You’ve worked hard to earn your money, so naturally you want to grow your earnings and protect them when you can—particularly from bad economic news like a recession.
Recessions are a normal part of the economic cycle. They happen when we experience two or more consecutive quarters of reduced overall economic activity. That reduction leads to job losses, home foreclosures, and a lot of uncertainty that can hit close to home, just like what happened during the Great Recession of only a decade ago.
Even though we can’t tell when or if the next recession will happen, or how long it could last, we can prepare for that possibility. And being prepared is a win-win situation: You can ride out a recession with less personal financial impact, and you can be fiscally stronger if a recession does not occur. These tips will help you prepare, just in case.
Most experts recommend creating an emergency fund with three to six months’ living expenses set aside in case you lose your job or have unexpected expenses to cover. An emergency fund is especially comforting in the face of troubling news about the world economy. Choose an account that pays competitive dividends like our High-Yield Savings Account. Avoid touching this savings for anything except a true emergency.
Equally important as an emergency fund, paying off debt—especially high-interest credit cards—benefits your bottom line. Set a goal to pay off your full card balance each month. If you can’t pay off excess credit card debt quickly, consider other relief options, like:
List all your monthly expenses and see what you can trim to live more frugally, like cutting cable, dining out less frequently, cancelling unused memberships/subscriptions, and buying generic brands. Use a tool that lets you see all your accounts together in real time, helps you make a budget, and helps you create and follow a plan to pay down debt. You could also create a ‘doomsday budget’ that focuses exclusively on critical expenses and absolute essentials.
Take a look at your portfolio of investments and determine how resilient it would be if a recession happens. If you’re near retirement, you might want to rebalance your portfolio to manage potential risk. If you’re younger and decades away from retiring, a more aggressive portfolio will have time to recover any losses. Regardless, diversifying assets into different places like savings, stocks and bonds, and a balance of other industries/sectors will help you ride out market dips more comfortably. At American Heritage, our team can help you plan and save for the future. Consider certificates or IRA certificates, which are insured, not affected by the stock market, and offer a smart way to add stability to your growing nest egg.
Contribute to your IRA or 401(k) even if a recession is looming or hits. A 401(k) is a long-term investment that will survive and recover from a recession – so stick with it if you’re still years away from retiring. If you’re close to retirement, talk to fund managers or your financial institution about moving money into safer low-yield funds or bonds.
Even when you’re working a full-time job, you might find ways to generate income on the side. Whether it’s selling collectibles, offering consulting, or even driving for Lyft or Uber, use that extra cash to pay down debt or pad your emergency fund.
Think carefully before making a change that could make your long-term financial security more vulnerable. Thinking about moving across the country? Starting a new career? Returning to school? Retiring in a few years? Factor in your financial needs as you make long-term plans. An uncertain economy shouldn’t stop you from pursuing your goals, but it should be taken into consideration.
For some jobs (and some high-value employees), recessions may pose less of a risk. Take advantage of training and certification opportunities to expand your skill set and increase your marketability if you do lose your job. Cultivate a network with others in your field, and keep your resume updated.