How to Prepare for a Downturn
If you are like many Americans, stock market fluctuations do not necessarily prevent you from sleeping at night – only about half of us invest in the stock market at all, and of these, “the richest 10 percent of holders” in the United States own 85 to 90 percent of stocks. ” – reports the Washington Post . Rather, what really matters to you is the thought of a weakening labor market. The fall in the S&P does not mean as much as the layoff of your company’s employees.
While it’s hard to predict what will happen in the near future, the good news is that the Federal Reserve at least expects unemployment to continue to decline in 2019 rather than increase. But if the economy goes into a downturn, what should you focus on next year to prepare your family’s finances besides saving money ?
Jonathan Clements, founder and editor of Humble Dollar , has a few suggestions.
Contribute to the Roth IRA
Financial experts love the Roths, and if you are eligible to contribute, you should do so for a number of reasons. All of them are outlined here . But as Clements writes, the economic uncertainty adds another catch: your Roth can be used as a kind of emergency fund, because you can withdraw your contributions (but not profits) at any time without penalties. This means that if you start contributing now and then lose your job and need funds, you can easily access some of the money that you couldn’t with a traditional IRA or 401 (k).
Pay off credit card debt
The Fed is raising interest rates , which means any debt you have is getting more expensive (weird how credit card rates go up immediately, but not savings accounts, hmm?). Paying off your debt should always be a priority, but it can become even more important if you lose your job and have to rely on your lines of credit to put you on hold for a short while.
Also, if you took out a loan from your 401 (k), paying off should be your top priority. If you do not lose your job and you have to return it, otherwise it will be treated as a distribution, and you should be paying taxes and penalties .
Rethink important financial decisions
If you’re worried about your job, now is not the time to take on new financial commitments. “For example, you can keep your current car for a few more years,” writes Clements. “If your job is in jeopardy, this is probably not the best time to take out a car loan or use your spare money to buy a new car. What if you still have debt for the last car you bought? “
Likewise, take stock of your current commitments and see if there is a way to reduce or simplify your work. Maybe you could make a few extra payments for the car now to reduce the burden on yourself in the future, unplug the cable, or start shopping at a less expensive grocery store.
These are just a few small steps you can take to prepare yourself and your family for potentially difficult times. If you are interested in other saving tips, we have a few here and here .
This post was originally published on 12/26/18 and updated on 8/14/19.