Will the U.S. enter recession territory later this year or early next? It’s certainly possible.
The Federal Reserve has been moving forward with interest rate hikes in an effort to slow the pace of inflation. But that has the potential to force the economy into a downward spiral.
When borrowing rates get too high, consumers tend to spend less. That’s what the Fed is banking on. But if consumer spending declines to an extreme degree, it could lead to a period of economic decline and rampant unemployment.
Now one of the best things you can do to gear up for a recession is to hoard plenty of money in the bank. But right now, it’s a very tempting time to invest. Stock values are down across the board, and if there are companies on your watchlist you’re eager to own, it’s a good time to scoop them up on the cheap.
But should you continue investing when a recession might be right around the corner? Or should every dollar you have go directly into your savings?
You need that cash protection
As a general rule, it’s a good idea to have enough money in the bank to cover three to six months of living expenses. But in light of a potential recession, you may want to aim for the higher end of that range — or even save beyond that point. The more months of expenses you’re able to cover from savings, the less likely you’ll be to land in debt if your job is pulled and it takes a while to find a new one.
So getting back to the invest versus save debate. The route you take in the coming weeks and months should really hinge on the state of your savings.
If you have enough money in the bank to cover a solid six months of bills, then you may decide that you’re happy with that number, in which case you should absolutely focus on investing. But if you’re only sitting on enough cash to cover, say, a month’s worth of bills, then it may be time to stop building up your portfolio and instead focus on protecting your near-term interests.
Now you may be thinking, “Well, what if I just keep investing and worst case, I’ll sell stocks if I lose my job?” You could go that route. But it’s a dangerous one.
You don’t know what the value of your portfolio will be at the time when economic conditions sour and your job is lost. And so you run the risk of locking in permanent losses if you don’t adequately fund your savings.
Where to invest right now
Let’s say you’re doing well with near-term cash reserves and want to keep investing. If you’re not sure where, a good bet is to stick with the companies you’ve long had faith in and have performed well. Remember, stocks right now are down across the board. If a favorite of yours is trading at a lower price point, that’s not necessarily an indication that it’s worth any less than at the start of the year.
Now if you’d rather take the pressure off, a broad market index fund could also be a solid bet. The S&P 500 is down considerably year to date, so buying shares of an S&P index fund is a good way to branch out without having to put too much thought into the process.
All told, now is still a good time to invest — even with a potential recession looming. But if you don’t have a lot of cash in the bank, make sure to pad your savings first. Doing so could spell the difference between racking up debt if things go sour versus emerging from a recession unscathed.
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