Based on current indicators, there is a 79% probability we are in the early phases of a recession. As an investment advisor, I have seen the impact of recessions on individuals and families—job losses, reduced income, retirement uncertainty, and investment volatility. While we cannot predict precisely when a recession will occur, we can certainly prepare for financial storms.
Here are seven steps to help you prepare:
1. STRENGTHEN YOUR EMERGENCY FUND
An emergency fund should ideally cover six months of living expenses, providing a cushion in case of job loss or unexpected expenses. Keep this money in a high-yield savings account where it remains accessible and earns interest.
2. REVIEW AND ADJUST YOUR BUDGET
Identify areas where you can cut back. Reducing discretionary spending can free up funds for savings or debt repayment. Create a leaner budget focusing on essential expenses like housing, utilities, groceries, and healthcare.
3. REDUCE DEBT
High levels of debt can be burdensome during a recession. Prioritize paying off high-interest debt, such as credit card balances, quickly. Use the debt snowball method (paying off the smallest debts first) or the debt avalanche method (paying off the highest interest debts first) to manage repayment effectively.
4. STRENGTHEN YOUR INCOME STREAMS
Diversifying your income sources can provide additional financial security. Explore opportunities for side gigs or freelance work. Enhancing your skills through education and training can increase employability and lead to higher income opportunities.
5. REVIEW YOUR INVESTMENTS
Recessions cause asset value fluctuations, which can lead to an imbalanced portfolio. Periodically review your portfolio and consider rebalancing it to maintain your desired asset allocation and liquidity. This might involve selling assets, increasing your cash position, or reallocating to cash-flowing investments.
6. STAY INFORMED AND AVOID PANIC
Stay informed about economic developments and market trends to prevent impulsive financial decisions based on fear. Focus on your long-term financial goals and investment strategy. Regularly review your financial plan with a professional advisor to ensure it aligns with your objectives.
7. SEEK PROFESSIONAL ADVICE
Speak with your financial advisor to navigate the complexities of managing your finances during a recession. An experienced advisor can provide personalized guidance, help you develop a comprehensive financial plan, and offer strategies to protect and grow your wealth.
Preparing for a recession involves proactive planning and disciplined financial management. Building an emergency fund, reducing debt, diversifying investments, and staying informed can strengthen your financial resilience and help you navigate economic downturns confidently. Remember, the goal is to safeguard your financial well-being and position yourself for future growth when the economy recovers.
