2022 is wrapping up, and it’s been an interesting year for the markets and the economy. Between several interest rate increases, high inflation and market turbulence, many Americans are coming out of this year feeling stressed.
Unfortunately, the outlook for 2023 is also a bit rocky, and key indicators point to a recession sometime in 2023. During the Federal Reserve’s November meeting, officials stated that it was time to slow down the rate hikes, and that a recession in 2023 is likely.
The good news is that there is still time to get prepared before a recession hits. Here is what you can do right now to feel more confident in your finances:
Financial Prep for 2023: Increase Emergency Fund
It can be difficult to pull back on spending during the holidays, but this year it would be particularly wise to look carefully at your money situation. The jobs market is strong right now, but layoffs do happen during economic downturns. You don’t want to be caught off guard if that happens.
A typical rule of thumb for an emergency fund is that it should cover three to six months’ worth of spending. So if you’re feeling behind in that area, work on prioritizing it for 2023. Also, make sure your emergency fund is accessible, and have cash on hand in case you need it.
You should also take a look at your debts. What plans do you have in place to pay it down? Is there anything you could pay off now?
Have a Plan for your Portfolio
Economic downturns are a fact of life, and your portfolio will reflect that. It’s been awhile since we’ve had a deep recession, so you may have gotten used to seeing relative stability in your portfolio.
No one likes to see their investments take a hit, but it’s important to remember that a well-built portfolio is built for hardship. That’s why diversification is so vital; it helps your portfolio to make gains when it can, but cushion market blows when necessary. Stocks can help you earn more money, while bonds can offer stability when stocks are falling. I write more about this in my post, “Why Your Portfolio Needs Diversification.”
There are opportunities during market downturns, too. Roth conversions, for example, allow you to convert money from your IRA to your Roth IRA. Some companies also let you convert from a traditional 401k to your Roth 401k. The benefit of doing this is that you get more shares in the Roth before the market swings back up.
Another opportunity is to convert after-tax non-Roth contributions to your Roth 401k (like in a Mega Roth Conversion.) Just like with the Roth conversion, this would allow you to get more shares in a Roth before the market comes back.
Finally, you might want to sell funds in a taxable account at a loss. You can deduct up to $3k per year in loss, so you could sell out of a fund and then buy something similar. Just keep in mind that due to wash sale rules, you can’t buy that same stock for 30 days.
Prepare Your Mindset
The challenge going into 2023 is all the uncertainty. There are so many different ways the current situation could play out, so prepare for the worst, but hope for the best.
Have a backup plan in case you or your spouse loses your job, and be ready to change your spending habits. Take a look at all of your contingency plans in case your circumstances change. The goal is to feel prepared and know your options, so that if you do fall on hard times, you know what steps to take next.
Here are more resources for managing finances and investments during a recession:
How to Invest Your Way Through a Recession
Roundup: What to do when Markets are Down
Managing Your Money in Uncertain Times
About Michael
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