- Everyone I work with wants to know how to protect their finances from a recession.
- I recommend building three to six months of emergency savings first and paying down debt.
- It’s also important to keep your money invested and get advanced job training while you can.
I’m a financial planner who also hosts a financial talk show. Both my private clients and show goers want to know what they need to do to prepare for a
Going through a recession in your financial life is as inevitable as death and taxes. There is no economist who can predict the exact date a recession will hit. I tell my clients and callers that with the right financial plan, you can recession-proof the retirement of your dreams. Here are four things you must do.
1. Accumulate your savings
An emergency savings fund is a fundamental element of any good personal financial plan. As a certified financial planner, I teach that a sufficient emergency savings fund is three to six months of your household expenses. Remember: These are your needs and not your wants. This cash reserve should be stored in a high-yield savings account. If you’re currently living paycheck to paycheck, you’re not ready to face a recession. Saving cash isn’t a sexy move to make with your money, but it’s the first thing you should do.
Unexpected financial emergencies often strike at the worst of times. Sudden unemployment can have a devastating effect on your long-term financial goals. Paying off retirement accounts and paying personal expenses with credit cards can set your financial goals back for years. I advise my clients to prioritize the accumulation of their savings. The emergency savings fund can protect your retirement plans during a recession.
2. Pay the debt
Surviving a recession requires a disciplined budget. Now is the best time to pay off or pay down debt. This will give your budget the room and flexibility to meet new demand caused by rising prices and falling wages.
During a recession, households must make many sacrifices. Paying off debt now will help keep you from destroying your
and going deeper into debt when debt payments are missed to keep up with essential monthly payments.
3. Do not leave the market
Our economy goes through seasons; we have cycles of ups and downs. During a recession, too many people get scared and sell their investments too soon. Investing carries inherent risk, but unnecessarily liquidating your retirement or other investment account can hurt your financial plan for years.
Tax penalties, blocked losses, and loss of long-term capital gains are some of the consequences of early retirement withdrawals. When you add up all the downsides of getting out of the market early, you should overcome your fear of short-term risk.
If you’re not nearing retirement, a falling market isn’t a setback. You can take advantage of lower market prices if you are dollar cost averaging, that is, putting the same amount on the market at regular intervals. If you’re nearing retirement, you should contact a financial planner to help you rebalance your portfolio to minimize your exposure to the coming recession.
4. Get or update advanced job training
Getting advanced job training before a recession is like putting on armor before a battle. As the economy slows, the job market becomes more competitive. Workers with a higher skill set have a better chance of not getting laid off and are more likely to find a new job.
I advise people worried about the next recession to look for all opportunities for advanced training. Advanced training opportunities don’t have to be expensive, they can be found at community colleges, trade schools, and through low-cost certifications.
The key to a recession-proof financial plan is to avoid the smoke and mirrors of social media hype. Get in touch with a financial planner and follow the recommendations no matter how boring they may seem.