4 key money moves in an uncertain economy, according to advisers

4 key money moves in an uncertain economy, according to advisers

By most measures, the new year is off to a good start. However, both economists and business leaders predict that tougher times are ahead for the market and the economy.

So far this year, the S&P 500 and Dow Jones Industrial Average have advanced 4% and more than 2%, respectively, while the Nasdaq Composite is up 5.9%.

However, inflation remains a persistent problem. The consumer price index for December showed prices cooled 0.1% from the previous month, but were still 6.5% higher than a year ago.

“The easing of inflationary pressures is evident, but this doesn’t mean the Federal Reserve’s job is done,” said Greg McBride, chief financial analyst at Bankrate.com. “There is still a long way to go to get to 2% inflation.”

Although the Fed’s battle against inflation is succeeding, it will come at the price of a hard landing for the economy, according to a CNBC survey of chief financial officers. Economists have been forecasting a recession for months, with most expecting it to start early in the year.

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To make the most of the current climate, advisers recommend a few key money moves in the coming year.

Here are your top four strategies for protecting yourself from stock market volatility, rising interest rates, and geopolitical risk, not to mention fears of an impending recession.

1. Pay off high-interest debt

“This is a good time to pay off some of those outstanding higher-interest loans,” said David Peters, a financial adviser and certified public accountant at CFO Capital Management in Richmond, Virginia.

Credit card rates, in particular, are now over 19%, on average, an all-time high. Those annual percentage rates will also continue to rise, as the Fed continues to raise its benchmark rate.

“For so long we’ve been pretty spoiled in the markets,” Peters said. In some cases, it used to make financial sense to take advantage of cheap credit for a larger purchase, rather than withdraw money from a savings or investment account. Now, “we need to reverse our thinking.”

Consider this: “If you have a 6% interest rate loan and you pay down the principal on the loan, that’s about the same as getting a 6% return on your money in the markets,” he said.

If you currently have credit card debt, “take one of the low or zero percent balance transfer offers,” McBride advised. Cards that offer 15, 18 and even 21 months of no interest on transferred balances are still widely available, she said.

2. Put your cash to work

Once you’ve paid off the debt, Peters recommends setting aside some money in a separate savings account for emergency spending.

“Online savings accounts can be a way to earn money at a time when other investments may not be performing well,” he said.

Yet while some of the highest-yielding online high-yield savings accounts are now paying out more than 3.6%, according to DepositAccounts.com, even that won’t keep up with the rising cost of living.

Ted Jenkin, CEO of Atlanta-based Oxygen Financial and a member of the CNBC Advisory Council, recommends buying relatively risk-free short-term Treasuries and scaling them to ensure you get the best rates, a strategy that involves holding bonuses all the way. of his term.

“It’s not a great return, but you’re not going to lose your money,” he said.

Another option is to buy federal I bonds, which are almost risk-free, inflation-protected assets.

I bonds currently pay 6.89% annual interest on new purchases through April, down from the 9.62% annual rate offered from May through October 2022.

The downside is that you can’t call the I bonds for one year, and you’ll pay the last three months of interest if you cash them in before five years.

3. Boost retirement contributions

Once you’ve paid off high-interest credit card debt and saved some money, “putting more into your retirement accounts right now can be a great move,” Peters said.

You can defer $22,500 in your 401(k) by 2023, up from the $20,500 limit in 2022. The new provisions in “Secure 2.0” will further expand retirement plan access and open up more opportunities to save in the future, Peters said , including making it easier for employers to make contributions to 401(k) plans on behalf of employees who pay off student debt.

Even if you’re balancing contributions with short-term goals, you still need to contribute enough to get the most out of company matches, he added, which is like getting an extra return on your investment.

4. Buy the dip

“Investors willing to take additional risk might consider ‘buying the dip’ by looking at sectors that hit hardest and may now be undervalued,” said certified financial planner Bryan Kuderna, founder of Kuderna Financial Team in Shrewsbury, New Jersey. , and the author of the forthcoming book, “What Should I Do With My Money?”

“Technology took it head on, Amazon lost half its market capitalization, if there was too big of a pullback there may be an opportunity,” he said.

Kuderna recommends dollar cost averaging, which helps smooth out price fluctuations in the market. Investing at set intervals over time can also help you avoid emotional investment decisions.

However, a long-term horizon is critical to this kind of approach, Kuderna added, which means being prepared to leave that money alone.

“The general advice I have is not to watch the market too closely, that’s when people start to get excited and that’s when mistakes happen.”

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