What happens if a recession hits?
An analysis by BCA Research warns that the US economy could fall into recession in 2024 or 2025. Fox BusinessRecent statements from the Federal Reserve suggest otherwise, but it would be wise to consider the possibility of a recession just in case.
Below are some strategies and considerations that can help you prepare and cope financially if the U.S. economy falls into a recession.
1. Prepare an emergency fund
An emergency fund acts as a financial safety net if your income is interrupted; it gives you peace of mind and helps you weather the effects of a recession; it helps you stay afloat in the event of unemployment, hyperinflation, investment crashes, or other economic uncertainties; and it helps you avoid debt and bankruptcy.
Most experts recommend saving three to six months’ worth of living expenses in a high-yield savings account, but if you can save more, even better, as this will give you a financial cushion that can help you weather a recession.
2. Reduce your debt
During an economic downturn, your risk of losing your job or having your pay cut increases. If a significant portion of your income goes towards debt repayments, your disposable income decreases, making it harder to manage your day-to-day expenses. What’s more, lenders may raise interest rates to reduce their risk, further worsening your financial situation.
To reduce debt, prioritize paying off high-interest debt, like credit card balances, and avoid taking on new debt unless it’s absolutely necessary to maintain financial flexibility.
3. Diversify your investments
Never put all your eggs in one basket. Diversifying your investments across different asset classes – stocks, bonds, real estate and commodities – can help mitigate the impact of a single market downturn.
For example, if your portfolio is 70% stocks and 30% bonds, the stability of bonds may partially offset a decline in stock prices. Regularly rebalance your portfolio to maintain an optimal asset allocation and reduce exposure to excessively risky investments.
4. Reassess your budget
Think of your budget as a financial roadmap. During a recession, things may change, so you’ll need to adjust your budget to make sure you’re staying on track toward your financial goals. For additional adjustments, you might consider changing how you budget.
Reevaluating your budget can help you adapt to new economic realities and make informed decisions to weather the storm.
5. Invest in stable sectors and assets
A recession doesn’t mean you should stop investing. Instead, be strategic about where you allocate your money. Sectors like utilities, healthcare, and consumer staples tend to perform better during economic downturns due to their importance.
Consider investing a portion of your portfolio in these resilient sectors. Investing in bonds and other fixed-income securities can provide stable returns and also reduce overall portfolio risk.
6. Stay invested and avoid panic selling
Maintain regular deposits into your investment account even during market downturns. Stick to your long-term investment strategy and avoid making impulsive decisions based on short-term market fluctuations.
For example, if the stock market experiences a major drop, resist the urge to panic and sell your investments. Historically, markets have tended to recover over time, and staying invested positions you to benefit from an eventual recovery. Consistent investing, such as dollar-cost averaging, can help you smooth out market volatility and build wealth over the long term.
7. Create multiple streams of income
Diversifying your income sources can provide you with additional financial cushion during a recession. Consider freelance work or side hustles that match your skills and interests. Platforms like Upwork, Fiverr, and TaskRabbit can help you connect with potential clients.
Let’s say you have graphic design skills. You can offer design services online to make extra money. Having multiple sources of income can help you weather an economic downturn and reduce your reliance on a 9-to-5 job.
8. Live within your means
Practicing frugality and avoiding lifestyle inflation are timeless financial strategies that are especially useful during a recession. Focus on spending money on the essentials and things that add real value to your life.
For example, instead of buying a more expensive car or home, maintain your current standard of living and save the difference. Living within your means allows you to manage unexpected expenses and invest in your future.
9. Evaluate housing costs
If you’re a homeowner, consider refinancing your mortgage to take advantage of lower interest rates. Consider refinancing from a 5% interest rate to 3% to reduce your monthly payments. This could save you thousands of dollars over the life of your loan.
If you live in a rented property, consider ways to reduce your housing costs, such as downsizing or renegotiating your lease. Lower housing costs will give you more money to save or invest.
10. Monitor your credit
Regularly checking your credit report and maintaining a good credit score are important financial habits. Use a credit monitoring service to stay informed about changes to your credit profile.
Setting up alerts for significant changes in your credit report can help you detect and address potential problems early. A higher credit score can help you secure better loan terms and interest rates, which is especially important during a recession.
11. Check your insurance coverage
During a recession, it’s a good time to review your existing insurance policies to make sure you have adequate coverage. Evaluate whether your deductibles and coverage amounts fit your current financial situation.
For example, if you have a high-deductible health plan, you might consider switching plans to reduce your out-of-pocket costs in the event of a medical emergency. Adjusting your insurance coverage can help protect your finances from the unexpected while keeping premiums and other costs manageable.
12. Get informed
Read books, listen to podcasts, and visit reputable financial websites to improve your understanding of personal finance and investment strategies.
This ongoing learning helps you navigate financial challenges and equips you with the knowledge to make informed financial decisions and find new opportunities, including identifying undervalued investments, understanding emerging market trends, and finding innovative ways to diversify your income streams.
13. Improve yourself
Invest in your skills through additional training, certifications, and education. Connecting with peers and staying informed about industry trends can increase your employability. For example, earning a certification in an emerging technology can make you more valuable to employers.
By improving your qualifications, you can increase your chances of keeping your current job or finding new opportunities if needed.
14. Build strong relationships
Networking provides valuable opportunities and support in tough economic times: stay connected with professionals, join industry groups, and attend networking events.
Joining professional associations and attending industry conferences can help you build relationships with colleagues and potential employers. Strong professional relationships can lead to job introductions, collaboration opportunities, and support during career transitions.
15. Talk to a financial advisor
If you are unsure about your financial strategy, you can consult a certified financial advisor for clear guidance. These professionals can help you create a personalized financial plan that is tailored to your goals and current economic environment.
Your advisor can help you rebalance your portfolio, optimize your debt repayment strategy, and identify investment opportunities. Regularly reviewing your financial plan with your advisor can help ensure it remains appropriate and effective.
Final thoughts
Whether a recession occurs or not, careful planning and proactive strategies can help protect your financial health. Building an emergency fund, reducing debt, diversifying your investments, and maintaining a well-structured budget are all important steps to ensuring financial security.
Remember, the key to surviving a downturn is preparation and adaptability. Staying informed, living within your means, and having multiple sources of income will help you better withstand financial uncertainty. Regularly reviewing your financial plan with a trusted advisor and making necessary adjustments will help you stay on track.
By implementing the methods above, you can secure your financial position and be better prepared for whatever the future holds.
