The steep sell-off in the stock market coupled with the recent downgrade of U.S. debt naturally has us nervous. Many economists predict we’re headed for a second recession. And while we can’t control market forces, we can control the safety of our money. Here’s my advice in these trying times:
An eight- to nine-month savings cushion held in a liquid savings account can come to the rescue in case you lose your job or suddenly find yourself strapped for cash. Remember to automatically pay yourself out of each paycheck. Use cash — you’ll be less tempted to spend!
Adjust your 401(k)
The safety of your 401(k) rests in how well you diversify your investments. Keep in mind that a 401(k) is a long-term savings vehicle, and you won’t be tapping this investment until your sixties — at the earliest.
That said, no matter what your age, it’s always smart to keep some of that money safely invested in bonds and CDs and other fixed-income assets, which take some of the guesswork out of the equation.
If you’re in your sixties, consider investing 50% or more of your 401(k) in fixed-income assets.
Have a five-year plan
Calculate the cost of any goals you want to achieve in the next five years — from starting a family to buying a house to going back to school — and make sure to keep those related savings out of stocks and in traditional savings accounts, CDs or money-market accounts at your local bank.
This way, if the market continues its downward spiral, you can at least ensure that your five-year goals can still be met.
Keep your cool
Emotion-driven, knee-jerk reactions to the market tend to be irrational, so avoid making any impulsive moves with your money when you watch stocks drop. If you’re a long-term investor, you don’t want to pull out of the market now, only to miss out on the rebound.
Keep in mind: Stocks have pretty much doubled following the 2008 market crash. Most 401(k) investors who stayed the course managed to recoup their losses. The market may get heated ... but it’s best to keep your cool.