the life insurance company’s operating performance, including claims, expenses, and investment earnings.
During market downturns, it may be possible to use a policy’s cash value for living expenses, preserving investment principal to potentially capitalize on an eventual market recovery. (Learn more: How life insurance can help you in your retirement)
That said, borrowing from your life insurance cash value has consequences. Not only does it increase the chances that the policy will lapse, but it also reduces the cash value and death benefit, which may result in a tax bill if the policy terminates before the death of the insured.
A financial professional can help you determine whether a permanent life insurance policy is right for you.
Look at recession-proof jobs
If you found yourself out of work during the COVID-19 pandemic, you were not alone. Some 9.6 million Americans lost their jobs (at least temporarily) during the early days of the lockdown.4
While a global pandemic may be an atypical threat for most workers, it did raise awareness of career vulnerability. Indeed, the retail, restaurants, entertainment, and service industries were by far the hardest hit.
To protect your paycheck going forward, you might consider a two-pronged approach:
- Upskill: You can potentially improve your job security by learning new skills through online training, earning certifications, and embarking on continuing education. You can also volunteer to take on more responsibilities with your current employer.
- Recession-proof your career: Some industries are simply more stable than others. Utility workers, teachers, grocery store clerks, auto mechanics, public transportation workers, and public safety workers are always needed regardless of economic conditions. Demand for lawyers, health care professionals, IT professionals, funeral home directors, pharmacists, and accountants also remains constant, according to CleverGirlFinance.com. If unemployment is high in your current job, consider switching to a different industry.
Career consultants, however, urge working adults to consider the cost implications of changing jobs or careers. It’s most cost-effective to simply transfer your experience and expertise to a different industry, rather than going back to college for a new degree or starting over at an entry-level position in a different field. (Learn more: Making a career change and the cost implications)
Economic uncertainty is a fact of life. There’s no crystal ball to show us what lies ahead, but we do know the steps we can take today to help insulate our financial affairs for tomorrow.
Those include creating an emergency fund, paying down debt, rebalancing our portfolio, purchasing protection and building cash value through permanent life insurance, and recession-proofing our careers.
Discover more from MassMutual…
This article was originally published in November 2021. It has been updated.