By Emily Guy Birken
on 12 November 2019
According
to the financial news sector, it seems probable that we're headed toward a
recession. Grim-faced economists think our current historic economic expansion
is headed for a fall, and the news of a looming recession couldn't feel
scarier.
There's
good news and bad news about these opinions. The good news is that no one has a
crystal ball, which means even the savviest of economic forecasters can't
possibly know what our economy will do in the future. However, we do know that
certain financial trends cannot go on indefinitely. (Remember in 2007 when we
all thought housing prices could only ever go up? We learned the hard way in
2008 that nothing keeps growing forever.)
So how
can you prepare for a recession that may or may not happen in a time frame you
can't predict? Thankfully, there are a number of actions you can take today to
protect yourself, and your finances.
Bolster your emergency
fund
Financial
experts recommend that everyone build an emergency fund that could cover three
to six months' worth of expenses. Your emergency fund can get you through a
period of unemployment until you land your next job.
However,
losing your job during a recession could be a little more dire than losing it
at any other time. When the economy as a whole has taken a hit, it can be much
more difficult to find another employer who is hiring. This is why the median
unemployment length during the recession was more than 25 weeks (nearly
six months), whereas the current median length of unemployment is just over 9 weeks.
Now is
an excellent time to add to your emergency fund. Start an automatic transfer to
your savings account with every paycheck, and look for other ways to beef up
that fund.
If you
don't have an emergency fund that could handle a lengthy unemployment, there's
no need to panic. Remember: anything you can put away will be helpful if you do
find yourself with a pink slip. (See also: 7 Easy Ways to Build an Emergency
Fund From $0)
Create your Plan B
budget
Another
proactive step to take is to map out what would change about your spending
habits if you were to lose your job or take a pay cut. Going through your
current budget and identifying the items you could cut can help reassure you
that your emergency fund will weather a loss of income.
You
could even challenge yourself to make some small cuts now and see if you miss
your former expenditures. That can free up some extra money (more for the
emergency fund!) and help you feel more in control of your spending now and in
the future.
Attack your credit card
debt
If
you're carrying a balance on your credit cards, now is a good time to get
aggressive with your payoff plan. Carrying debt into a recession could make for
an overwhelming burden if you experience a pay cut or a layoff. You'd hate to
find yourself unable to pay your credit card bills — and have to deal with debt
collectors — when you're already feeling financially stressed. (See also: The Fastest Way to Pay Off $10,000 in
Credit Card Debt)
Go to the doctor
The
cost of health care can be prohibitively expensive, even for Americans with
health insurance. According to a recent Bank of America Workplace Benefits
Report, 53 percent of American employees
have skipped a medical appointment, a test or procedure, or purchasing
medication in order to save money.
This is
why it's a good idea to schedule a checkup with your doctor now. Health care is
expensive even when you have insurance, but it's even more expensive if you're
uninsured. Getting a checkup while you have employer-sponsored coverage in
place may head off any potential health (and financial) problems.
Resist the urge to
tinker with your investments
Watching
your retirement portfolio take a dive during a recession can be
heartburn-inducing. It's easy to listen to that voice inside that's screaming
at you to take your money out of the market or lose it all. But liquidating
your investment accounts means you've turned your temporary, on-paper losses
into permanent losses.
If we
do go into a recession, plan on only looking at your portfolio quarterly — or
even less often. This is one situation where putting your head in the sand will
help your sanity and your bottom line.
If you're close to
retirement, make sure you have cash
The
only caveat to leaving your investments alone is if you're on the verge of
retirement. Retiring during a recession can take a serious bite out of your
retirement portfolio if you're still entirely invested for the long term. In
that situation, you may find yourself retiring, but unable to access your
retirement income because it has taken a recessionary hit.
If, in
the next few years, you'll need to live off the money that's currently
invested, then make sure you transfer some of your investments into cash
equivalents. These will remain stable and available for you even if a recession
hits just as you're ending your career. (See also: 9 Creative Ways to Boost Your
Retirement Savings)
Be prepared
While
there's no way of knowing exactly what's around the corner, we can all improve
our financial lives by taking simple precautions. Whether we're on the brink of
a recession or the reports of the economic demise have been greatly
exaggerated, you'll be glad you took these steps to protect your money.
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