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Many people are worried about an impending recession, and it’s easy to see why. Rising inflation, soaring consumer prices, supply chain issues, global market instability and labor shortages have all many financial experts say that another
is around the corner.
As a financial planner, I am often asked when the next recession is approaching. While I can’t predict exactly when the economy might deteriorate, I can offer some good news: we’re not in a recession yet.
This means that now is the best time to prepare your money.
Here are my tips for staying ahead of the tides and protecting your money against recession.
1. Think about where to cut back
Many things have become more expensive recently – gas, food, cars, furniture – which means now is a great time to review your budget and identify some areas to cut back on.
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 throw away are services or purchases you can do without – think dinners,
services – but that doesn’t mean you have to go and delete all the things that bring you joy.
Deciding whether something is a need or a want is not always black or white. Some things that may seem non-essential to some people, like a gym membership, others just can’t live without. It’s about weighing your current priorities against your long-term goals.
2. Start stocking up for rainy days, if you haven’t already
Recession or not, you should have an emergency fund. These savings help you avoid borrowing money to cover unexpected expenses like repairs, medical treatment or job loss.
Emergencies are just that — unexpected. And many people aren’t prepared for it: 25% of Americans say they have no emergency savings, according to a Bankrate study.
If you’re just starting out, I recommend having about six months of expenses, including the amounts you spend on necessary items like rent, utilities, and groceries. This number may seem high at first, but small contributions over time can add up to these savings.
You’ll want to store your emergency money in a liquid account (like a high-yield savings account) for easy access when you need it.
3. Pay off your high-interest debt as soon as possible
The last thing you want to deal with during a recession is high-interest debt weighing you down. Credit card debt should be the first to go, especially when the
is expected to raise its borrowing benchmark this year.
Their interest rate influences short-term loans like credit cards. In other words, your credit card interest could increase even more, forcing you to pay hundreds (or thousands) in interest.
Once you’ve paid off your debt, you’ll have room in your budget to invest in other things, like increasing your emergency fund or offsetting rising consumer prices.
4. Think about your career
Recessions go hand in hand historically with higher unemployment – which means preparing your career for the next recession is essential.
This is a great time to reach out to your network and continue to maintain connections with others in your field. Generally, higher education comes with lower unemployment rates – so if you’ve been thinking about going back to school, now might be the time. Adding new skills or strengthening your current skills could give you an edge in a tighter future job market.
Be sure to weigh the pros and cons of forgoing a salary or taking on student loan debt to graduate. I would also recommend being practical about the industry you are considering. No job is completely immune to recessions, but some industries are more immune to cuts.
5. Keep Calm and Carry 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 worrisome, 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 has seen a full rebound (and more!).
If you really want to act before any future recession, I would simply recommend that you review and rebalance some of your investments. Having a diversified portfolio can help you minimize your losses during a volatile market. Remember: if you have an already diversified portfolio, doubling down on your plan and focusing on the long term is one of the best things you can do for your money.
There is no doubt that the thought of a recession can be anxiety-provoking. But making a plan ahead of time and taking the necessary steps to prepare can help you feel more in control of your situation and reduce some of your stress. For me, there’s never a bad time to review your financial situation – so if you’re looking for a sign, now is the time to start!