Anyone who expected inflation to have peaked by now was in for a nasty surprise last week. The most recent report showed that prices rose 8.6% in May from a year ago, the fastest pace in 40 years.
Add to this falling stocks, rising interest rates, and global economic problems caused by Russia’s invasion of Ukraine, and it’s understandable that people don’t feel too good about the economy, even though the job market remains strong.
So if you’re looking for ways to protect yourself financially while making the most of what you have, here are some options to consider.
Get a new job now
With a very low unemployment rate and many job openings, the job market remains an ideal place for job seekers. But if there is a recession, that could change quickly. So take advantage while you can.
“If you’re not working, or looking for a better position, now would be a good time to take advantage of the great strength in the job market and secure a position,” said Florida Certified Financial Planner Mari Adam.
Take advantage of the real estate boom
If you’ve been hesitating about selling your home, now may be the time to take the plunge.
The housing market is in full swing, with house prices up almost 15% year-on-year in April and rents up almost 17%.
Meanwhile, mortgage interest rates are now about 2 percentage points higher than they were earlier this year, making a home much more expensive to buy and that may dampen demand.
“I would suggest to anyone planning to put their house on the market to do so immediately,” Adam said.
Home loans: lock in fixed rates now
If you’re buying a home or refinancing your debt, lock in the lowest fixed rate available as soon as possible.
That said, “don’t jump into a big purchase that doesn’t suit you just because interest rates might go up. Rushing into buying a high-value item, like a house or car, that doesn’t fit your budget is the ingredient.” perfect for a disaster, regardless of how interest rates move in the future,” said Lacy Rogers, a Texas certified financial planner.
If you already have an adjustable rate home equity line of credit and used part of it for a home improvement project, ask your lender if they would be willing to lock in rates on your outstanding balance, thus creating a home equity loan fixed-rate mortgage, suggested Greg McBride, chief financial analyst at Bankrate.com.
If that’s not possible, consider paying off that balance by taking out a Home Equity Line of Credit (HELOC) with another lender at a lower promotional rate, McBride said.
Cover your short-term cash needs
Having liquid assets to cover yourself in the event of an emergency or sharp market declines is always a good idea. But it’s especially crucial when you’re dealing with big events beyond your control, like layoffs, which often spike during recessions.
That means having enough money set aside in cash, money market funds, or short-term fixed income instruments to cover several months of living expenses, emergencies, or any large and anticipated expenses (for example, a down payment or college tuition).
This is also advisable if you are close to retirement or are already retired. In that case, you may want to set aside a year or more of living expenses that you would normally pay for with withdrawals from your portfolio, said Rob Williams, managing director of Financial Planning, Retirement Income and Wealth Management at Charles Schwab. This should be the amount you would need to supplement your fixed income payments, such as Social Security or a private pension.
Additionally, Williams suggests having two to four years in lower-volatility investments, such as a short-term bond fund. That will help you weather any market crash and give your investments time to recover.
Credit cards: minimize fees
If you carry balances on your credit cards, which often carry high variable interest rates, consider transferring them to a zero-rate balance transfer card that locks the interest rate to zero for 12 to 21 months, McBride suggested.
“That protects you from rate hikes for the next year and a half, and gives you a clear path to pay off your debt once and for all,” he said. “Less debt and more savings will allow you to better weather rising interest rates, and is especially valuable if the economy deteriorates.”
If you don’t transfer it to a zero-rate balance card, another option might be to get a personal loan at a relatively low fixed rate.
In any case, the best advice is to do everything possible to pay off balances quickly.
Rebalance the portfolio if necessary
It’s easy to say that you have a high risk tolerance when stocks soar. But you have to be able to withstand the volatility that investing inevitably brings over time.
So check your holdings to make sure they still fit your risk tolerance for a potentially rockier path.
And by the way, rebalance your portfolio if after years of gains in the stock market there are any overweight areas. For example, if you’re now too heavily weighted in growth stocks, Adam suggested reallocating some money into slower-growing, dividend-paying value stocks through a mutual fund.
Also check that you have at least some exposure to bonds. Although inflation has caused the worst quarterly return on high-quality bonds in 40 years, don’t write them off.
“In the event of a recession as a result of the Federal Reserve aggressively raising interest rates to quell inflation, bonds are likely to fare well. Recessions tend to be much kinder to investors.” high-quality bonds than stocks,” Bennyhoff said.
Find out what “losing” money means to you
For example, if you keep money in a savings account or certificate of deposit, inflation is likely to outpace any interest you earn. So while you keep your capital, it loses purchasing power over time.
On the other hand, if preserving capital for a year or two is more important than risking losing it, which can happen when investing in stocks, that inflation-based loss may be worth it because you’d be getting what Bennyhoff calls a ” profitability easy to obtain.
But for longer-term goals, calculate how willing you are to risk to get a higher return and avoid inflation eating into your savings and earnings. “Over time, you’ll be better off and more secure as a person if you can grow your wealth,” says Adam.
Keep calm. Do the best you can. Then “let it go”
Reports in the news about rising gas and food prices or talk of a possible world war are disturbing. But don’t get carried away by the news. Building financial security over time requires a cool, steady hand.
“Don’t let your feelings about the economy or the markets sabotage your long-term growth. Stay invested and disciplined. History shows that what people, or even experts, think about the market is often wrong. The best The way to achieve your long-term goals is to keep investing and maintain your allocation,” Adam said.
During the downturns of the last century, stocks tended to recover faster than expected at the time, and they did well on average over time.
For example, since the financial crisis erupted in 2008, the S&P 500 has returned an average of 11% per year through 2021, according to data analyzed by First Trust Advisors. The worst year of that period was 2008, when the shares fell 38%. But in most of the years that followed, the index posted gains. And four of their annual earnings ranged from 23% to 30%.
“If you’ve built a properly diversified portfolio that fits your time horizon and risk tolerance, the recent market downturn is likely to be a mere blink in your long-term investment plan,” Williams said.
It is also important to remember that it is impossible to make perfect decisions, since no one has perfect information.
“Gather data. Try to make the best decision based on that data plus your individual goals and risk tolerance.” Adam said. Then he added, “Let it go.”