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How to Prepare Your Finances for a Recession

The coronavirus pandemic has had a number of effects on the U.S. economy, including many recession-like symptoms. The Coronavirus Aid, Relief, and Economic Security (CARES) Act has been put in place in an effort to curb some of these effects. Provisions within the new law include stimulus check payments to most Americans, many small business relief measures and more. However long a possible recession lasts, there are steps you can take to protect your money from its likely negative effects.

Creating a financial plan to follow during a recession is extremely important. Speak with a financial advisor about it today.

Build an Emergency Savings Fund for You and Your Family

Ideally, you’ve got an emergency fund. Financial experts commonly recommend giving yourself a runway of about three months. That is, you should have enough on hand to cover three months’ worth of expenses should you lose your job. But during this uncertain  time, you’ll want to have more available. So if you have three months’ of expenses, you’ll want at least to double that amount. During the Great Recession, it took people six months or longer to find jobs.

If you have the additional money stowed away in something liquid like a certificate of deposit, it’s fine where it is. But if it’s in something less liquid, you may want to move it to, say, a high-yield savings account. Of course, with the market down, you’ll want to tread carefully before officially selling any investments. But if you’ve already taken some profits off the table, you may want to set aside part of them for your emergency fund.

If you don’t have additional savings – or any savings, now is a good time to start your emergency fund. Of course, this is at once the easiest and hardest piece of advice when it comes to recession-proofing your finances. Easy, because it takes no special insight to know that having more money will make life less difficult during troubled times. Hard, because you can’t save money you don’t have.

One way to pad your savings is with the CARES Act stimulus check that many Americans have already received in their bank account. Single individuals whose AGI is less than $75,000 get $1,200, while married couples whose AGI is less than $150,000 will receive $2,400. People who earn more will receive reduced amounts, though families will receive an additional $500 per dependent child. If your check has yet to arrive, use our stimulus check calculator to find out how much your payment will be for.

Resist the urge to spend your stimulus check, on something unimportant. If you don’t need the money for essentials, sock it away for now or invest it.

Rework Your Monthly Budget

How to Prepare Your Finances for a Recession

Perhaps the most tedious single exercise in personal finance is a monthly budget, which is why most households don’t keep one.

That isn’t to say that most people don’t know what they’re spending. From that perspective, the average consumer absolutely budgets. Most households keep a general monthly sense of how much goes in and goes out. They get sloppy, however, around the details.

You’ll want to go through your finances with a fine tooth comb. Look through things like your monthly subscriptions to identify products or services that you hardly use anymore. The same goes for memberships to the gym or other clubs.

A detailed monthly budget is good financial housekeeping for any period, but in a recession it can be absolutely critical. It will let you know where you can find some money every month, and the areas that might let you cut back.

The truth is, if you’re like most people, you spend more every month than you realize. That’s good news. It means there’s some money to find.

Create a Plan for Managing Your Debt and Loans

During a recession one of the hardest pieces of personal finance to manage is debt. This is because it’s largely intractable. Thanks to the CARES Act, though, you do have a couple of avenues of relief.

If you have student loans, and they are federally backed as opposed to private, the government has suspended payments until Sep. 30, 2020. During this time, interest will not accrue. You can still make payments if you want, and all of the money will go toward your principal. But if you are worried about losing your job or not having enough money down the line, this is a good place to save.

The CARES Act also provides mortgage and rent relief. If your mortgage is federally backed, the government wants you to continue making payments as long as you have a job. But if you lose it due to the coronavirus pandemic, you have the right to request forbearance on your mortgage for up to 180 days, and an additional 180 days on an as-needed basis. That said, if your mortgage is held by a private lender, you should still look into whether it is offering special terms during the pandemic. Again, if you are able to suspend some or all of your mortgage payments, you should set the saved money aside.

The next step is deciding what to do with your debt. Look at options for restructuring to lower cost accounts, or consolidating your debt to a more manageable form. Ideally, you want to pay off your high interest debt to make sure that it isn’t hanging around your neck if you lose your job. But don’t simply throw money at the credit card. You’ll also need your cash reserves going into a recession, so strike a balance between paying off your loans and keeping some money on hand for emergencies.

Review and Reevaluate Your Investments

How to Prepare Your Finances for a Recession

It’s not necessary to stop investing during a recession, but it should be done with extra caution. Make sure that your asset allocation has a large cash portion if you’ll be needing to tap your portfolio. You may also want to develop passive streams of income now. Peer-to-peer lending and real estate investment trusts (REITs) are two traditional ways to create an income stream. Or maybe you want to look into a fixed or fixed indexed annuity.

If you have spare money to invest for the long term, consider core sector stocks and dividend stocks. On the other hand, avoid volatile sectors like energy, oil service, commodities and financial shares. Stocks of consumer discretionary companies, those that offer non-essential items such as apparel, luxury goods and consumer services, are also prone to volatility during a recession.

Most importantly, don’t try to time the market. It may be tempting to buy the dip and reap returns, or sell off your equities and wait for a return to normalcy. But the former risks greater losses and the latter risks missing out on the recovery. You’re better off sticking with your existing long-term investing plan.

Prepare to Possibly Look for a New Job

The biggest problem during a recession is layoffs. Yes, the market tanks and business development slows down. For the average consumer, though, the top fear is simply losing their job. So start looking for a new job now, before you lose the one you have.

Looking for a new job doesn’t have to mean actively sending out cover letters. Finding a job is a process that involves networking, reconnecting with old contacts, rebuilding old relationships and trying to find opportunities. It means paying attention to your skills and figuring out what might make your resume more impressive. It means looking seriously for growing job markets and new places you could take your career.

All of this takes time, and the worst moment to start is after you’ve been laid off. Instead, start now. If your job is safe, you’ll have touched base with old friends, updated your résumé and gotten a clearer picture of career possibilities. All useful things.

If not, though, you’ll be ahead of the game.

Tips for Weathering a Recession

Photo credit: ©iStock.com/MicroStockHub, ©iStock.com/Gwengoat, ©iStock.com/D-Keine

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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