A wise friend recently asked me: “What should I be doing now to prepare for the next economic recession?” Whether you think the next downturn is nearly upon us, or is still years away, this is an excellent question to ask. Having lived through several economic downturns and having observed the behaviors that go along with them (both detrimental and beneficial), I share my top 3 tips here.
Remember learning fire safety from school days? What do you do? “Stop, Drop, and Roll.”
Before a crisis hits is the perfect time to stop and make your action plan, rather than trying to make decisions during a time of stress. So, take a moment to pause now, take a breath, and review your financial situation. What are your monthly obligations? Do you have enough savings to pay the rent next month, should your job be downsized? What expenses could you potentially cut back, or cut out? On the income side, are there other ways to expand your income, if your current income source changes?
I don’t pose these questions to alarm you; just the opposite. Planning now can bring calm because you know what to do when and if a crisis hits. When you’ve practiced and prepared mentally, you can feel more confident about handling the future.
Bonus tip: If you find this difficult, consider reaching out to a friend or advisor to help you talk through it (that’s what we’re here for).
If you aren’t already, consider dropping extra cash into a savings account. Stashing cash in case of emergency is always a good practice. But in the framework of what to do before a recession, stashing cash can also set you up to take advantage of opportunities that arise when prices fall.
For example, during the 2007-era housing crisis, we saw houses in the Austin area being sold for significant discounts. Investors who had the cash to do so could potentially buy homes at historically low prices. The key was having cash on hand when the time came.
So, how can you do this? Pay into your savings account like paying a bill: make a deposit every month (or whenever you get your paycheck). If you have a specific goal, you could name your savings account to help keep you focused. For example, if you are saving to purchase your next house, you could call it your “Next Home” savings account. If you don’t have a specific goal, you could call it your “Opportunity Account.” Then, “Set it and forget it.” Don’t use this money for anything else. If you are patient, then when opportunities arise, you may be better positioned than you were before.
And my final tip is: keep on rolling. Whatever you do, keep going. Remember that news headlines are meant to be sensational and stir up emotion. This does not help you; it helps keep reporters in business. As much as possible, let the news roll off your back and out of your life. Instead, keep focus on your plan and your goals.
A recession is NOT the time to stop contributing to your investment accounts. Again, recall the concept of investments being on sale during a downturn, and realize that you may actually be taking advantage of price fluctuations.
Recessions are also definitely NOT time to cash out of your investments because you fear losses. By cashing out, you could be effectively locking in losses. Leaving investments in the market gives them the opportunity to recover and get back on track.
No matter where the economy or the stock market is, these 3 tips are good financial habits to practice anytime. But especially if you are feeling wary about an economic recession, just remember “stop, drop, and roll.” This can help you to build your financial muscle, so it’s a bit easier when the heavy lifting comes.