Are You Recession Ready?
Economies go through cycles over time and despite currently being in the midst of one of the longest bull markets in history, we can say for sure that it won’t last forever. There are warning signs that can signify that a recession is coming, but often these don’t become apparent until after the fact. Similar to floods and earthquakes, it’s not about prediction but rather preparation.
Accurately predicting the next recession is impossible. However, you can take steps to prepare for it and help secure your financial future in the process.
Fear is the driving force behind many drops in the market, and it’s always best to make financial decisions when you aren’t in a panic. If your investments start dropping in value and you sell them off, that is value that you won’t be able to recover. It is usually far better to ride out market downturns and sell when markets are high. However, as you approach retirement you may not have another 10-15 years to wait on riskier investments to recoup drops. That is why it is essential to frequently review your investment mix and make sure that your risk matches not only your timeline but also your personal tolerance.
Do Some Self Reflection
How do you feel about your current job stability? Is your industry one that ebbs and flows a lot with economic markets? How much financial risk are you currently undertaking? Have you recently purchased a new home or had a child? Do you have high healthcare costs to factor in?
Have a Plan
It’s always a good idea to have a plan in place for the worst-case scenario. Having six months of expenses saved up in an emergency fund can make a huge difference if you lose your job or have other unexpected financial burdens arise. If you are close to retirement or already in retirement, it is essential that your investments are closely monitored to ensure adequate income to cover both your intended lifestyle as well as rising living and healthcare costs. Now would be a great time to sit down with your financial advisor to discuss your goals and any risk concerns you may have.
Cash is King
When the markets are up and you need some emergency cash, taking an early withdrawal from your 401(k) is always a reasonable option that can sometimes be worth the penalty depending on the situation. But when the markets drop this becomes a more desperate and costly plan. Having more liquidity and a larger emergency fund can make a huge difference in weathering economic downturns successfully.
Get Those Credit Cards Paid Off
Make sure that you are paying off your credit cards every month if you can. If you are currently spending more than you are earning, then start scaling back now so that you can get a plan together to get those cards down to a zero balance. Consolidating your credit card debt under a personal loan with a lower interest rate may be a good option to get that debt under control. Oftentimes when people are doing well financially, they can get a little fast and loose with their spending. If you need help a household budget can make a big difference in tightening up on unnecessary spending and lifestyle creep.
Remember that recessions are a normal part of the economic cycle and it’s not the end of the world. In fact, it can be a great time to buy-up investments at a discount as they are sold off by panicked and unprepared investors. As long as you make the appropriate preparations, you should be able to weather the next recession without losing too much sleep.