The new year has brought with it welcome relief as most stock indices have posted back-to-back weekly gains to start the year. However, it may not be all smooth sailing ahead. As the Federal Reserve continues to raise interest rates to bring inflation under control, many economists are now predicting that we are in store for a recession in 2023. While the word "recession" conjures up memories of 2008 for many people, most economists do not expect it to be as severe this time around.
Even so, now is the time to prepare for stock market uncertainty, rising interest rates and a possible recession in the year ahead. Follow the three key moves below to make the best of these uncertain times.
1. Pay down your credit cards
Credit cards are now more expensive than ever with the average credit card interest rate at 20.1% and climbing. If you are unable to pay off your balance each month, consider paying down as much as your budget allows. This will not only reduce the interest you pay each month, but also free up more of your cash flow to help with inflation.
2. Review Your Emergency Savings
Most financial experts agree that you need six months of expenses in an emergency fund. However, less than half of U.S. households said they were able to cover an unexpected $1,000 expense according to a Bankrate survey in January of 2022. Building up a proper emergency reserve might not make you rich, but it could certainly prevent financial ruin, especially during a recession. If you already have a healthy emergency fund in place, check the interest that you are earning each month on your cash. If the APR is less than 3%, consider moving your reserve to an online high yield savings account, many of which pay well over 3% today.
3. Remember the Fundamentals
One of the oldest adages in investing is "buy low and sell high." Yet many people are reluctant to invest when they see double digit market losses. If you have the proper emergency reserves in place and a long-term horizon, consider buying the dip and putting your spare cash to work. The IRS also raised the 401(k) contribution limit for 2023 to $22,500, with the catch-up contribution for those above the age of 50 increasing to $7,500. Now is a great time review your current contributions to make sure you contribute the maximum, or at least enough for your full employer match.