With no shortage of doom and gloom out there proselytizing an impending recession worse than the last, it’s easy to feel spooked or pessimistic about the near future. While there remains plenty of evidence to suggest no recession is anywhere near and we could sit here all day arguing about it, it’s meaningless to do so. No one has a crystal ball. We can only speculate. However, that doesn’t mean you can’t be prepared. Financial preparedness should be built and maintained regardless of the current health of the economy. This is your financial health, not the economy’s health we’re talking about here. If you’re financially healthy, it doesn’t matter what life (or the economy) might throw your way as you’ll be ready for it. With this in mind, I provide you with 4 tips that to improve financial health and help you prepare for the next recession.
Stay the course
This is easily the best piece of advice I can give. Far too often, when a recession hits, people lose their jobs, take pay cuts, and their investments tank. Then, they freak out and have a very negative emotional reaction. This reaction almost always ends in poor financial decisions. They start liquidating their investments, they sell other assets at a loss, they rack up a bunch of credit card debt, and it all quickly spirals out of control.
Being prepared for a recession means being prepared to make smart decisions when decisions need to be made. You’ve set particular goals for yourself and you’ve laid a plan out to get to where you want to go financially. If that’s maxing out your 401(k), for example, you don’t want to stop maxing out your 401(k) just because you see the account value drop in a recession. You want to keep your end goals and short-term goals in focus. Don’t let your emotions derail that course.
Take advantage of market volatility
When the stock market is crashing, you should be buying, not selling. As I stated in the previous tip, making irrational financial decisions from negative emotions is to be avoided in a recession. When you see your investment accounts losing value, this means an opportunity exists to buy more shares at a lower price, not sell your holdings for a loss. Rule 101 of investing is “buy low, sell high.” This is how you can be successful in the long-term.
Another important aspect of long-term success through market volatility is remaining invested through it all. There’s ample proof in the pudding that those that stayed invested through market downturns have done better than those that did not. To show you why, I’ve included a graph PIMCO put together on this below.
As you can see, the average investor buys when the market is hot. Everyone’s making money hand over fist and all the media outlets praise the results. This is dangerous, however, as you’re already late to the game. You bought high, now the market crashes, and you want to sell. The only result of this strategy is your hard-earned money lost. Timing the market consistently over time is impossible. The best action long-term is to stay the course! Contribute to your investment accounts on a monthly basis regardless of what the market is doing and take advantage of the downturns when they arise.
Build an emergency fund
If a recession hits and you lose your job, you don’t want this to derail everything you’ve been working for. It could force you into racking up credit card debt or requiring money from your retirement accounts prematurely. You can avoid this from happening by ensuring you have an emergency fund in place. Maintaining an emergency fund is one of the hallmarks of long-term financial stability. We never know what life might throw our way. All we can do is be prepared.
Each person’s situation is unique so there’s no ‘set amount’, per se, that you should have in an emergency fund. In general, we recommend at least 3 to 6 months of fixed and variable living expenses. Your fixed expense would be your mortgage, utilities, student loan payments, etc. Variable expenses could be groceries, dining out, travel – any expense that might vary from one month to the next.
You should look at your budget and consider all the factors that might impact your ability to meet your financial obligations (savings goals included!) should an emergency arise. This will help you determine what amount you should keep in your emergency fund. You’ll want this built already by the time a recession arises so you’re well prepared.
Pay off bad debt
Many people think any form of debt is bad, but that’s not the case. There is such a thing as “good” debt and it’s important to distinguish the difference. Good debt helps you better your financial situation. A mortgage to buy a house, student loans (within reason) to improve your job prospects and earning potential or a personal loan to consolidate and pay off credit card debt quicker could all be considered forms of good debt.
It’s the bad debt you want to avoid. The most common form of bad debt is credit cards. These come with very high-interest rates and can easily be mismanaged. Bad debt will also follow you around like the plague, always nagging at you, always making it difficult to borrow money, and always putting a crunch on your cash flow. If a recession hits, you don’t want the potential negative impacts of that recession putting you in a place where you’re struggling to pay off credit card debt, or worse, having to rack up even more.
Get your credit cards paid off and balance-free before the next recession rolls around and learn how to properly manage credit card spending. Addressing the behavior or habits that resulted in holding a balance on credit cards in the first place is the key to overcoming credit card debt into the future.
The Bottom Line
It’s important to reiterate that these are not financial steps you should take solely for the purpose of preparing for the next recession. These financial tips are applicable at all times. Building and maintaining financial health should be a lifelong pursuit regardless of what the economy is doing. When you’re financially healthy, you’re financially prepared for anything life can throw your way.
If you feel you need more help with your financial health or aren’t sure how best to implement these tips, schedule a meeting with us today.
Chad Rixse grew up in Anchorage, Alaska and lived in Seattle, WA for 11 years where he graduated from the University of Washington before moving back to Alaska. He is fluent in Spanish, loves to travel and connect with other cultures. He’s been helping clients plan for their financial futures since 2014 and has an immense passion for helping others and making a positive impact in their lives. Outside of work, he’s a self-professed golf addict, foodie, and master taco maker.