How To Prepare For A Recession
Recessions are a fact of economic life and, in many ways, a natural reset. Though we are currently enjoying one of the longest bull markets in modern history, it’s important to think through how the next recession might financially affect you and your loved ones before it arrives—and, armed with that knowledge, to begin to plan accordingly.
In a perfect world, a recession would trigger a reduction or cancellation of debt. Unfortunately, you can’t stop paying your household bills, even in a recession. Failing to pay could lead to penalties and collection agency calls -- making it much harder to get the best interest rates on loans and insurance in the future.
As families tighten their budgets and focus more intently on covering day-to-day living expenses, investing often falls by the wayside. But abandoning your investment strategy during a recession can have a long-lasting, negative impact on retirement and other long-term goals like saving for college. In fact, many investors wait too long to re-enter the market, leaving potential gains on the table when the stock market eventually rebounds.
Unemployment is the most stressful byproduct of a recession. As demand slows and companies try to stem losses, employees may be furloughed or laid off. Although a recession is a temporary slowdown—typically defined as two consecutive quarters of reduced economic growth—it can feel like an eternity if your family experiences a job loss. Not only can the loss of income lead to financial instability, it could also have a strong negative impact on your mental health and stress levels.
What You Can Do to Prepare
Create an Action Plan
Rather than try to time the downturn, make a plan. Here are a few steps you can take now to get started:
- Establish a comprehensive budget and look for opportunities to start paying off extra debt now.
- Rank your lifestyle priorities and determine a plan that would give you peace of mind if you need to hunker down.
- Reduce risk by choosing investments that offer protection during economic downturns.
- Start thinking about potential part-time employment ideas, in the event you might need to supplement your income in the next downturn.
Get Everyone Onboard
Weathering a recession will require an all-hands-on-deck effort. It’s critical to sit down as a family to talk about what’s happening in the economy and how it may impact your household. It’s especially important to remind younger family members that recessions are inevitable, but temporary. Devising a plan together will work wonders during tough times.
Start Planning Now
Change can be startling, even in the best of times. To help limit the impact of a recession, or any unexpected event affecting your lifestyle, start executing your plan today. Remember, finding ways to spend less on housing, food and transportation will be beneficial for your bottom line regardless of what’s happening in the market. This practice will not only ease you into your strategy, but it will also give you the opportunity to make tweaks to your plan before you need to implement it in a downturn.
Change What You Can
You may not be able to stop or time a recession, but you can be in control of preparing yourself and your family for a downturn. By adjusting your lifestyle and remaining focused on what really matters, you can potentially minimize the impact of a recession on your life, ensuring that you weather fiscal storms as safely and securely as possible.
Securities are distributed by AIG Capital Services, Inc., Member FINRA.