The threat of a recession is real. The threat is also not unusual or uncommon: The United States has had 11 recessions since the end of WWII, an average of one every six years.
Though common, recessions can create a challenging environment for investors and consumers. But there are things you can do to be prepared. Here are seven specific steps to help prepare yourself for a recession.
1. Reduce Expenses
Recession brings uncertainty. No one knows how deep it might be or how long it might last. To weather an economic storm, consider reducing expenses. This is no time to pay for things you don’t need or use. Review your subscriptions and ongoing expenses to see where you can cut back. Several small reductions can add up to a meaningful change.
2. Build Cash
The first step to prepare for a recession, or any other anticipated economic hardship, is to build cash. Cash provides flexibility to get through tough times. Cash is the resource you should have to take care of expenses that may crop up, or to help you through a job loss or other challenge.
3. Continue Investing/Stay Invested
It is generally a good idea to continue systematic investments, such as contributions to retirement plans.
It is also generally a good idea to remain invested in long-term investments, even though you may see increased volatility.
There’s no harm in evaluating if the specific investments you hold are still appropriate but avoid reducing investments overall.
4. Review Insurances
This key point tends to be overlooked during tough economic times. High levels of inflation can leave people underinsured as asset values increase faster than coverage levels. Review homeowners and auto policies to make sure the coverage levels are still appropriate for current asset values.
5. Evaluate Employment
Some jobs are more secure than others. Consider the security of your present employment, and whether that could be improved by changing jobs. Inflation has taken a big bite out of consumer purchasing power.
Consider negotiating a raise if you choose to remain with a present employer.
Consider updating your résumé and monitoring job opportunities to make sure you are meeting your needs for income while maintaining a degree of security. The job market often tightens during a recession.
6. Evaluate Purchase Plans
Evaluate purchase plans to see if it makes sense to accelerate or postpone any planned purchases. Consumers with excellent job security may want to accelerate some purchases to lock in current prices; those with lower job security may want to delay or reconsider purchases that might increase their expenses or reduce their cash position.
7. Make or Update Long-Term Plans
Recessions are going to happen. As consumers and investors, recessions are outside of our control. We are still responsible for making our own futures the best they can be. To do that we need to make good financial decisions in support of a long-term financial plan. Economic changes and life changes make it necessary to update that plan periodically.
The Bottom Line
The future is out of our control. We will experience good economic times and we will experience tough economic times. We can help ourselves by making plans and taking actions to make sure that we are doing the best we can expect to do in the current circumstances.
When we may be heading into a period of economic difficulty or uncertainty, we can take specific steps to help us be better positioned to deal with whatever comes our way. Those who prepare will fare better than those who do not. We cannot prevent a recession, but we can be prepared for one.