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Should recession fears stop you from investing? It depends on your financial situation. Read on to learn more. [[{“value”:”
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From an unemployment standpoint, the U.S. economy is in a pretty good place. February’s 3.9% jobless rate is not only low historically speaking, but it’s relatively low in the context of recent years.
Despite that, data from Empower shows that 42% of Americans are still bracing for a recession this year. And if you feel similarly, you may be wondering if you should hold off on investing your money. But the answer is, it depends on your financial situation.
Take care of your near-term needs first
Investing money is a great way to grow wealth over time. The sooner you start investing, the more wealth you have the potential to gain through the years. But if you have some near-term financial shortcomings to address, then you’re better off waiting to invest so you can work on those.
One of the best ways to get through an economic downturn unscathed is to have a fully loaded emergency fund. At a minimum, that means having enough money in savings to cover three full months of essential living expenses.
If your savings aren’t at that level, then you shouldn’t invest yet — regardless of whether you’re worried about a recession. Rather, your first financial priority should be to boost your cash reserves. That way, if a recession hits and you’re laid off, you’ll have money to pay your bills.
The next thing you should do is assess your debt. You don’t have to worry as much if you’re carrying a mortgage you might still be paying in 20 or 25 years. But if you have high-interest debt, like a credit card balance, that’s the sort of debt you’ll really want to shed ahead of a recession, as having to make those payments could be a huge financial burden. (And again, even if we take a recession out of the equation, the sooner you pay off a credit card, the less interest you end up accumulating.)
However, if you’re set with emergency savings and the only debt you have is a mortgage or a reasonably affordable car loan, then you shouldn’t let recession fears stop you from investing and putting your money to work. Over the past 50 years, the stock market has averaged an annual 10% return. If you have $5,000 to invest, in 30 years, it could be worth over $87,000 at that same return. Wait five years to invest it, though, and you’re looking at just $54,000.
Prepare for a recession, but don’t stress needlessly
Based on present economic conditions, a 2024 recession looks unlikely. However, we can’t definitively rule one out. At the start of 2020, recession fears weren’t particularly prevalent. But then a pandemic hit a couple of months later that knocked the economy on its tail.
As such, it’s always a good idea to be ready for a recession. And you can do so by maintaining a strong emergency fund and steering clear of high-interest debt. But you shouldn’t let recession-related worries stop you from investing your money and taking advantage of the opportunity to grow wealth over time.
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