When markets become volatile, the tendency is to do something. Check your portfolio, read the news, move things around. Mostly this wastes your time and sometimes even your money.
What really helps is a setup that doesn’t require you to react.
Look at your debt without judgment
Sit down one evening and write down each debt: amount owed, interest rate, and minimum payment. This is the whole exercise.
Real numbers are usually more practical than a rough mental estimate. Plus, guessing only causes worry you don’t need.
Focus on paying extra on the items with the highest interest rates first, typically credit cards at 20-25% APR. A card at 22% is costing you more than almost any investment that is generating income for you. Paying off credit card balances is a guaranteed return.
Consider setting up an automatic payment once a week, such as on Friday, to make up for the interest. It doesn’t have to be a huge amount, just something you can afford that reduces the balance (and doesn’t just pay interest).
Stop and review big purchases
Before making any big purchases right now, check to see if the pricing and financing terms still make sense given current market conditions.
What felt like a reasonable car payment or equipment financing plan six months ago may look different today if interest rates have changed or your income has become less predictable. A brief pause to compare options and confirm that the terms still work in your favor is one of the simplest ways to protect your financial foundation during uncertain times.
Automate one thing and stop making decisions
The goal isn’t to make better money decisions every week. This means less decision making overall.
Set up a small automatic transfer to savings or investments — even $50 or $75 — on a scheduled schedule. When it runs on its own, you stop debating whether you can afford it or not. It just happens automatically.
And if your income isn’t steady, use percentages instead: 50% for bills, 20% for expenses, 20% for loans, 10% for investments. Everything works together automatically.
Keep your investments simple
Volatile markets generate a lot of opinions. Most are not actionable.
Broadly diversified funds are low-cost, don’t require stock picking, and don’t require your attention every week. These include stock market indices which are used by many companies to diversify investments for individuals but they provide a safe balance without being too aggressive or conservative. Unattractive, but really solid investment.
What is the money for? Long term money can overcome recession in the economy. But short-term funds used to meet any of your requirements in the next one or two years should not be in the market at all. Keep those buckets aside and one bad month won’t force your hand.
If you’re wondering if now is a bad time to start, the market will always give you a reason to wait. There is no exact time for this. Think of it this way: timing the market matters more than timing the market.
(See my post Portfolio tricks that prove profitable when the market gets weird.)
retirement plan
If you qualify, Roth IRAs and Roth 403(b) plans may be two of your best retirement moves. Many Roth IRA accounts give you the option to choose from a variety of investment options ranging from aggressive to conservative investments that grow over time. They are tax-advantaged accounts that offer you the opportunity to grow your savings tax-free.
Check out our blog article that compares both types of IRAs to see which one may be right for you.
And, if you’re also considering a 401(k), check out this article, which compares Roth IRAs to 401(k) accounts.
Know what triggers a tax bill
Understanding capital gains rates and resisting the urge to react to market fluctuations can save you a lot at tax time.
When you sell an investment at a profit, that is taxable income. Keep it less than a year and it will be taxed at your normal tax rate. Over one year and it is taxed at capital gains rates that are lower than your ordinary income tax rate.
Before a tough month in the markets tempts you to move everything around, it’s worth knowing. Responding quickly could cost you double the loss: once on sales and once on taxes.
Also, keep in mind that dividends and reinvested interest also count as taxable income in the year you receive them, even if you never touch the money.
For an in-depth look, see: Essential Tax Tips for Maximizing Investment Gains.
Also see How to Report Capital Gains and Losses Directly into TurboTax.
You’re closer than you think
List your debts.
Automate a transfer.
Keep the long-term money somewhere diversified and leave it alone.
Know the tax consequences before you sell.
These are the most important things to think about. No precise timing is required, just some cool habits doing their job regardless of the uncertain market.
You don’t have to go through this alone. If you want a second set of eyes, TurboTax Expert Assistance PremiumYou can connect with a tax expert who understands investing and can review when it’s tax season, or even completely prepare your return.