Inflation is at a 40-year high, interest rates are rising, the price of oil is driving gas prices north of $5 a gallon, there is war overseas, and the stock market feels like it’s teetering on the edge of a precipice. I can go on, but I won’t. These factors alone are more than enough to test all our wits. It’s stressful and anxiety-inducing. I’m right there with you.
This is the perfect time to take a deep breath and remember that recessions don’t last forever. The worst thing you can do for your finances is to make reactive moves driven by fear. Here are some tips to fortify your finances and add resiliency to your financial life so that you can take advantage of opportunities to not only survive but to thrive in a recession:
Beef up emergency savings: When you are preparing for a recession, one of the best things to do to increase your resilience and decrease anxiety is to increase your savings. The rule of thumb at a minimum is to have $1,000-$2,000. The financial planning standard is 3-6 months’ worth of your monthly expenses. For recession prep, you might want to increase this further to 6 – 9 months’ worth of expenses, if possible, for the simple reason that you may need to weather a loss of income for a longer period of time.
How to do it:
Step 1: Set up a separate high yield savings account for your emergency savings.
Step 2: Automatically save as much as you can to build this account. You can use a daily savings calculator like this to determine how much you need to save per day or month to get to your goal in the time frame desired.
Get on a leaner budget and cut back on large purchases: This is a great time to implement a lean budget so that you can increase your ability to save. This budget eliminates any non-essential spending and drills down to exactly how much you would need for the essentials like food, shelter, bills, and transportation. Cutting back on large purchases will also allow you to preserve the cash you have and decrease the risk of adding more debt. (Remember that interest rates are rising, which means your borrowing costs will rise too!)
How to do it:
Step 1: Track your expenses by picking an approach that works best for you. If you are a pen and paper person, print out your statements and jot everything down or put it in a spreadsheet like this one. If you have a preference for technology, consider using budgeting software through your bank or other budgeting software programs like these that can help track your spending.
Step 2: Use tips like these to reduce your expenses.
Step 3: Use the additional discretionary savings to help you build your emergency savings faster and/or pay off high interest rate debt, which is typically anything greater than 6%! You can use a debt blaster calculator like this to help formulate your strategy. The savings for goals calculator illustrates the progress you can make with the additional savings.
Stick to your long-term investing strategy
The last thing you want to do is panic sell. Timing the market is virtually impossible to do, and many times market losses are recovered in sporadic days within an average of 1.5 years. If you are sitting on the sidelines, you miss out! Instead, you’ll want to take a moment to reassess your situation and decide what the best move is for your investments based on your investment goals, time frame, and comfort with risk.
How to do it:
Step 1: Evaluate your risk tolerance by taking a risk tolerance questionnaire. This is how you can confirm if you are generally in an appropriate investment allocation. If your money is invested in a target date fund or other asset allocation fund, then this will already be done for you. If you’ve created your own mix, it might be time to reallocate between stocks and bonds. Here are 4 ideas to rebalance your portfolio if you need some guidance there.
Step 2: If you have excess cash to invest, consider dollar cost averaging. This is a method to get a lower average price in a beaten-up market. As Warren Buffet said, “Be fearful when others are greedy, and greedy when others are fearful.”
Diversify your skills/income streams
The coronavirus recession initially wiped out a lot of service-related jobs. We never know which industry might get hit the hardest when a new recession comes. The large takeaway from this is that having a diverse set of skills can allow you to diversify your income streams and increase your resilience in your income earning potential!
How to do it:
Step 1: Upskill. Start with leveraging your employer-provided benefits. Many of them offer tuition reimbursement benefits or professional development stipends. Some offer free subscriptions to MOO
Step 2: Update your resume and LinkedIn profile and begin networking. You can use the help of a service like these or scan the LinkedIn profiles of the influencers you follow for inspiration on how to build yours.
Step 3: Network professionally. Begin reaching out to your own circle of family and friends for ideas/leads on side hustle opportunities that fit your time and skill set. LinkedIn is also an invaluable resource. I’ve found success in following the individuals I want to speak with and highlighting in my introductory note an accomplishment or resource that they have shared and what I liked (or loved) about it. I then ask for an informational meeting.
Recessions are a normal part of life…and they don’t last forever. The best thing to do is to learn from the past, don’t panic and be prepared. Now is a great time to take these steps to get you to a better place so that instead of just surviving, you find a way to thrive! If you need help getting started, don’t hesitate to reach out to a qualified and unbiased financial planner, especially if you have one available through an employer-provided financial wellness benefit!