When it comes to the economy, the question isn’t if there will be another recession — it’s when.
A recession is like a rainstorm: You can take steps to limit its impact once the rain starts pouring down, but the best way to withstand a storm is to fix your roof before the storm starts.
Track Your Spending Now
You might be feeling financially invincible when things are going well — no matter how much you spend, there always seems to be enough left over at the end of the month to make sure all the bills are paid. But, you really aren’t sure where all of the money goes.
If you start tracking your spending today, you’ll at least know where your money is going. If you don’t like tracking your own spending, it’s getting even easier to let an app track your budget for you.
Minimize Debt When Possible
When you’re employed in a great job that pays you a nice salary and bonus, it can be reasonable to make all your monthly debt payments and still take three vacations a year.
However, cutting back to two vacations during the good economic times and paying down debt can mean you don’t have to cut back as much when a recession hits. So, find ways to reduce your debt now.
Maximize Your Value to Your Employer
During the Great Recession, unemployment peaked at 10 percent in October 2009, according to the Bureau of Labor Statistics. As high as that sounds, that means the nine in 10 people still were employed.
To increase your chances of weathering the recession without losing your job, focus on what you can do today to increase your value to your employer, such as improving your communication skills and taking on new tasks to increase your versatility as an employee. That way, if your employer has to make cuts during the next recession, your head won’t be on the chopping block.
Build an Emergency Fund
Before the recession hits, build up an emergency fund so that you have easy access to cash in the event you need help making ends meet.
Your emergency fund is money you have set aside for unplanned expenses. Whether you take a salary cut or you have to transition between jobs, Tamra Stern — a certified financial planner and director of wealth management at Main Street Research — said to make sure you have an emergency fund to weather the transition.
“A cash reserve should be six to nine months of living expenses,” said Megan Gorman, partner at Main Street Research a registered investment advisor. “So, it isn’t a small sum. But in the event there is a recession, it can give both peace of mind — and opportunity.”
Prepare With an Emergency Budget
If you already have a budget in place that you use to manage your spending today, that’s a great first step. Before a recession hits, take your planning up a notch by preparing an emergency budget before you even need it.
An emergency budget is a plan for how you would spend your money if your financial circumstances took a nosedive, such as having to take a pay cut or losing your job.
“Plan ahead by having an emergency budget with expenses 20 to 30 percent less than [your] normal budget,” said Owen Winkelmolen, financial planner and founder of Plan Easy, a financial planning platform. When you have your emergency budget set up, you already know that you can survive financially in the event you need to cut back.
Consider a Career Change
Though there’s no way of knowing for sure what industries will be hardest hit, some companies and industries are more prone to layoffs than others.
“Though we know that recessions are coming, there is no crystal ball,” said Stern. “Many companies resort to layoffs during recessions to attempt to keep business afloat. There are areas of the economy that continue to do well during a recession: healthcare, education and government.”
Improve or Preserve Your Credit Score
When you’re doing well financially, it can be tempting to let your attention to details, like making sure every bill gets paid on time, slip a little. Sure, nobody wants to pay a late fee. But if it doesn’t affect your overall lifestyle, you might not realize the harm it’s doing to your credit score.
A lower score can come back to bite you during a recession because you might not be able to get a loan you really need. Even during a recession, lenders are still making some loans, said Jeremy Shipp, an investment advisor. But, “this all depends on your credit score, so make sure you are always maintaining great credit discipline,” he said.
Rebalance Your Portfolio to Reflect Your Risk Tolerance
The time to think about your risk tolerance is before a market crash hits, not after. For example, if you’re close to retirement and 90 percent of your portfolio is in stocks, consider reallocating a portion of your investments to fixed income because you don’t want to be forced to cash out when the market is at a low.
If the market crashes before you can rebalance, try to wait out the recession, if possible, said Stern. If you’re not sure how you should be managing your investments, consider finding a financial advisor.
Exercise Caution Before Borrowing
Before you take out a loan during a recession, make sure you can really afford to make the payments, said Shipp.
“If you’re borrowing for an opportunity (buying a cheap asset), then you want to fully understand the asset you are buying and have a high degree of comfort and certainty that the opportunity will pay off,” he said.
Adjust Your Income Tax Withholding
During the 2018 tax year, 120 million federal income tax refunds were issued by the IRS, averaging $3,068 each. Essentially, that means most taxpayers make an interest-free loan to the IRS during the year and then get the money back when they file their tax returns.
In years when cash flow isn’t an issue, that’s not a big deal. However, your finances might be tight during the next recession. If you would rather have that money throughout the year to pay bills or pay down high-interest debt, you might need to adjust your withholding. To do so, complete a new Form W-4 and submit it to your employer.
Don’t Give Up on Your Investment Strategy
Though looking at your stock portfolio during a recession can cause you consternation and heartache, if you have a solid, long-term strategy in place, a recession isn’t the time to change horses.
“The old adage is buy low, sell high,” said Gorman. “Seems obvious but most people do the opposite. So instead of looking at a recession as a negative situation, look at it as a chance to take advantage of a recalibration of valuations.”
Jump From Renting to Buying
Real estate prices often fall significantly during a recession, which can create a great opportunity for renters looking to make the jump to owning their own home. According to the Bureau of Labor Statistics, about a decade of housing price growth was wiped out between 2005 and 2008.
“A recession can be an opportune time to make large purchases if you have good credit and cash flow,” said Stern. “Forward thinkers will actually wait for recessions to make these large purchases. Why buy something at full price when you can get it on sale? Strong borrowers actually have much more latitude to negotiate rates and points on house purchases during recessions when liquidity dries up.”
Review Your Insurance Coverage
Reviewing your insurance can help you not only make sure you’re not overpaying, but also ensure that you’re adequately protected. During a recession, your budget is likely tighter than usual, so you don’t want to overpay on premiums.
But, that doesn’t mean you should automatically take the cheapest option. If something happens and you’ve chosen the cheapest option, the extra costs could be untenable at a time you need the help the most.
Start a Side Hustle
Even if you’re able to make it on just your salary, consider getting a side job you can do on your own time to supplement your income. You might tutor students, teach a musical instrument or start your own consulting business with the skills you learn at your day job.
Not only can a side hustle provide extra money, but also if you lose your main job, you have a separate income stream to keep yourself going.
Cut Your Unnecessary Expenses
No list of how to survive a recession would be complete without mentioning cutting your expenses.
“You need to break your living expenses into two categories: necessary living expenses and luxury expenses,” said Gorman. “The necessary ones often can’t get cut — groceries, electricity and so on. But the luxury ones — vacations, dinners out — you need to review and see if they are necessary.”