What is a recession exactly?
A recession is a slowdown in economic growth that is sufficient to impact employment, manufacturing, retail sales, GDP, and consumer income. The National Bureau of Economic Research (NBER) officially defines when a recession begins and ends based on changes in indicators including unemployment rates, income, and industrial production.
Building Savings
If you don’t already have a healthy emergency fund, building one is the first step you should take to strengthen your defenses against economic downturns. A general rule for emergency savings is to keep three to six months of monthly expenses in cash. This can help you survive a period of unemployment if you lose your job.
Reassessing Your Budget
To build an emergency fund, you may need to examine your spending. It’s always wise to monitor your spending, and this is especially important during tough times. “Make sure every dollar counts and has a purpose,” said Jovan Johnson, a certified financial planner (CFP) at Piece of Wealth Planning. You can achieve this with a zero-based budget, which encourages intentional spending. When you carefully plan your spending, every dollar of income goes toward specific expenses. For example, you can budget for categories like housing, food, loan repayments, and utilities. But what happens if you earn more than you spend on bills? You can add additional categories for savings (emergency fund, retirement savings, vacation fund, etc.). As a result, you’ll be less likely to spend money on discretionary items that could prevent you from achieving your financial goals.
Paying Off High-Interest Debt
Another way to prepare for a recession is to pay off high-interest debt. This can reduce your monthly obligations, making it easier to weather any hurdles you face during a recession. For example, if you lose your job or work fewer hours in a slow economy, life will be easier with lower monthly payments.
Focusing Your Long-Term Investments
Should you change your investment strategy to avoid potential recession-related losses? “The short answer to that is no – as long as you have a proper investment strategy designed for the long term,” said Eric Roberge, CFP at Beyond Your Hammock. It may be better to have a long-term strategy designed for all types of circumstances, including recessions. By using this approach, you don’t need to take proactive steps in anticipation of a recession because your plan already accounts for recessions (and other events) occurring periodically.
What Not to Do During a Recession
Thanks to having a strong emergency fund and a versatile investment portfolio in place, you may not need to make changes if a recession occurs. This is the beauty of having your financial matters in order before experiencing tough times: you can focus on more important things in life and support loved ones.
Abandoning Disciplined Investing
When it comes to your investments, you should be careful not to make emotional decisions if markets decline. If you sell every time there’s a market dip, you’re buying high and selling low. “Learn that market fluctuations, corrections, and downturns are normal market behaviors, and they’re not something you should react to. In fact, responding and trying to manipulate your investments is exactly where average investors get into trouble,” Roberge said.
Taking on Large Expenses
When facing the risk of job loss or other economic challenges, it may be best to keep your expenses as low as possible. Adding significant monthly obligations like a hefty car payment could make things difficult if your finances are impacted by a recession.
Questions
Frequently Asked Questions (FAQs)
How do you prepare for a recession if you are retired?
Make sure you are taking on an appropriate level of risk in your portfolio. If you have more stocks than you are comfortable with, it may be suitable to reduce your exposure to stocks by moving some of your money into bonds and cash. Talk to a financial advisor for specific recommendations and run “what if” scenarios.
When was the last recession?
The U.S. economy officially entered a recession for two months in February 2020 after more than 10 years of economic expansion.
What are the causes of recession?
Economic slowdowns can occur for various reasons. Some of the most common causes include bubbles that eventually burst, unsustainable inflation, and shocks that disrupt normal economic conditions. One example in this regard is the recent recession related to widespread temporary shutdowns aimed at slowing the spread of COVID-19.
Source: https://www.thebalancemoney.com:443/how-to-prepare-for-a-recession-5196421
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