The Great Recession, as it is now called, hit a lot of people hard. Jobs were lost, as were homes and retirement funds. Now the economy is recovering though it might be difficult to see for some people. However, the stock market has steadily climbed in the last four years, and the rate of unemployment is creeping downward.
For some people the turnaround means they are simply able to get back to normal, paying bills on time and maintaining a regular job. If you managed to weather the storm a bit better, though, you might be looking for ways to turn the economic recovery to your advantage.
As the economy improves, there’s an opportunity to not just recover, but also actually improve your financial situation. Here are a few tips to help you make the most of the economic recovery.
Start With the Basics
Your finances should be solid before you even think about risking your money. There are a few basic steps you should take before you start putting your money to work for you.
1. Pay Off Debt
One of the principle ways the government has of influencing the economy is the Federal Reserve’s interest rate. This is the rate at which banks can borrow money from the Fed. The lower the rate a bank can borrow, the easier it is for them to make a profit and the more likely they are to lend money and invest. One of the first things the US government did during the Great Recession was drop that rate as low as possible.
As the economy recovers, however, that rate is going to go back up. As a result, loans with adjustable rates, such as mortgages, will become more expensive. New loans will also become more expensive as the interest rate will be higher. Paying off the debt you have will mean you have more money available to you and need to borrow less.
Likewise, paying off credit cards will mean you can eliminate that debt, or have the credit available to you if you need it later, without taking on new debt.
2. Consider Refinancing Debts
Some debt may be more difficult to pay off, or you may not want to pay it off. Mortgages are usually big sums of money that are not easily paid off. Student debts can be good for tax breaks, and regular payments look good on your credit report.
However, with such a low-interest rate, it may be a good time to refinance. Replacing higher interest loans with lower interest rate loans can save you a lot of money over the long term, and should be done before the Fed raises its interest rate.
3. Avoid Adding New Expenses
It can be tempting to use that low rate to borrow money, and use it to go on a trip or buy a second home. You might also want to borrow the money to invest. However, this is something that should be done cautiously, if at all. New debt is always something of a risk. In fact, people taking new debt that they could not pay off is what caused the recession in the first place.
Assess your income and only add debt that you can manage responsibly. Other expenses should also be added carefully. Managing your money well is what put you in a position to take advantage of the upturn in the first place. Maintain those good habits.
4. Save For An Emergency
Illness and accidents can be scary and surprising. They are also usually pretty expensive. An unexpected expense can not only be upsetting, it can also ruin your finances and credit.
You can guard against these sorts of emergencies by saving some money, and then setting that money aside. Building up a financial buffer of at least $500 to $1000 will prevent you from having to take a loss to get some liquid cash or get so far in debt you end up in over your head.
Put Your Money To Work
Once your finances are solid and secure, you can start thinking about ways to make your money work for you. There are some opportunities during an economic recovery that are not available any other time. The stock market is still climbing, and other opportunities may present themselves. The important thing is to be smart when investing your money.
5. Take Advantage of Opportunities
There are always places to put your money, or people who have a good idea and just need some start-up capital. You can stick with the stock market, funds, and other financial instruments. This is a good strategy and will almost always return at a good rate. This is particularly true since the market bottomed out and is climbing back up.
There may be other opportunities out there as well – if you have a sharp eye and are open minded. Perhaps you can start a new business or have a hobby that can make money once you put a little money into it. Each situation is unique, but you never know when a good opportunity is going to present itself.
6. Know the Basics
Before investing anywhere, the stock market, private investment, or whatever, it is important that you understand the basics of your investment. The stock market is complicated. Starting a business takes money and knowledge. Investing in someone else’s business can be even riskier.
It’s important, therefore, that you know what you’re getting into before you make a commitment. Know how different funds and stocks work. Understand what you can expect your rate of return to be, and then keep track of what it ends up being. If you’re not prepared to do some homework, you should probably stick to straightforward investments.
7. Invest In Areas That Do Well In A Recovery
Some types of investments do better in a recovery than others, historically. Certain types of funds have a better rate of return. Some sorts of businesses will do better in an upturn than others. There isn’t a recession-proof business, but some are more resistant to financial downturns. It can take some research to figure out what these types of businesses are. However, it is worth the effort.
8. Don’t Put All Your Eggs in One Basket
Any good investment advisor will tell you diversity is the key to investment security. Any business can fail, either through poor management or simple bad luck. The stock market might drop again, or a fund might lose value. But, it is unlikely, short of another recession, that everything will happen all at once.
Investing in a variety of different business types and investment types will mean that while any single investment may fail, your finances won’t fail with them. It can keep you earning no matter what happens.
9. Set Long-Term Goals
Realistically, the only investments that have a quick turn can be found in Vegas, and any investor will tell you the gambling table and horse track are bad risks. Real investing means planning a year, or several years, down the road.
This is particularly true during an economic recovery. It is liable to be slow. Current predictions project that the stock market won’t recover fully for another 2 to 3 years.
And, the market and economy may dip back down before it fully recovers. It’s more or less impossible to predict where the bottom of any downturn will be, and you shouldn’t try. If your investment loses value for a short while, you can’t panic. An economic recovery may be slow, but it will tend upward over the long term.
10. Understand What You’re Able To Risk
Any investment is a risk, and it’s important to understand how much risk you can handle. There are a few ways to measure that. There’s the financial point of view. If an investment goes sour, how much can you lose before you run into problems? This is an important question. You should have a sense of where your line for loss is, and have a firm point at which you bail.
Another way to assess risk is how much you’re able to handle emotionally and psychologically. A good rate of return may not be worth the toll it takes on your life in other ways.
The economy is recovering slowly, but it is recovering. If you’re able to take advantage, there are some opportunities that can make you some money and improve your financial position. As with any financial decision, however, it should be done cautiously and from a solid starting place.