Tips for Recession-Proofing Your Finances
When a recession hits, it usually takes some time for everyone to notice, since it is usually a fairly slow process, but the coronavirus is letting us watch a recession happen in real-time. Usually, we do not know we are in a recession until the National Bureau of Economic Research’s Business Cycle Dating Committee announces it. This committee is who decides when recessions begin and end.
The decision to start or end a recession is something that usually takes a few months to determine. However, with millions of people getting laid off en masse and thousands of businesses across the country closing their doors, it is looking like we have a new recession looming ahead. According to the Department of Labor, in March over 10 million people filed for unemployment, in pretty much every industry, and the Fed is predicting that the unemployment rate may hit 32.1 percent, which is even higher than the Great Depression.
If we are indeed entering a recession as a result of the coronavirus, there are some things you can do now to help safeguard your finances to help you ride out the next recession. Here are a few tips to help you brace yourself for the next recession.
Diversify Your Portfolio
You are going to see some stocks drop during a recession, and if you have invested too heavily into one sector, your portfolio could take a huge hit when the stocks drop. However, if your portfolio is diverse and you have investments in a good variety of sectors, you may not take quite as much of a hit when things go down.
Investing some of your money in things other than stocks can also help you with this. Real estate is usually a fairly solid investment, especially if you invest in residential properties because people always need somewhere to live. Rent has consistently shown to be an excellent passive income.
For many Americans, this is not feasible; they live paycheck to paycheck without even a little extra money to set aside, and when they are able to set money aside, they have an emergency that drains those funds quickly. If you fall into this category, do what you can to set aside money, and try to save at least a month's worth of living expenses, in case something happens.
If you are in a better place financially, try to save up three to six months’ worth of living expenses. This is the advice of most financial experts, though to many the idea of being able to save that much is laughable.
You can start small and put just a little bit away every paycheck, placing it in a high-yield savings account.
Reduce Your Debt
Pay down as much of your high-cost debt as you can to help your budget breathe a little better. It is probably best to start with your credit card debt, then work on your auto loans, mortgage, and other debts. It is recommended to wait on student loans since they usually have provisions in place to keep them from crushing you like a credit card debt can.
Another bonus to paying down a credit card is that you then have access to a little more funding if an emergency comes up and it exceeds your emergency funds, or you do not have emergency funds to begin with.
Cut Back on Expenses
To help you survive a recession, take a look at your spending and determine what you need to cut back on. Put together a monthly budget and try to stick with it as much as you can. You should probably consider waiting on a big purchase like a new home or car until the recession has passed.
“COVID-19 Impact.” News Release, 23 Apr. 2020, COVID-19 Impact.
Foster, Sarah. “7 Ways To Help Recession-Proof Your Finances.” Bankrate, Bankrate.com, 16 Apr. 2020, www.bankrate.com/personal-finance/smart-money/ways-to-recession-proof-your-finances/.
“The NBER's Business Cycle Dating Committee.” The NBER's Business Cycle Dating Committee, 20 Sept. 2010, www.nber.org/cycles/recessions.html.