Should You Boost Your Savings Now That Stocks Are Down?

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KEY POINTS

  • The stock market's performance was really poor for the first half of 2022.
  • In light of that, it could pay to pump more money into your savings.


You may want to for one big reason.

Although it's hardly a secret that stocks have been down this year, you may be surprised to learn that the market just clocked in its worst first half-year performance since 1970. Not only are a lot of investors seeing losses in their brokerage accounts and IRAs, but many people are rethinking their retirement plans in light of the current downturn.

Now the reality is that if you're investing for a far-off milestone like retirement, and you're only in your 20s, 30s, or 40s, there's really no need to lose sleep over the state of the stock market. This isn't the first time the market has underperformed, and stocks have a long history of recovering from downturns.

But if you want to buy yourself more peace of mind and prevent potential losses in your portfolio, then now could be a good time to boost your cash reserves. Here's why.

More protection buys you more options

As a general rule, it's important to have enough money in your savings account to cover at least three full months' worth of essential living expenses. These days, though, many financial experts advise having a larger emergency fund -- one with enough money to cover six months' worth of bills or more.

The logic is that the more savings you have, the more flexibility you'll have to cover things like unemployment or unplanned bills. But boosting your savings could also give you more flexibility when it comes to managing your stock portfolio.

When stocks are down, the only way to officially lose money is to sell investments at a price that's lower than what you paid for them initially. If you leave your investments alone during a downturn, you may not end up losing so much as a dime.

But what happens if you lose your job or have an unplanned bill, and your savings aren't robust enough to cover your costs in full? In that case, you may have no choice but to tap into your portfolio and liquidate investments for cash. But in doing so, you could lock in permanent losses.

That's what makes now a great time to put more money into savings. Doing so could make it so you don't have to touch your investments at a time when cashing out is far from ideal.

Don't just put money into savings

It's definitely a good idea to pump extra cash in your savings right now. But if possible, also put some more money into your brokerage account or IRA and use it to buy stocks.

Right now, stocks are down, which means it's easy to scoop up shares of quality companies at a discount. That could set the stage for long-term profits if you hold your stocks for many years.

If you're uncomfortable with the amount of money you have in savings, then by all means, prioritize boosting that account over your brokerage account. But if you add to your savings and still have money left over, do know that putting it to work in your brokerage account is an unquestionably smart move given the state of the market.

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