We all know the saying that the only certainties in life are death and taxes. Most economists would add recessions to that list. Just like the tide ebbs and flows, modern capitalist economies naturally go through periods of expansion and retraction. History shows that the U.S. averages a recession every 6-7 years, and many economists believe that we are overdue for our next recession.
If you feel like you have just started to recover from the “Great Recession” of the 2000’s, you are not alone. More than 2/3rds of Americans are not prepared for another recession. Fortunately, there are things that you can do to start preparing your personal finances for an inevitable downturn in our economy. Our top four suggestions are listed below:
1. Pay off your high interest debt.
The best way to prepare for a recession is to free up your future money. If you have debt, it means you have spent money that you haven’t even earned yet. Some debt is fine; it is an investment in your future and can lead to more prosperity. High interest debt is always a drag on your financial health. Make it a priority to pay off any high interest debt before a recession hits. That way, if you do come upon financial hard times, you are not also worrying about paying off past mistakes. Here is a helpful guide for getting out of debt.
2. Build up your savings.
It is probably no surprise to hear that an important way to avoid financial disaster is to have a financial cushion. Savings are vital in order to cover your expenses if you are laid off, have an urgent repair, or unexpected medical expenses. Most personal finance specialists suggest that you keep enough money in your savings account to cover six months of expenses. Even if this seems out of reach, set a goal for your emergency fund and do what it takes to build your savings up to that level.
3. Secure your job.
For many people, losing a job is the most devastating aspect of a recession. Recessions often lead to lay-offs, and there may be little that you can do to control this. Before a recession even starts, ask yourself if you are doing everything possible to be an essential employee at your organization. Be a superstar at work and you may be able to keep your job as long as possible.
Making yourself a valuable employee is a good strategy for both staying employed and for finding new employment quickly if you are laid off. Take advantage of any additional trainings in your field, learn new skills, and put extra effort into networking. If you are in an industry where layoffs are on the horizon, start training for a new job now. Look into evening classes, get certified in a new skill, and make initial connections now. If you are laid off, you want to have a jump start on all of the other people suddenly looking for work.
4. Review your investments.
Recessions often come with a downturn in the stock market and may require you to revisit your investment strategy. Of course, much of this depends on your personal long and short term goals. If you are close to retirement, you may want to shift some of your investments out of more volatile, risky areas and into safer and more stable options. If you are investing for the long term, then don’t let your emotions around what many consider normal ebbs and flows of the market lead you to make rash decisions.
Whether the next recession comes in the next few months, or the next few years, following the suggestions above can help you build a more secure financial future.