Considering that the Federal Reserve cut interest rates this week with the purpose of stimulating economic growth and curbing potential job and economic declines, we decided to discuss about nice financial “cardinal rules” we need to follow.
If you already tried these practices, that’s wonderful. However, if you are missing any of these tactics, you should consider adding them to your day-to-day life. All these strategies for managing your money are mandatory to protect you from problems that could arise from an economic downturn. So, let’s debate if we should prepare for a recession or not, and if yes, how to do it!
Evaluate your income stability
You can start by asking yourself how can a recession affect your income. Are you on a fixed or variable income? Do you run your own business? Are you in the kind of industry that’s extremely sensitive to economic downturns?
If you conclude a recession is bound to have a specific impact on your livelihood, it might be a good idea to start thinking about how you can earn extra income if needed. Alternatives can include freelancing, taking up a side hustle, or joining the gig economy. Now it might be the proper time to strengthen your professional network and update your resume, too.
Review your spending
After considering all the ways in which your income could change, you might come to the conclusion that you will need to reduce your spending during a recession. If so, you might want to start by reviewing your budget and identify areas where you can trim spending, especially if your income is bound to decline.
For instance, canceling subscription services you don’t need, switching to generic brands, or even reducing spending on entertainment and eating out are some areas where you might be able to save money without actually sacrificing too much of your lifestyle. It might also be beneficial to postpone huge purchases. Instead, use the funds to build or even strengthen your emergency fund.
Pay down your debt
As a crucial part of reviewing your spending, make sure you also check all your debts, including the amount owed, term, interest rate, and required minimum payments. Try to formulate a plan to pay them down.
Prioritize making all the minimum payments first, then try to focus on your high-interest-rate debt. If you already have multiple debts lined up with high interest rates and a credit score you’re proud of, you might be able to explore whether it’s worth consolidating debt.
What do I mean by consolidation? Well, consolidation implies lowering your monthly payment and interest rates, but you might incur fees that would ultimately negatively impact your credit score.
Plan your emergency fund
Even if you somehow manage to earn extra income while cutting back on spending, you might still deal with a gap between your take-home pay and the overall amount required to cover your essential needs during a recession.
Having a proper emergency fund in place can help you cover all the unnecessary gaps without selling your investments, tapping into your retirement account, or taking on more debt. We advise you to have somewhere between 3 and 6 months of living expenses in an emergency fund.
So if you don’t have one, now is the right time to start building one. If you already have one, it’s worth evaluating whether or not you are still comfortable with the amount saved, depending on your income stability and flexibility to adjust your spending habits.
Review your protection plan
In case you lose your job or your hours are dramatically reduced, you might lose the insurance linked to your employer, like health, disability, and life insurance. It’s fairly important to keep any coverage lost, as unexpected events can easily derail your financial strategy.
So what you might want to do is start looking into other alternatives and costs. You need to keep these coverages on your own, especially when you start planning your recession budget. If you know your options, you can easily prevent gaps in coverage and prepare for higher costs of keeping the coverage individually.
For any insurance policy you have purchased individually, like home or auto insurance, now is the time to see if you can lower your premiums without sacrificing more coverage.
Don’t abandon equity markets
When fears of recession run high, they can also stir quite a strong emotional response, as well as a call to action when it comes to investing. The first instinct is to sell stocks or bonds, thinking they might underperform during a recession, then buy back into the market when it is over.
However, this could ultimately lead to underperformance in investor portfolios. Looking closely at stock market performance, we might notice that stocks generally act as a leading indicator of recession. By the time the recession takes place, stocks have already priced in much of the slowing growth, and the pain has already been registered.
In the end, equity market performance can be good, since this is usually when stocks tend to bottom and even rebound. However, investors might not have the chance to buy into the more favorable market prices as soon as the recession is over. We also notice that some of the most extraordinary performance days in stock market history were during bear markets and recessions.
Revisit your time horizon and performance expectations
Experiencing short-term market declines might be a difficult thing to handle. Understanding the time horizon for your financial goals and revisiting the right long-term performance expectations for your portfolio can definitely make it easier as far as all the ups and downs of an economic cycle go!
Taking a closer look at consumer sentiment and stock market performance, we notice that stocks tend to do quite well when sentiment is bottoming. Well, not all periods of falling investor and consumer sentiment will lead to recessions, however valuations generally fall as sentiment falls.
Ultimately, this can translate into better, long-term performance for buyers of stocks. On a similar note, bonds have market their own run-up in yields this year, since prices have drastically fallen. We tend to believe that yields have already peaked and that they might trade in a range-bound fashion for the rest of the year.
Take stock of exactly how much risk you are willing to take
The overall risk that’s appropriate for your portfolio differs from other people’s. In fact, it is solely based on you and your life circumstances. Whether we’re talking about income, goals, debts, investment horizon, and age, they can all impact the amount of risk you should take when it comes to investing. Too much risk in your portfolio, and you might deal with short-term losses that you weren’t ready for.
Now is the proper time to revisit your comfort with risk, as circumstances could soon change. You probably overlook this, but your risk tolerance plays an immense role during periods of market volatility since it can affect your investment goals. Investing comes down to balance, including balancing the return you might need to reach your dreams and the comfort level you desire.
If you found this article useful, we also recommend checking: Target Cuts Prices on 2,000 Items: Here’s Why
