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Many people are concerned about a looming recession, and it’s easy to see why. Rising inflation, rising consumer prices, supply chain issues, global market instability and labor shortages are leading many financial pundits to say another recession is around the corner.
As a financial planner, I’m often asked when the next recession will come. While I can’t predict exactly when the economy will deteriorate, I have good news to report: we are not yet in a recession.
That means now is the best possible time to get your money ready.
Here are my tips for staying ahead of the tide and recession-proofing your money.
1. Think about where you should cut
Lots of things have gotten more expensive lately – gas, groceries, cars, furniture – which means now is a good time to rethink your budget and identify some areas where you can save.
I’m a big fan of using your budget as a living, breathing record that can be revised and modified as your needs change. The easiest items to scrap are services or purchases you can live without — think dinners, streaming services — but that doesn’t mean you have to cut out all things that bring you joy.
Deciding whether something is a need or a want isn’t always black and white. Some things that may seem insignificant to some people, like a gym membership, others can’t do without. It’s about balancing your current priorities with your long-term goals.
2. Start building up your bad weather reserves if you haven’t already
Recession or not, you should have an emergency fund. These savings help you avoid borrowing money to cover unforeseen expenses like repairs, medical treatments, or losing your job.
Emergencies are just that—unexpected. And many people are unprepared: 25% of Americans say they have no emergency savings at all, according to a Bankrate study.
If you’re just starting out, I recommend you have about six months’ worth of expenses, including amounts you spend on essentials like rent, utilities, and groceries. This number may sound high at first, but small contributions over time can build up these savings.
You should keep your emergency money in a liquid account (like a high-yield savings account) for easy access when you need it.
3. Pay off high-interest debt as soon as possible
The last thing you want to deal with during a recession is high-interest debt weighing on you. Credit card debt should be the first to be reduced, especially with the Federal Reserve likely to raise its borrowing benchmark this year.
Your interest rate affects short-term lending like credit cards. In other words, your credit card rates could go even higher, leaving you paying hundreds (or thousands) in interest.
Once you’ve paid off your debt, you’ll have room in your budget for other things, like boosting your emergency fund or offsetting rising consumer prices.
4. Think about your career
Recessions have historically been associated with higher unemployment – which means you need to prepare your career for the next downturn.
Now is a great time to reach out to your network and continue to connect with others in your area. Typically, higher education is associated with lower unemployment rates – so if you’ve been thinking about going back to school, now might be the time. Adding new skills or bolstering your current skills could give you an edge in a future, tighter job market.
Be sure to weigh the pros and cons of potentially taking a pay cut or taking student loans to earn your degree. I would also recommend being practical about what industry you are considering. No workplace is completely immune from recessions, but certain industries are safer from downturns.
5. Keep calm and move on
Recessions can be an emotional and stressful time, especially when it comes to your investments. Watching your portfolio fall into the red can be worrying, but it’s important to avoid a knee-jerk reaction.
Changing your investment strategy could hurt you in the long run – the market often grows over the long term and behaves in ways you might not expect. Case in point: after falling more than 30% in March 2020, the stock market staged a full recovery (and then some!).
If you really want to trade ahead of a future recession, I would recommend simply reconsidering and rebalancing some of your investments. A diversified portfolio can help you minimize your losses in a volatile market. Remember, if you have an already diversified portfolio, one of the best bang for your buck is to double down on your plan and focus on the long term.
There is no doubt that the prospect of a recession can create fear. But making a plan beforehand and taking the steps to prepare can help you take better control of your situation and reduce some of your stress. As far as I’m concerned, there’s never a bad time to reevaluate your financial situation – so if you’re looking for a sign, now is the time to start!