The economy can be unpredictable, so it’s always a good idea to be prepared for the worst — but what should that preparation entail?
A recent Fidelity Investments study asked women how they have responded to economic uncertainty in the past year, and the responses ranged from pre-emptive moves to proactive measures. In this “Financially Savvy Female” column, we’re chatting with Lorna Kapusta, head of women and engagement at Fidelity, about the best ways women can prepare for an economic downturn.
Build Up an Emergency Fund
The Fidelity study found that 34% of women started holding more money in cash/keeping more savings in cash over the past 12 months in response to economic uncertainty. As for whether or not this is a wise way to prepare for a downturn, Kapusta said it depends on your own preferences — though women should avoid keeping too much money in cash.
“Our past research has shown that women tend to hold more in cash, which can mean leaving earnings potential on the table as money invested has greater potential for growth over time,” she said.
However, it is a good idea to build up an emergency fund.
“You do want to make sure you’ve set aside enough liquid cash for an emergency fund that will cover at least three to six months’ worth of essential expenses,” Kapusta said. “This is especially important during times of economic uncertainty. Once you’ve saved that amount, investing any additional savings can help your money grow and help hedge against increasingly high inflation.
“If having cash on hand makes you feel more comfortable, consider keeping that in a money market fund or high-yield savings account to make sure it’s at least earning interest.”
Think Carefully Before Switching Jobs or Careers
According to the Fidelity survey, 22% of women delayed leaving their jobs or switching careers as a response to economic uncertainty. While you shouldn’t give up on an exciting career opportunity due to a possible economic downturn, it is important to take the time to consider whether or not this is the best move for you at this time, rather than just job hopping for a higher salary.
“It’s important to carefully evaluate any career move to better understand what works best for you personally and for your family,” Kapusta said. “Consider your overall compensation, which is more than salary — it includes other benefits like healthcare, retirement, vacation time and more.”
Move Cash Savings Into a Money Market Account
The Fidelity survey found that 15% of women moved cash savings into a money market fund that is earning interest in response to economic uncertainty, which can be a savvy move.
“A money market fund can be advantageous as it is considered to be one of the least volatile types of mutual fund investments, it’s more liquid compared to some other investments — meaning you can retrieve your funds easily, and it’s less prone to market fluctuations, making it a great option to consider during market volatility,” Kapusta said.
“Although we feel the impacts of today’s inflation on our everyday spending, rising rates have also led to some improvements in interest rates on money market funds, so it’s worth checking out.”
Move Short-Term Investments To More Conservative Options
In response to economic uncertainty, 15% of women said they moved to more conservative investments/savings. This can be a smart move to make when you are investing for shorter-term goals.
“If you have a shorter time horizon to a goal like buying a home, you may want to consider shifting to a more conservative approach to combat the impact of market volatility on your savings,” Kapusta said.
However, this isn’t typically a necessary move to make if you are investing for long-term goals.
“If you have a longer horizon to meet your goals, you may be more risk tolerant, meaning you have time on your side to weather potential market ups and downs,” Kapusta said. “Knowing how long you have to reach your goal, and also your tolerance to risk, will help you decide on the best investment mix. And if you’re not sure, getting help from a trusted financial institution is a great next step.”
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