Top 5 Ways to Prepare for a Potential Recession
Many folks are pointing to the probability of a recession, or a mini-recession, in the coming year. In simple terms, a recession means a consistent downturn in economic activity for longer than six months. Things like a decline in the stock market, an increase in unemployment, and an increase in consumer prices can all be indicators.
Will a recession actually happen? The National Bureau of Economic Research (NBER) economists aren’t totally convinced that it will. So, what should the average person do?
Preparedness is always a good idea when times are uncertain. We look at the top five ways to get you and your finances ready for whatever the economy brings our way.
Top 5 Ways to Prepare
Just like we make preparations in and around our homes for an imminent hurricane or bad weather, we can do the same for a potential economic storm. Preparing our finances to withstand any storms can be done with a few steps. Perfection isn’t necessary here, just progress.
1. Emergency Fund
If financial advisors seem to harp on this a lot, there is a reason. Emergencies happen! People unexpectedly lose their jobs, get seriously ill, and incur damage to their homes or cars. It happens because life happens to us all.
Think of an emergency fund as a safety buffer between you and whatever big expense life hands you out of the blue. When you have money set aside for unpredictable events, you reduce the likelihood of going into debt to pay for these surprises. It also eases some of the stress that comes with these emergencies.
How to build an emergency fund?
● Decide on a goal. Every good decision starts with a goal. How much do you need to have set aside? Six months of earnings is what most advisors recommend to have on hand.
● Automate contributions. Decide how much you are going to contribute each week or month from your paycheck and set up an automatic transfer. That way, you don’t have to think about it.
● Don’t touch it. Remember, this money is for your future self, not for a weekend trip or splurge.
2. Pay Off High-interest Debt
What is high-interest debt? The general rule of thumb is that if the interest rate on debt is a double-digit figure, it is high interest. For example, credit card debt interest rates can be 15 to 21% and are considered high-interest versus federal student loan debt, which is around 3%.
How to pay off high-interest debt?
● Pinpoint what to pay first. Obviously, you will first want to pay down any debt that is over 10% interest rate. If you don’t have any in the double-digit range, look for whatever is the next highest.
● Pay a little extra. Don’t just settle for paying the minimum each month. Kick in a few more dollars. Even adding $10 a week more towards debt will get you out of it faster.
● Establish automatic payments. This avoids having to handle the payment each month. Plus, you don’t have to think about it.
3. Don’t Add More Debt
This is a no-brainer, but so easy to mess up. Carrying a big, expensive debt load through a recession can be downright scary. If they lay you off or experience a pay cut, your budget and ability to pay what you owe will take a hit that may take years from which to recover.
How to not add more debt?
● Delay big purchases. Is your car giving you problems? It’s tempting to sell it or trade it in for a new (or new-to-you) vehicle. But if that means taking on more debt, resist the lure and consider repairing it instead.
● Be creative. There are some pain-free ways to save money and avoid going into debt across every area of our lives. It is possible to save money and still enjoy life with a little creativity.
4. Leave Your Investments Alone
The last thing you want to do is bail out on your investments and retirement plans. You and your financial coach have carefully planned and made good investment choices. Successful investing is achieved by keeping a long-term viewpoint.
Stocks were on a wild ride this year. They may continue to go up and down. But trust the process and stay the course.
How to leave your investments alone?
● Don’t touch them for the next year. Once you have committed to leaving them alone, you have the benefit of watching and observing what is happening in the economy and won’t feel the pressure to panic-sell.
● Stop checking on your portfolio. It can be obsessive watching your portfolio value go up and down each day. Resist the urge to do so.
5. Don’t Freak Out
Well, this is easier said than done. We all have different relationships to money and the potential loss of it. But fretting about the economic circumstances of our country and our own bank accounts helps neither one.
How not to freak out?
● Turn off the news. Or at least be selective about what and how much of the news you consume. The newscaster on TV doesn’t know you or your financial situation, so please don’t take doom-and-gloom financial advice from them.
● Be realistic. Economic ups and downs are normal and to be expected. If you have taken steps to be prepared for a potential recession, then trust that you are prepared.
Recession or no recession, the economy will continue on. The best thing we can do to weather any economic condition, good or bad, is to be prepared. Building up an emergency fund, paying off high-interest debt, not accumulating more debt, leaving current investments alone, and not freaking out will help us all to ride the wave and come out on top.