- Many experts predict a recession to be on the horizon in the US.
- Whether or not that’s the case, there are a few steps you can take to start preparing your money to survive a downturn.
- Experts recommend strategies like getting rid of as much debt as possible, understanding how much money it takes it run your household, and diversifying your income streams and your investments.
- For help creating your own recession-proof financial strategy, SmartAsset’s free tool can help find a financial planner near you »
It’s been more than a decade since the Great Recession, but many economists think the next significant downturn could be closer than we’d like. According to a survey from the National Association for Business Economics of more than 200 economists, 72% of respondents expect a recession to hit the US by the end of 2021.
Generally speaking, a recession is marked by two consecutive quarters of declines in real gross domestic product or GDP. In other words, if a significant decrease in economic activity lasts for more than “a few months,” you can consider it a recession, according to the National Association for Business Economics.
Whether or not a recession is on the horizon, it’s smart to start preparing your money now. Here are eight expert tips to “recession-proof” your finances.
1. Get rid of debt
Getting rid of your debt payments is a major part of protecting yourself in the case of another recession. In order to “recession-proof” your finances, you should first take a look at your monthly cash flow: your income and expenses, said Kaleb Paddock, CFP at Ten Talents Financial Planning.
“Your first step is to identify any non-mortgage debt payments and become focused on paying off these debts as fast as possible,” he said. “Why? If we hit a recession, by eliminating non-mortgage debt payments you’ll be preparing for optimal cash flow flexibility in the event of a drop in income. In other words, you become very financially nimble if your income stream dries up.”
2. Monitor all your expenses and tighten your budget where possible
Andy Mardock, CFP and founder of ViviFi Planning, said monitoring how your money is being spent and separating your discretionary expenses from your fixed expenses is crucial to surviving and even thriving during a recession. When you separate your needs from your wants, it becomes easier to eliminate and save some money on non-essential things, like one or two of those streaming subscriptions.
“If we don’t know what it takes to keep the lights on, it is hard to predict how well the household is positioned to overcome major events such as job loss,” Mardock said. “Those that have the opportunity to cut spending during economic downturns are better able to stick to their financial strategy and avoid setbacks during lean times.”
3. Keep stacking that emergency fund
If you find yourself without a job during the next recession, an emergency fund will come in handy.
According to Ian E. Rea, CFA, CFP at Slate Peak Financial Services, many people follow the rule of thumb of setting aside three to six months of living expenses, but even that may not be enough depending on your profession. He pointed out that since many employers could be scaling back during a recession, it could be harder to quickly find a new job to support yourself and your family.
“And even if things go perfectly in your job search after a layoff, you’re still looking at a quite some time between paychecks as you make your way through the interview process, getting the offer, then waiting for your first day, and eventually your first paycheck in your new role,” he said. “Again, a sufficient emergency fund can make all the difference.”
4. Don’t stop networking
Mike Hennessy, CFA, CFP at Harbor Crest Wealth Advisors, said it’s often easy to become complacent after landing a job that feels perfect, but in order to make sure you’re covered if the economy takes a dive, you should always be trying to make new professional connections.
“Stagnant professional growth is akin to the effects inflation has on your cash,” he said. “It’s not visible in a single day, but at some point in the future you will wake up with way fewer assets and skills than you thought you had. Who knows, that one business card you give at a networking event may be the key to a new position if the tides turn in the economy and at your company.”
5. Consider starting a side hustle to bring in extra income
“Learn a new skill, polish your resume, and apply for side hustles that can help bring in more income. If you expect a layoff during a recession, this will help take off some of the burden knowing that you have some money coming in on the side,” said Sahil Vakil, CFA, CFP at MYRA Wealth.
6. Diversify your portfolio
In the same way Vakil encouraged diversifying your income streams, Mardock recommended doing the same thing to your investment portfolio. He said he’s heard many stories of folks losing millions of dollars during economic downturns because they had most of their money invested in a single company on the stock market.
“This becomes especially challenging for those who receive stock as compensation through stock options, restricted stock units, and employee stock purchase plans,” he said. “The problem is multiplied when both the income on which a household depends and their investments are tied to one company’s success or failure.”
He continued: “Diversifying can often become a multi-year process due to the tax impact, investment restrictions, and vesting schedules. It is essential to create a diversification strategy as soon as possible.”
7. Pay attention to the financial news and do your own research when making investment decisions
“The more you educate yourself on the volatile nature of the stock market and the historical trends the more prepared and confident you will be to ride out any storm that may come,” Gideon Drucker, CFP at Drucker Wealth Management, said. “This doesn’t mean you need to become an economist, but having some context the next time the market goes down is huge.”
Drucker noted that the stock market goes down about 10% every 15 months, on average, “but despite all that volatility it has still averaged 6%-8% each year annual rate of return over the last 50 years and every single 15-year period in history has positive returns.”
“We have to be prepared to lose money over the short term when we invest,” he continued. That means you shouldn’t panic when the stock market starts failing. Instead, consider taking Mardock’s advice and picking up a few more stocks at the reduced price to put yourself in a prime position for gains when things begin looking up again.
8. Stay the course
“If you follow these steps, you now have a plan to protect your finances when the next recession hits. The key is to stick to it! Deviations from your plan can derail the best of intentions,” said Adam Deady, CFP and investment product consultant with MassMutual.
For help creating your own recession-proof financial strategy, SmartAsset’s free tool can help find a financial planner near you »
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