In case of recession, protect yourself but don’t panic
If the threat of a recession gives you pause when it comes to your personal finances, remember now is a time to prepare, not panic.
Worries about the economy increased this week when a fairly reliable recession warning emerged from the bond market. But without a crystal ball, it remains unclear when a recession might hit. Still, financial experts say people should consider taking certain steps that are beneficial in any economy but would aid households greatly in a downturn.
DON’T PANIC >> The longstanding advice remains — do not panic and stay the course on your financial plan.
It is sage advice, said Dan Keady, chief financial planning strategist at TIAA, but it also goes against the grain for many people. “It’s hard just to do nothing,” he said. “The best investment strategy is a long-term one. If you buy and sell your investments frequently, you’ll more likely than not buy and sell based on emotion — panic or excitement.”
If you simply cannot sit still, use this pressure as an impetus to check your plan. Are your goals the same? Are your investments allocated where you want them? SAVE UP >> One of the smartest moves anyone can make is to build up an emergency fund. These are a great idea at any time to help weather unexpected expenses, but can become critical in a downturn.
A recession typically comes with job losses, and an emergency fund can be a lifeline for many families. Even those with good job security should take heed as everyone can feel an income pinch during a recession, as companies might eliminate bonuses, reduce overtime or slow pay increases, noted Lauren Anastasio, a certified financial planner at SoFi.
Americans, by and large, don’t have enough set aside in savings to handle financial hurdles.
Experts recommend having enough set aside to cover anywhere from three months to nine months of basic expenses. So, set aside whatever money you can and keep it in an account you can readily access. Even in this low interest rate environment, there are some savings accounts earning near or above 2%.
PAY OFF DEBT >> It is important to pay off any high-interest debts, such as credit card balances.
Americans dramatically reduced their debts after the last recession, but those debt levels creeped back up. This can be costly as the average interest rate on a credit card is 17.82%, according to Bankrate. It hit a record at 17.86% last month.
Paying down those debts will not only reduce the amount paid over time, it also frees up available credit that may be needed in a pinch ahead. That is important as banks tend to tighten lending during recessionary periods, so it could be harder to get a loan or line of credit. MAKE GOOD CHOICES >> It should go without saying, but be judicious about big financial decisions.
Consider holding off on any big purchases like a car or home remodeling if it is a stretch, Anastasio suggested. If you are going to need cash in the next few years — say for the birth of a child, a sabbatical or a return to school — make sure you have that available and not tied up in something that may lose value.