Between pandemic shutdowns, health concerns, controversial politics, and hyperinflation with soaring prices, many US investors may feel they are losing control of their situation. Add to that a bear market for stocks, with a potential recession looming.
To stay flexible, we can focus on taking care of our physical, mental and financial health – and our families. We can act now to prepare for tough times in the short term and protect our long-term financial choices. We can find a manageable balance between enjoying our money now and saving for what we need later.
There is some good news. Despite the fall in the US stock market, the bear markets are temporary. While every bear market is unique, they tend to last 11 to 12 months on average and then bounce. Since 1957 Standard & Poor’s 500
gain At a rate of 2.9% after one month, 5.5% after six months, and 23.9% after one year after the start of a bear market. Bear markets provide opportunities For purchase deals and tax administration.
If a recession hits the US, it will also be temporary. Since 1945, the National Bureau of Economic Research has documented 13 recessions, and they are It lasted an average of 10.3 months. The last great recession from 2007 to 2009 lasted for 18 months.
While economists are in a “wait and see” mode regarding a recession, it’s time to act and prepare for the potential effects. Here are five ways to manage:
1. Know your financial standing, starting with cash flow: Do you earn enough money per month to cover your expenses? Income minus expenses equals cash flow. When your income exceeds your expenses, you have a positive cash flow. You need positive cash flow to pay off debt or increase savings. Is cash flow positive or negative? You can improve your cash flow by increasing income, decreasing expenses, or a combination of the two.
“ Take temporary measures to boost your finances by paying off credit balances or increasing your emergency fund. “
2. Increase your income: If you’re under financial stress, improve your cash flow by taking extra shifts, getting a second job, or building your side business. Given that recession is possible, diversifying your sources of income provides support if you lose your basic income. You don’t have to do this forever. Take temporary measures to boost your finances by paying off credit balances or increasing your emergency fund.
3. Cut your expenses with an open mind and a critical eye: If you have negative cash flow and are concerned about your finances, look closely at cutting costs. With inflation, you may take advantage of savings to cover increased costs. This is not sustainable.
Look at all aspects of your life, starting with housing. How can you reduce your monthly housing costs? Think about temporary or permanent possibilities. Can you rent a portion of your home for mortgage support and utilities? Selling your home and excess possessions for a smaller location or less expensive location? Working remotely in a less expensive country?
Next, look at transportation and food. Can you sell your car, or exchange your new car for a less expensive model, without paying a car? carpool more? Preparing food weekly to avoid ordering takeout? While some of these decisions are not easy, especially if you have children, taking proactive and creative measures can provide additional savings and peace of mind.
4. Find a balance between enjoying your money now and saving for future needs: Life is more than hard work now to enjoy later. Living today with saving for tomorrow is a balance with trade-offs. Visit this café if it helps you all day – and if you have the income to cover expenses. Want to take a family trip? Awesome, go and have fun if you have the means. Or enjoy low-cost local activities with family and friends, and apply your accommodation savings toward a future goal such as funding your retirement account. Making memories doesn’t require fancy vacations and fancy restaurants.
5. Use the bear market to improve your tax positionA bear market is the perfect time to convert a taxable IRA to a Roth IRA. Let’s say you contributed $6,000 to your traditional IRA in 2020. You bought 60 shares of an ETF or mutual fund for $100 each. In this bear market, the stock is now at $75 per share, and your total investment is $4,500. Although difficult to bear, this is an opportunity.
When you convert a traditional IRA to a Roth IRA, you pay taxes on the present value of converting your portfolio into tax-free assets. Roth withdrawals are tax-free, unlike a traditional IRA. By converting now, you pay less tax on the new $4,500 value instead of the original cost.
In addition, you can lower your tax bill by selling discounted stock to record a loss. Let’s say you recently sold a rental property that rose significantly. You expect a high tax bill on this sale. Knowing this, you can sell the stock at a loss to offset the taxable property gains.
Or suppose you invest $30,000 to buy 500 shares in a small ETF at $60 per share. The shares are now $45 per share, for a total value of $22,500. You sell it for a loss of $7,500, which is a line item on your 2022 tax return. You can then reinvest the $22,500 in a similar ETF (also twice its price) to stay in the market while still receiving tax benefits.
The economy and the market, by cycling, take us on unpredictable road trips. This time, the end isn’t quite in sight, but that too will pass. By taking proactive and creative management actions during this course, you will be better prepared to meet your current needs and protect your long-term financial health.
Michael Jarry is a certified financial planner who heads up Yardley Wealth Management, LLC in Yardley, Pennsylvania. He is the author of two books, “The Smart Person’s Guide to Financial Planning and Investments: A Simple, Straightforward Approach to Understanding Your Personal Finance,” and “Separate Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner.”