7 Ways to Protect Yourself from a RecessionAug 03, 2022
Just the word, “recession,” is scary for most of us, but you can put many of your fears to rest. By adopting these seven basic principles into your life, the pain of a recession can be largely minimized.
1. Live within your means. Living within your means every day is just another way of saying that you should never need any additional consumer debt. Once you begin creating debt in your life, more inevitably seems to follow. Gas prices may be high, but buy that gas with a credit card at 27% and you'll see just how expensive it can be.
Taken to the extreme, if you have a two-income household, you may want to try to learn to live off just one income. Think of the retirement you could fund with the other income. And if one of you should lose your job, you'll already be living on one salary.
2. Have a second source of income (or a third or a fourth). A second income source is never a bad idea, even if you just put in a few hours here and there. Job security is practically nonexistent now, and an additional source of cash flow increases your financial security.
3. Keep a long-term perspective with investments. Expect that there will be periods of time when your investments will lose money. But you only truly lose money if you sell. The economy almost always improves over time, so you'll make back all your money and then some. In fact, a recession can be the perfect time to invest money.
As you get closer to retirement age, move your money into more liquid and lower risk investments. Otherwise, you may not have enough time to recover from any market downturns before you require access to that money.
4. Consider your risk tolerance. All the financial gurus have tons of charts and graphs that tell you how much of your money should be invested where, based on your age. But if you aren't sleeping well because your portfolio is down 12%, you may need to adjust your asset allocation. You should feel secure in your investments, not be in a state of panic.
Don't sell while the market is significantly down, but when things improve you can move some of your assets into bonds or more stable blue-chip stocks.
5. Diversify your portfolio. Keeping your money in different investments will lower your stress and your theoretical losses. You'll also be less likely to do something impulsive. You don't have to get carried away; something as simple as dividing your money between your home, savings account, bonds, and stocks is sufficient.
6. Maintain a good credit score. In a recession, qualifying for credit can be challenging enough already. If you want to purchase a house, get a new credit card, buy a new car, or in some places even rent an apartment, you need to maintain your credit scores. Pay your bills on time and keep your credit card balances as low as possible.
7. Keep an emergency fund. An emergency fund is an important part of any financial plan. There are many reasons for this. If someone loses a job, there is money available that won’t result in an investment loss if used.
You never know when the unexpected may happen. What if your car needs a new transmission? Do you really want to be forced to sell some stock that will realize a 25% loss? What if you need money immediately? Some assets can take time to liquidate. And you may need even more time before you can access the funds.
The best part about these suggestions is that they’ll serve you well all the time, not just during a recession. Recessions are never easy, but if you make a few small lifestyle changes, you’ll ease your burden and reduce financial stress.