6 Things You Need to Do with Your Money in a Strong Economy
We're currently experiencing one of the strongest economic recoveries in generations. Despite some reasons to feel concerned about the future -- be they political, humanitarian, other otherwise -- you probably have even more reasons to feel optimistic about your finances right now.
Which makes right now an excellent time to make some smart money moves that either help you take advantage of the healthy economy or prepare you for the point in the future when the tides inevitably change.
Here are six things you can do with your money in a thriving economy to make the most of it:
Shore Up Your Rainy Day Fund (Before Any Storms)
Even when the outlook seems sunny, you know the rain will move in at some point. It might be a long way off, it might not last long, or you might not sustain any damage from the storm -- but we know it will happen at some point.
And that means you can prepare for it with a rainy day fund (or an emergency fund or cash reserve, whatever you prefer to call it). Take advantage of boom times by ensuring your emergency fund is full. You can make a lump sum contribution to the account or create a new line item in your budget and contribute a little each month until you hit your goal.
What constitutes a "full" fund depends on your situation and how many obligations you need to meet. If you're single with no dependents or married with no mortgage or children, your emergency fund probably doesn't need to be as large as someone with multiple children with a spouse that stays at home (meaning the whole family depends on one income).
A good rule of thumb says to keep three to six months' worth of income in a cash reserve account that you can tap should you face an emergency, like job loss or unexpected medical bills.
Again, if you have more financial responsibilities (or are simply more risk-averse), consider keeping 6 to 12 months' worth of income in that account. If you work in an industry that's highly dependent on the overall economy, this goes doubly for you – think of cyclical businesses like real estate, construction, or particular service sectors.
Take a Strategic Approach To Your Debt
Now is a good time to aggressively tackle high-interest rate debt like credit cards, personal loans, and other types of financing where you pay a lot in interest. By knocking out your balances, you'll:
· Have more money each month to put toward investments and goals you want to reach.
· Improve your credit score.
· Eliminate liabilities that could weigh you down in the future.
If you want to pay off debt in the most cost-effective way, focus on the highest-interest rate balances first (which will likely come from things like credit cards). This kind of debt costs you the most, so you want to get rid of it first.
Paying down student loans will probably be your next priority after paying off credit cards. When it comes to your mortgage, you need to think carefully about whether your money would do more for you by lowering your home loan or going toward investments.
A financial planner can help you model out scenarios to see which option helps you build more wealth over time. At the very least, commit to making a debt repayment plan so you have action steps to follow and can see a clear path toward debt freedom.
Now is also a great time to apply for lines of credit like a Home Equity Line of Credit (HELOC) or other pledge asset loans. Having these lines of credit in place before you may need them in the future can be a valuable planning tool.
Check in with Your Retirement Accounts
When's the last time you raised your contributions to your retirement accounts? It's easy to set your 401(k) on autopilot and forget about it -- even when you're earning raises or bonuses and should contribute more to keep pace with your income.
Take a moment to check in with your 401(k) -- or other workplace retirement plan. Increase your contributions, even if it's just one or two percent. As a bonus, set a reminder or event on your calendar to do this on a quarterly or annual basis to ensure you steadily increase your savings rate over time.
Consider If a Backdoor Roth IRA Contribution
If you've seen your income rise with the strength of the economy, you might find yourself locked out of a Roth IRA. Roths come with individual and household income limits, and once you exceed those, you can no longer contribute to these accounts. At least, not directly. A backdoor Roth IRA contribution might be an excellent strategy to start using so you can still get money into your Roth (and enjoy the tax advantages that come with that).
Allow Yourself a Splurge (But Keep It Reasonable)
While we encourage our clients to save and invest so they can build wealth, we're not all work and no play. After all, money is meant to be used -- and there's nothing wrong with using some of it now instead of stashing it all away for the future.
You should be able to enjoy the good times while they're here, but that doesn't mean spend with abandon.
Think great vacation... not vacation home.
When it comes to splurges, focus on experiences over material things -- or lots of responsibility and
maintenance. You want to avoid locking yourself into long-term financial commitments like buying a much bigger house, taking out a sizeable loan for a boat, and so on. Why? Because you'll be paying for those indulgences for the next 15 to 30 years, and unfortunately, we know economies are cyclical.
It's reasonable to expect future downturns and even recessions at some point in the next three decades. You don't want to stick yourself with a splurge you'll struggle to continue to pay for once this current bull run ends.
Don't Forget What a Weak Economy Feels Like
Thinking about hard times when things are good might sound like strange advice -- but one of the most
dangerous things about strong economies, especially when it comes to investors in the markets, is that it's so easy to forget that corrections and downturns are completely normal.
Many average investors start making behavioral mistakes when markets treat them well. They give in to recency bias, believing that things will continue the way they currently are. Even outside of the investment world, consumer behavior tends to change when people feel optimistic. We tend to spend more freely (and perhaps more irresponsibly) because our jobs feel strong and money seems abundant. That kind of habit can put you in a precarious position should the current economy start losing some of its strength.
None of this is to suggest that you should be extremely pessimistic and expect doom and gloom -- but you need to keep a balanced, broad view of the financial markets and the economy instead of narrowly focusing on a thin slice of time (which, for most of us, is "right now").
If you have the right financial plan and investment strategy in place, you have less to worry about. You need to follow that plan and design because you're in this for the long run. Focus on your goals, and remember that neither weak nor strong economies last forever.
Andrew Comstock, CFA