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October 10, 2019

Steps to Recession-Proof Your Finances

If the economy does not weaken to the point that a recession occurs, the mainstream media just might eventually talk the nation into a recession. The sad truth is that eventually, a recession is inevitable. But before panic sets in, know that it doesn’t have to be doom and gloom ahead. Those who prepare ahead for a recession will be able to weather the storm and emerge with their finances intact. Being proactive now will allow you to rest assured knowing you’ve done your part to protect your finances.

1. Pay Down Your Debt

A pile of debt will cause considerable problems during the recession. If you have debt, do your best to pay it down now while the economy is still humming. Otherwise, you will have a number of significant outstanding obligations to creditors when the economy goes sour. It will prove awfully challenging to satisfy your debt payments when your hours are reduced at work, when you are downsized or when your income stagnates and the cost of everyday goods increases.

When paying down your debt, zero in on obligations that have the highest interest rate. If possible, transfer your credit card debt to a line of credit with a lower interest rate. Once your credit cards are paid down, it is time to shift your focus to your student loans. Apply for income-based repayment (IBR) for your federal student loans so you only have to pay a monthly minimum that corresponds to your level of income. It is also possible to refinance your student loans to either reduce the interest or pay them off sooner than otherwise would be possible.

2. Enhance Your Financial Safety Net

Everyone needs a financial safety net. However, precious few people have a substantial financial windfall available in the event of unemployment, downsizing or an economic recession. If you do not have a sizable financial safety net, the time to create one is now.

Ideally, your financial safety net will equate to upwards of six months worth of bills. As an example, if your monthly expenses total $2,000, you should have about $10,000 saved just in case the economy takes a turn for the worse. This way, you will have enough money to cover your debt obligations, put food on the table and get some enjoyment out of life even if you are not employed full-time due to a slow economy.

3. Minimize Spending

Do you really need those $3.50 coffees every morning? How about that new pair of shoes you have been eyeing? Is it absolutely necessary to add to your video game library? These are the questions you must ask amidst a recession. Take a close look at your spending, determine what you can cut back on and put the unspent money directly into your savings/investments. If you are struggling to identify items/services to cut back on, collect your receipts for a couple of months. You might find you spend too many nights out at local bars or restaurants with friends. Maybe you have one or several subscription services that are unnecessary. Stop spending on these non-essentials and the savings will add up to a considerable amount of money in due time.

However, completely cutting out all social activities just because they cost money has the potential to backfire. After all, one of the best ways to secure employment is to connect with others in your industry. Continue to spend on networking events, cut back on social spending unlikely to lead to new job opportunities and you will feel good about the limited amount of money you spend during the recession.

4. Diversify Your Income

This is the perfect time to add another stream of income. If you do not have a side hustle, consider starting one now. Even the addition of a part-time job will help supplement your income as a recession looms. Though working even more hours will certainly take up your limited free time, it just might open doors to new career paths you would not have considered had you strictly stuck with your primary employer during the economic meltdown.

If you decide to moonlight, check your primary employer’s employee manual to determine if you are required to notify them of your second job. Some companies mandate employees notify their employers after obtaining another form of employment. Being honest just might work out to your advantage in the form of a raise that entices you to remain focused on your current position instead of moonlighting at a second employer.

5. Analyze Your Asset Allocation

Checking in on your asset allocation is very important. If you’re on the cusp of retirement, you might consider this your time to get a bit more conservative. If you are still in your 20’s, then keeping a hefty portion of your portfolio allocated towards stocks still works. It’s all about balancing your risk tolerance with your goals and factoring time into the mix.

6. Add Alternative Investments to Your Portfolio

It is a mistake to invest the majority of your money in stocks or mutual funds. Diversification is the name of the game, especially in the midst of a recession. Merely diversifying your savings across a handful of stocks and mutual funds will not suffice.

Alternative investments are also necessary to mitigate risk when the inevitable recession strikes. Add real estate, precious metals, antiques, artwork, collectible coins and other alternative investments to your portfolio and you will be comprehensively hedged against risk. This way, if certain sectors of the economy are hit particularly hard during the recession, your savings will be spread out across a number of diverse investments to mitigate risk.

 

Whether you believe a recession will come in 2020, 2021, or even later, you’ll never regret being extra prepared. Planning is the key to financial success— actually sticking to that plan is what will set you apart from others. 

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