Here’s What You Can Do Now to Protect Your Financial Health Against a Future Recession
There’s no need to panic, but you also don’t want to be caught off guard.
When things are going well, it’s easy to feel like you have your financial health well in hand. Practicing good personal finance tips and establishing financial independence can seem straightforward enough when markets are up, your job is stable, and your debt is manageable. If you could keep everything under control, your path toward financial prosperity would be easy.
Unfortunately, part of dealing with finances is adjusting for the outside factors. Global or national market trends (aka the shifts you have no control over) can have a major impact on your personal financial health, as when there’s a recession. A recession is a period in which general economic activity declines. In other words, spending and investment on the global or national scale decreases, leading to a ripple effect of economic downturn on the smaller scale. Companies may go out of business or downsize, leading to a loss of jobs; consumers may focus on saving over spending. During a recession, there are often business failures (and sometimes bank failures), slow or negative growth in production, and higher unemployment.
The Great Recession in 2008, the last recession the U.S. faced, may still be on many people’s minds. It—with the 2008 financial crisis that contributed to the recession beginning—led to a spike in unemployment and an enormous decline for the housing market. With that recession still in the recent past, mentions of another recession in the coming years can be frightening, but a recession isn’t necessarily something to panic over.
First, recessions are a normal part of the business cycle. As the economy grows, that expansion is bound to slow or reverse for a short period at some point. Second, while predictions of a 2019 or 2020 recession were widespread in 2019, the chance of a recession within the next year is at 26 percent, according to Bloomberg. It’s unlikely that a recession would occur in 2020, per the Bloomberg analysis, so there’s definitely no need to panic.
Still, it never hurts to be prepared, especially if the chance of recession increases suddenly. If the last recession left a large dent in your (or your family’s) finances, you’re likely inclined to be overcautious about another one, and there are steps you can take to ensure the impact of the recession on you is minimal, even if you can’t control whether there is a recession or if it causes you to lose your job.
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How to prepare for a recession
Set aside savings
As with most financial hardships, the number one step for outlasting a recession with your savings intact (or mostly intact) is to establish substantial savings in the first place. “An emergency fund should be considered part of one’s savings plan in order to prepare for the unexpected,” says Shirley Yang, VP of deposits at Marcus by Goldman Sachs.
An emergency fund should contain enough money in an accessible account (a savings account, not an investment account) to cover a few months of expenses in case you should lose your job. Most advice says to keep three to six months’ worth of expenses in an emergency fund, but setting at least six months’ worth aside can provide even extra security if you’re really concerned about the recession. If your work isn’t consistent or you work in an unstable industry, this is especially key.
Yang recommends placing that money in an account separate from your regular savings or checking accounts. Seek out an account with a high interest rate, so that money can continue to grow while it sits in wait; Marcus by Goldman Sachs currently offers a 1.7 percent APY on its savings accounts, one of the highest in the industry right now.
Interest rates tend to fall during a recession. This is good if you’re planning on taking out a loan, but if your money is in a high-interest savings account, that means the interest it earns will decrease. Yang suggests diversifying your savings to ensure that, should interest rates fall, your money will continue to grow, especially if you have a substantial amount of money in savings. Certificates of Deposit (CDs) offer fixed interest rates, so funding one before a recession means taking advantage of a higher interest rate.
Some CDs charge a penalty if you withdraw your money before the terms of the CD end, so put only extra savings there, and keep your emergency fund in a savings account. There are no-penalty CDs, though (Marcus offers one), that allow people to withdraw the balance without any penalty or fees.
Consider your investments
If you have money invested in stocks or mutual funds, those investments are likely to lose value during a recession. If that money isn’t necessary in the near future, you can leave it invested, and it will likely regain its value (and even improve) once the recession ends. If you know you will need the money you have invested in the near future, though, it’s smart to sell your investments and keep that money in a protected account, such as a savings account or CD.
Your investments will come out on the other end of a recession if you let them sit; selling investments during a recession for a lower price than they paid for them is how people lose money. If you plan to keep your investments until the market improves, make sure you have enough money in savings to live off of, should you need it, and let your investments ride out the financial storm. Hopefully, you planned for dips in the market when you figured out when to start investing.
If you have enough money set aside, a recession is an excellent time to purchase investments: Prices will be lower, allowing you to buy low and sell high once the recession ends; just don’t use your emergency savings to do so.
Avoiding frantic, desperate moves is key to getting through a recession with your financial health intact. A period of economic downturn is not the best time to start a new career path or take a financial risk, especially if you’ve never done those things before. Depending on your situation, you may want to wait to buy a house or a new car, take an expensive vacation, get married, or even have children until the economy has improved. It’s certainly possible to do all these things, but if you’re particularly concerned about your finances, you may feel more comfortable waiting.
If you believe that a recession is coming, consider accomplishing major financial milestones before, or put together a plan to accomplish them during or after. Buying a house during a recession to take advantage of lower interest rates can be a smart move, but only if doing so doesn’t put your overall financial stability at stake. (You don’t want to buy a new house only to lose your job when your company downsizes, for example.) By putting together a rational, practical guide to your financial goals, you can be sure shifts in the economy won’t do too much to prevent you from reaching them.