I asked a financial advisor to review my portfolio and share 6 ways to protect my finances against recession before it's too late

I asked a financial advisor to review my portfolio and share 6 ways to protect my finances against recession before it’s too late

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  • I shared my finances with an advisor to get his advice on preparing for a recession.
  • He said to make sure my money is making money, get proper insurance, review my investment strategy, and consider a Roth IRA.
  • He also advised spending less than I earn and planning ahead for possible side hustle.

After spending most of my 20s making various financial mistakes, ranging from getting into debt to not investing, I spent my 30s being hyper-focused on managing my finances well.

But speaking of an impending recession hitting the US economy in 2023, I found myself nervous that all of my planning and financial goals could go to waste if I don’t do the right things now to protect my money at the future.

To make sure I’m doing everything I can to protect my money from the recession, I showed my financial portfolio to Certified Financial Planner Jeremy Keil, who shared six ways to switch strategies now to protect myself as much as possible. of a recession.

1. Make sure your money is making money

Because I don’t feel comfortable with my investment strategy and knowledge, a large part of my financial portfolio consists of cash that sits in my savings account.

Although Keil doesn’t think being so cash-rich is a mistake, because during a recession that cash can supplement my income if needed, he said there were missed opportunities to just leave the cash in n any type of savings account.

Action step: Keil recommends making sure I keep the money in a high-yield savings account that earns at least 3% interest, and pay attention to higher interest rates offered in future in d other banks.

It also says I should explore more CD options that offer high interest, with durations I’m comfortable with. Another option he recommended, which I did not explore, is to buy treasury bills. Currently, you can purchase these notes at an interest rate of 4.4% for a six-month term.

2. Get proper insurance policies

What may not be so obvious when it comes to protecting your finances against recession is making sure you have the right insurance policies.

“A recession means there’s less money around you,” says Keil. “Things that you would normally be able to get through, and even afford, could create even bigger problems.”

For example, Keil says, if you were sick or injured and out of work for a few months, you might be able to handle that financially if the stock market was up or your company was willing to work with you. But during a recession, everyone’s money is tighter, so illness or injury can be more costly without the right insurance in place.

Action step: As an entrepreneur and self-employed, Keil recommends that I take out disability insurance in case something happens to me that affects my ability to work. Also, as I am married and planning to have children in the near future, Keil also recommends that my husband and I consider a life insurance plan.

In addition to having a solid health insurance plan, Keil suggests looking at a plan that includes a health savings account.

“If you can, max out your HSA,” says Keil. “Not only does it help you cover the cost of a health emergency later on, but the money you put into this account won’t be taxed and can be carried forward each year if you don’t use it.”

Another strategy Keil mentioned is that if you have an HSA but can cover a health expense out of pocket, do so and keep the receipt. Later, if you need money from your HSA, you can get reimbursed for that health bill and withdraw that tax-free money from your HSA and put it back into your savings account.

3. Spend less than you earn

When it comes to planning for a recession, Keil says your expenses and income are the main factors that determine whether you’re prepared for a recession. “If you have a large financial commitment, like a mortgage or rent, those costs won’t change in a recession,” Keil says. “But if your income drops, your fixed expenses will stay the same.”

That’s why he says it’s so important to control what you can control, which is your expenses, especially your fixed costs.

Right now, I’m saving between 20-30% of my income each month. However, I fear that a recession will cost me clients and opportunities as an entrepreneur and freelancer.

Action step: Keil said to take inventory of all the fixed costs I have and see if there are any I can reduce, adjust or prepare to change if I have to during a recession. For example, some of my fixed costs include paying my rent, monthly health insurance premium, and utility bills (electricity, cables, etc.).

I started thinking of ways to consciously lower my electric bill each month (by not leaving the lights or air conditioning on when I’m away from home) and called my cable provider and d internet access to see if there was a lower tier plan I could downgrade to.

Since I can’t lower my current rent payment, I’ve found options to turn to in case my income is significantly reduced and I can’t afford to pay my current rate, such as researching areas cheaper places to move to once my lease ends in six months and I create profiles on sublet sites, just in case I need to use those platforms to find someone to take over my lease.

4. Diversify sources of income

As an entrepreneur and freelancer, the amount of money I make each month varies depending on projects, clients, and overall company sales. Because a recession could impact the amount of work I get, Keil suggested preparing now to launch additional income streams later if needed.

“The fastest way for a person to increase their income is to have a side hustle,” says Keil.

Even if you don’t have one now, he recommends starting to prepare to grab one if needed.

Action step“Invest in yourself,” says Keil. “Update your LinkedIn profile and resume, and start adding up the costs of a potential side hustle and save that money now.”

For example, Keil says that if you needed to earn some extra cash and decided to become an Uber driver, you might need to invest in renting a car (if you don’t have one), as well than auto insurance that covers you as a business. Setting aside or planning for these expenses now can help you when you are in dire straits and need a new source of income during a recession.

5. Review my investment strategy

Finally, when I showed Keil my investment portfolio, I mentioned that I didn’t know what to do with all of the individual stocks I had invested in during the pandemic, without doing research or having a strategy. Now that most of these stocks are down, I was worried that any change would cost me even more money.

Keil says a bear market gives people an opportunity to correct those investments, especially if your current strategy is making you anxious or isn’t one you’re comfortable with.

Action step“If you’re not going to beat the market, you might as well join the market and buy an index fund instead,” suggests Keil.

Since many of my individual stocks are down 15-20%, Keil shares that I probably won’t pay taxes when I sell most of these stocks (since they will be sold at a loss) and that I I’ll put the money in an index instead. funds, like the one that tracks the S&P 500.

If I change my investment plan and put the money in index funds instead, says Keil, it can take the emotion out of owning individual stocks. “When you have an index fund, you have a few hundred or thousand stocks, so you don’t feel as married to that index fund as you would with the performance of individual stocks, especially if they’re still falling. more during a recession.”

6. Consider a Roth IRA

As for investing and saving for retirement, I currently only do so through my SEP IRA, which Keil says is a good strategy, especially during my high income years. , because the money placed in this account reduces my taxable income for the year.

Action step: Keil also recommends opening a Roth IRA since withdrawals of contributions and earnings are tax-free once you turn 59½. Although the money you contribute to this account does not reduce your taxable income, you can withdraw any contributions you make to this account at any time tax-free. (Note that you must leave any income up to 59 1/2 to withdraw tax and without penalty.)

“Think of this as another version of an emergency fund,” Keil says.

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