What Should You Consider During a Market Correction or Recession? (Part I)
Last week, the S&P 500 dipped into bear market territory (20% down from an all time high). Many people believe that a recession is right around the corner when you add in the market correction, rising interest rates, inflation and a return of student loan payments (maybe). Historically, it’s situations like these where people make the worst mistakes with their financial choices by letting emotions drive decisions. So what are some things you can proactively and methodically consider at this time with you personal finances?
In part one of this two part post, I’ll discuss topics of consideration around cashflow, assets, and debts. In part two, I’ll look over taxes and estate planning topics.
Cash Flow
Will your cash flow be tight?
Review your budget, that is your real budget, and look for places you can cut some unnecessary expenses. If you’re not honest with how you spend your money month to month, you’ll never get where you want to be financially. This is the primary key to make your money work for you vs you working for your money.
If you have a shortfall with your budget (i.e. more expenses than income), really consider how you’re going to come up with the money. Generally, try to avoid withdrawing from your IRA due to the large penalties that may exist if you’re not retired, and of course taxes. Hardship withdrawals may exist in your 401(k) if they meet certain criteria. These avoid the penalty, but not the taxes that may exist. Lastly, people often look to 401(k) loans, but you’ll just be adding a payment to a scenario where you already have too many payments. If it defaults, then you have taxes and penalties. Lastly, you may not be able to take another 401(k) loan unless the defaulted one is paid back in full.
If you’re really crunched, prioritize your biggest obligations and look to extend due dates, alter payment schedules, minimize fees, penalties, and any negative impact to your credit. You don’t want a short term mistake to wind up as a long term punishment on your credit report. If you’re in a real bind, call your lender and talk through options.
Do you need to review your emergency fund?
First, what does your emergency fund look like today? Is it just a number or did you come up with it in a logical way? Typically it’s recommended to have 3-6 months of living expenses in your emergency fund. In order to know this, you should go back to your budget and see what’s required to sustain your living expenses over 3 to 6 months and what expenses are not required. Focus on the required expenses to build up that fund. Are you starting at zero? Aim to get $1,000. It’s amazing the level of security that can bring when the “every day” unexpected expenses come up on us. Put this money in a separate account and do not touch it, unless an emergency arises!
Have you experienced a change in your job status?
If you were laid off, due to no fault of your own, you may be eligible for unemployment benefits.
If you voluntarily changed jobs, then you should review your new pay amount, taxes withheld, restructure your budget, and review employer benefits that may be helpful to you.
Were you planning to retire soon?
Review what your current situation looks like, in light of the market changes, and make sure you’re still comfortable to retire, or if you would like to work longer. If you’re working with a financial planner, request a meeting to discuss your situation so you can have a deeper analysis.
If you still want to retire and you’re concerned financially, consider reviewing your budget and reduce spending on the “extras” in the first few years of retirement. If you were planning to take a large vacation, buy a second home, etc., maybe you postpone a year. Your financial planner should be able discuss the impact of delaying these large purchases.
Are you taking a distribution from an investment or retirement account?
Consider taking distributions over a longer time period. Knee jerking and selling in a down market locks in those losses. By spreading them out, you may have a chance to ride the volatile market a bit more to your advantage.
Asset & Debt Issues
Do you have a mortgage or other debts?
Chances are, the window of opportunity may have closed to refinance at a lower rate, especially on mortgages. The Federal Reserve is focused on raising interest rates to fight the onslaught of inflation. If you have a vehicle or other debts, consider reviewing the rates and seeing if there are opportunities to save some money.
Do you want to rebalance your investment and retirement accounts?
Revisit your target asset allocation and your overall investment philosophy. Asset classes don’t always move in the same direction or as much together in tandem. Rebalancing allows you to take some of your money from investments that have done well (relatively) and put it towards those that haven’t (relatively) in your portfolio. Typically, you can think of taking a little bit of your out-performers and putting it into those that have fallen behind. It also helps to maintain your target risk level that you are desiring in a particular portfolio.
If you’re only holding onto an investment because you have a low basis (the cost of what you originally paid), you may want to review and see if the taxes are at a palatable level for you to sell some or all of it and minimize realized gains.
Always exercise discretion and discipline. Investing is a long-term mindset that requires prudent action with each and every move.
Do you have extra cash that is not earmarked for an upcoming expense?
Discuss with your financial planner and determine if you should consider investing to take advantage of the drop in the market. Again I’ll say: always exercise discretion and discipline. Investing is a long-term mindset that requires prudent action with each and every move.
Do you typically make contributions to a traditional IRA or Roth IRA?
Consider making these contributions sooner rather than later to take advantage of low valuations. There is not a single person on earth who can tell you with certainty which way the market will go next, but given the recent pull back, this is worth the thought.
If you’d like to discuss any of these topics as it relates to your current situation, please feel free to click the schedule appointment button at the top or bottom of this page!