If you’ve paid attention to business news in recent weeks, you might be certain the sky is about to fall.
Stock indexes have fallen steeply from the start of the year. Tech companies are freezing hiring and even laying off some workers after disappointing earnings. Inflation keeps rising. Financial experts and analysts have been ringing the recession alarm bell.
Of course, no one can predict if and exactly when a recession—which is defined by falling GDP, higher unemployment, decreased consumer confidence, and falling stock prices—will happen. Indeed, experts have been predicting one for the past few years, and it hasn’t occurred yet. Many economists say that if one is on the horizon, the probability is higher it will happen in 2023 than 2022.
Still, if you’re worried that a downturn is imminent, you’ll want to start protecting yourself now. You can’t personally solve the systemic issues at play that would lead to a recession. But there are certain things you can control that can help relieve some of your financial anxiety. Here are a few to focus on.
1. Save as much as you can
This one shouldn’t come as much of a surprise. But the No. 1 way to protect yourself in a recession is to have a decent amount of liquid savings available in case you lose your job or take a pay cut.
Traditionally, financial experts advise having three to six months’ worth of necessary expenses stashed away in an emergency fund—enough to cover housing, food, utility bills, loan payments, etc., so you won’t have to rely on a credit card or some other form of financing. But it’s up to you and your family how much you need to set aside to be truly comfortable.
If you don’t have that much saved, now is the time to make savings a priority. Ask yourself, “If I lose my job, what is necessary to keep my household running?” You’ll know best what you can cut out. If you have multiple subscriptions—think streaming services (Spotify and Hulu and HBO Max) and shopping memberships (say, Costco and Amazon Prime), for example—keep the ones you use the most and cut the others.
“You don’t want to have to eat ramen noodles in order to have Netflix,” says Lori Gross, a financial and investment adviser at Outlook Financial Center in Troy, Ohio. “You have to look at what’s important to you and your lifestyle.”
Eliminating something like Netflix from your budget isn’t a long-term savings solution, especially when it can provide a lot of entertainment at a relatively low cost. But if you’re worried about the immediate future, cutting an expense like that for a few months can put a little more money in your pocket and into your savings account.
Additionally, consider putting off certain unnecessary purchases—like home upgrades or a new car—if you can, especially with interest rates creeping up and car prices still sky-high because of inflation. It’s better to pad your savings than take on additional debt.
2. Find ways to increase your cash flow
The flip side of cutting spending is increasing income over the next few months. Maybe it’s time to join the Great Resignation and secure a better-paying job. That said, there are some potential risks with jumping ship and being one of the newer employees at a company when the economy turns; you’ll want to do your due diligence and make sure a job change makes sense.
A salary increase is obviously one of the best ways to insure you have more money coming in. But if you’re looking for smaller ways to earn more, another option is selling some of your unused possessions. Apps like Depop, Poshmark, and ThredUp make it easy to sell belongings like clothes, shoes, and accessories. Facebook Marketplace and eBay are good options if you’re looking to sell larger items, like household goods, furniture, bikes, etc.
A last-resort option is to reduce the contributions you’re making to a 401(k) or other retirement or investment account for a few months, and redirect those contributions to your savings account, says Bryan Cannon, a certified financial planner and CEO of Cannon Advisors in Charlotte.
“Not that I advocate reducing long-term retirement savings, but for the short term, it might make sense to stop your retirement contribution to build up your after-tax savings,” says Cannon. But once you get a comfortable amount saved, you should make sure to reprioritize your long-term investing plan.
3. Pay off high-interest debt
While saving more money is crucial when preparing for a downturn, it’s also a good idea to reduce your debt load, particularly high-interest debt from a credit card or other loan.
There are two main consumer debt-payoff strategies financial advisers typically recommend. With the avalanche method, you make minimum payments on all of your accounts and then throw any remaining money each month at the debt with the highest interest rate. Then there’s the snowball method, in which you put any extra money toward the debt with the lowest dollar balance. Once that’s paid off, you move on to the next lowest-balance debt, and so on, regardless of interest rates.
The avalanche will save you the most money on interest payments in the long term, but many people find more success with the snowball method because it’s easier to feel as if you are making progress toward your debt repayment goal and keep at it. Ultimately, you should do what works best for you—but remember, paying off that high-interest debt first will be especially beneficial to your bottom line.
You could also consider consolidating high-interest credit card debt into a fixed-interest personal loan or a 0% APR balance transfer credit card, if you’ve got good credit. This can help you streamline your debt and pay it off faster at a lower interest rate. Just make sure you have a clear plan to pay it off before you open a new account.
4. Keep investing if you can
When markets tank, the standard financial advice is to ignore the news and stick with your original investing plan. The rationale here is that if you check your 401(k) balance and see that it’s plummeting, you might be tempted to do something you later regret, like panic selling or halting or cutting your contributions.
Doing something rash would keep you from benefiting from the eventual recovery following any potential recession. If you can afford to do so, keep investing, says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Mich. He notes that March 23 was the two-year anniversary of the COVID-19 stock free fall. In the two years since, the value of top stock indexes has soared, even with 2022’s decline taken into account.
A falling market is potentially good for your long-term investments. Take advantage of it if you can. The best way to do so is through dollar-cost averaging, or automating a fixed contribution at a regular interval (say once a month). And understand that it might be years until you see the payoff.
“If you keep calm, remove emotion, and stick with fundamentals, you can handle the storm,” says Milan.
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