Since the depths of the recession in 2009 the market and economy have been on a nearly uninterrupted climb and many have taken for granted that this run has been one of the longest in recent history without a recession. And what is certain is that there will be another recession – a question of when, not if. The market turmoil in December was a reminder of this for many. Being ready for a recession does not require you to build a bunker filled with canned food to shelter in, but instead just to get your financial ducks in a row.
In this article I will not be making any predictions on when the next recession will come. I don’t have a crystal ball, and anyone who tells you that they can call the start of the next recession is misleading you at best… Proof of this is that whenever you go over to CNBC of Bloomberg the talking heads are all making predictions – we’ll go higher or the markets will trend lower and we’re overdue for a crash vs. having another decade of good times left. Instead I’ll be making some suggestions for how you can prepare for when the recession hits.
Emergency Savings Fund
As I’ve said many times, you absolutely must have an emergency savings fund, and this is especially true if the economy is in recession. During recessions we often see stock markets crash (and we want to avoid selling low), credit dries up making it hard to get a loan, and jobs disappear.
If your job disappears and you get laid off, then you need to ensure that you have 6-12 months or more of savings. During the recession finding work can be hard because you won’t be the only one searching for work, so you might be unemployed for an extended period of time.
If you are in a position to increase your emergency savings fund from 6-12 months to 18-24 months you’ll be able to sleep well knowing that even if you are out of work for an extended period that you won’t be out on the street.
Stock markets often go down during recessions, providing us with a valuable buying opportunity. If you are able to continuously invest during the recession then you’ll be able to benefit from the rise, and lower your cost-basis across your portfolio. If you only buy during the market tops and not during the lows you won’t achieve the long-term averages need to fund yourself throughout retirement.
However, as a word of caution, remember that rebounds from recessions can be slow and often bumpy, so it is better that you only invest the money if you strongly believe that you can leave it in for the long-term. You don’t want to start piling money in on a short-term bounce only to find out there is another leg down and that you need that money.
The less debts you have to pay, the longer your emergency savings will last you in a crisis. Although it is always good practice to keep your debts at reasonable levels, when heading into a recession this is especially import. During recessions banks and other lenders (especially payday lenders) can become less forgiving and more aggressive on collections, and might not be willing or able to show you any flexibility. Look into using either the Avalanche or Snowball methods to pay down your debts.
Also, not having things like car loans means that you can drop from full coverage to liability coverage only, which will allow you to cut your monthly bills.
Know Your Budget
It is important to understand where you are spending money and how you can cut costs. When you start to analyze your spending carefully, possibly using a reverse budget, you can find lots of areas for saving money. Lunches and meals out, subscriptions you don’t use, and bills that have crept higher as discounts expire are low hanging fruit for savings.
Although I encourage everyone to keep an eye on their spending at all times, when you need to rapidly cut your spending you need to know which areas are ripe for trimming. For those who haven’t just gone through a budgeting exercise and round of cuts there are very few who can’t cut 10% or more from spending outside of their current rent/mortgage and auto loan payment.
Recession proofing is all about getting your finances in order, and potentially buffing up your emergency savings. If we take these steps ahead of time then we’ll be able to weather any financial storm and come out the other side, potentially even stronger than when we started.
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