With all the uncertainties that the Corona Virus has brought, it can be hard to predict what is going to be the long-term effect on the economy. Unfortunately, if a recession does hit, it will be something beyond our control. However what we can control is how we personally respond to it and how we prepare for it. Taking precautionary measures sooner rather than later can help you protect your finances and make them recession-proof.
The US won’t know for sure that we’re in the middle of a recession until the National Bureau of Economic Research’s Business Cycle Dating Committee confirms it. This private, nonprofit group of economists is the sole arbiter of declaring when a recession starts and ends, and it may not be declared until we are a few months in. So, even if the outlook is not looking favorable it’s never too soon to ensure that your finances are well-equipped to weather any storm.
- Pay Down Debt – Reducing your liabilities can not only make paying your bills easier, but it also lessens the burden if money does get tight. Carrying high debt balances can create a huge amount of stress and put you in a precarious position if you need to suddenly refinance your home or take out a loan. Keep your debt to income as low as possible.
- Boost Emergency Savings – This is a no brainer. Constantly building up your emergency savings when things are going well can be a lifesaver when a recession hits. Your job and income may be in jeopardy if certain sectors start feeling a crunch. That Emergency Savings account can help you pay your bills and stay afloat until you can find a steadier income source.
- Cut Back – When you learn how to live with less, you can use the extra funds to pad your savings and you won’t find yourself struggling to adapt to a new lifestyle. Cutting back doesn’t mean going without everything that you enjoy, it just means making more conscious choices about what you spend your money on.
- Live within Your Means – It’s important to create a monthly budget and live within those guidelines. You have to pay rent or a mortgage, utilities, food, student loans, insurance, and transportation – those are essential. However it’s your discretionary budget that might need an adjustment. If a luxury vacation would put you in debt, then that would be living outside of your means. Need help making a budget, we have you covered in a recent blog we wrote – How to Create a Personal Budget You Can Live With.
- Don’t Make Rash Decisions – Recessions usually don’t sneak up on us overnight, they take several months to culminate, and they rarely last only a few months. Go through your investment portfolio and make sure your investments are spread out across different industries and even different types of assets so that when the market tumbles, your investments won’t be as affected, and your losses won’t be as deep. Changing your strategy mid-recession could be the worst thing you could do. Unless you plan to retire in the next year or so, and the markets are taking a huge hit, you may be better off riding out the storm vs. pulling all your money out.
- Boost your Income – Given your skillset and availability, you might want to look into creating a side hustle. This could be as simple as starting a storefront on Etsy or doing computer repair work for businesses on nights and weekends. Anything you can do to help pad your income in case you lose your 9-5 job or to help you build your emergency fund. Multiple streams of income will not only pad your bank account, but they will also give you peace of mind – if one stream has a crunch due to the recession your other streams may be able to protect you.
It’s hard to predict the future when we often use the past as a guide. Our economy is always changing and there are so many different sources that play a role and affect it. Downturns never come at a good time, so it’s always best to make sure your finances are recession-proof. If you have questions about setting up and emergency savings account or refinancing your home, our team is ready to help.
Washington Branch Manager, Assistant Vice President