What does a recession mean for you? Personal finance advice from financial planners.

What does a recession mean for you? Personal finance advice from financial planners.

As a promising young investor by the name of Warren Buffett once quipped: Only when the tide goes out, do you realize who has been swimming naked.

Well, time to check your trunks.

The word “recession” has been flying around lately, and not without reason. A witch’s brew of inflation, a bearish stock market, a crypto crash, hiring slowdowns, war in Europe, and rising interest rates have even the most seasoned investors scratching their heads about what’s to come.

In fact, the likelihood of recession within the next 12 months has spiked to 44%, according to economists surveyed by the Wall Street Journal—a level “seldom seen outside of an actual recession.”

More than anything, it’s a simple fact of market history: Sooner or later, a recession will hit full-force. One famed investor, ARK Invest CEO Cathie Wood, has mused that we are probably there already.

“What we do know is that recessions will occur, and they are part of a normal cycle,” says Rob Williams, managing director of financial planning and wealth management for brokerage Charles Schwab.

“It makes sense to have a financial plan that’s systematic, and ready for whatever the market will deliver—and hopefully you have that in place well ahead of time.”

So what’s an individual investor to do? Some things are far beyond your personal influence, like what happens with the stock market or whether inflation continues to rage around the world. But other things are very much in your control. And you would be wise to undertake those steps now, rather than wait until it’s too late.

Bolster your emergency fund

Think of yourself as a military strategist: You want your finances to have multiple lines of defense, in case you ever find yourself under attack. And your first defensive wall is always the emergency fund.

That’s the cash you have on hand, right now, in case you face sudden and unexpected expenses: auto repair, job loss, a medical issue, a tax bill, or anything else. The Federal Reserve found that 32% of Americans wouldn’t be able to come up with $400 in a pinch—and that’s a problem.

“Have an objective to save three to six months’ worth of fixed expenses, and be realistic about how long it may take to get there,” says Heather Winston, director of financial planning and advice for financial services firm Principal.

“What you are doing is saving your future self from having to take on debt, and make other really tough choices when that rainy day comes about.”

If you don’t have that sum in your account right now, that’s job one, and it’s OK to start small. Trim back discretionary spending, try to lower fixed monthly expenses like the cable bill, get rid of unused subscriptions that are charging automatically to your card (the app Truebill can you help with that), and earmark windfalls like tax refunds or annual raises to your cash hoard.

If you are approaching retirement age, you might want to aim even higher and put aside enough cash to get you through a full year, suggests Schwab’s Williams. That way your hand won’t be forced to cash out too much of your retirement savings during a market bottom.

Time to make a move?

In any approaching financial storm, one of the smartest actions is to slash your fixed monthly costs. For most people, the largest such cost by far is housing.

So if you happen to be a in a phase of life where you don’t need quite so much house—perhaps the kids have graduated and gone off to college, for instance—now would be an opportune moment to consider downsizing. The monthly differential between, say, a four-bedroom house versus a two-bedroom condo —along with all the associated costs like property taxes, landscaping, utilities, and upkeep—could be massive, especially when multiplied over many years.

“Downsizing now does make sense for people who have a lot of equity in their home,” says Daryl Fairweather, chief economist for brokerage Redfin. “If you are trading down, you could potentially afford to buy your next one in cash, and not get hit with rising interest payments.”

With the work-from-home trend that blossomed during the pandemic, you could also consider moving to a lower-cost locale, if your employer isn’t requiring you to be on-site in an expensive urban area anymore. According to a recent McKinsey survey, 35% of respondents said they had the opportunity to work remotely five days a week. “That’s a good option for people who are trying to figure out how to cut costs without impacting their lifestyle,” says Fairweather.

Another housing thought: You could consolidate other high-rate, risky debt into something more manageable, like a home equity line of credit (HELOC). That is credit extended to you based on the equity you have built up in your home, but which you don’t necessarily have to tap—kind of like a financial safety valve.

“Take out a HELOC as a safety net,” says John Ulzheimer, a credit expert and president of the Ulzheimer Group. “The annual fees are immaterial, and your home value has likely shot up over the last few years. You can tap the equity and use it only in the case of an emergency.”

Tread carefully, though. While a HELOC does give you some financial breathing room, it also potentially puts your home at risk. “Be sure that you can make your payments, or you could lose your home,” warns Ulzheimer.

Perform a portfolio X-ray

Maybe you’re one of those rare souls who examines your portfolio allocation every year, tweaks it accordingly, and triple-checks that your retirement plan is on track. More likely, you have put that off for a very long time.

Well, it’s time to take a look. There is no blanket prescription for proper asset allocation, since it depends on risk appetite. But basic portfolio management principles say that younger investors in their 20s or 30s should probably be almost all in equities, since they have such a long investing timeline ahead. Meanwhile those close to retirement should have ratcheted back, at least partially, into steadier assets like bonds and cash.

For general allocation recommendations by life stage, check out the percentages suggested by Baltimore-based investment managers T. Rowe Price.

“This is a tale of two markets, with some assets going up and some going down,” says Schwab’s Williams. “In a market like this, it makes sense to look at what your allocation is and see if it’s still working for you.”

In particular, if the market is making you feel queasy and your risk tolerance is at its limits, consider tilting slightly towards cash and short-term bonds, suggests Williams. That added liquidity will help you cover any short-term needs, let you sleep better at night, and help prevent drastic emotional reactions like selling everything. “A down market is when you start to think about protecting what you have, and that’s where cash and short-term bonds can help,” he says.

When it comes to long-term contributions, take this occasion of a down market to boost them, if possible. A bear market means that shares have become cheaper, so buying now will likely pay off handsomely over the long-term—just as it did for those who bought equities after the financial crisis of 2008-9.

“If you have the capacity to do so, always have the mindset of putting 10–15% of your income toward retirement,” says Principal’s Winston. “Even if you’re starting small and don’t have that yet, adding just another 1% or 2% over the course of the year can really add up.”

Get smart with credit

In addition to bolstering your strengths, you also need to minimize potential weak spots. One obvious vulnerability: if you are carrying any high-interest credit card debt. Such obligations can easily spiral out of control and put other assets at risk—so make that debt a priority and attack it now.

“If you are carrying credit card balances, it’s likely the most expensive of all your debts,” says Ulzheimer. The average rate right now is 17.09%, according to creditcards.com—and that’s just the average, so many cards charge much higher than that.

One smart way to minimize potential damage: a balance transfer. “If you’ve got good credit, you can open a balance transfer card, move your interest accruing balances to an interest-free card, and then work to pay off the debt aggressively,” says Ulzheimer. “You may be able to qualify for a card that gives you six to 12 or more months of zero interest.”

You might also ask your bank for higher limits on your current credit cards, even if you have no immediate need to tap them. Because if you run into financial trouble later, and start bumping up against credit limits, too bad—it’s likely too late to ask for more.

“Ask your card issuers for higher credit limits, but be careful here,” says Ulzheimer. “If you ask for too much, you may be required to apply for a new card with the same issuer. Most issuers will allow you to increase your limit—but not by much.”

A side note on credit: You should also take the occasion to clean up your credit reports from major agencies like Equifax, Experian and TransUnion. You can check your reports with the agencies themselves, or through some third-party sites like Credit Karma (creditkarma.com).

You might find outright mistakes, in which case each of those agencies has a dispute mechanism on its website. Or you might find legitimate debts that are still outstanding—maybe the notification was sent to an old address, for instance—in which case you can resolve them with the creditor, and then have them notify the agencies that you’re all paid up.

Boosting that credit score significantly could save you tens of thousands of dollars on big purchases like autos and homes—a difference which could prove even more critical during a recessionary period.

Power-boost your career

Many people tend to think of job loss as something they can’t control, much like a weather system moving in.

Not necessarily so. Even if your company gets roughed up in a national recession, there are a number of proactive steps you can take right now to shore up your career prospects and stave off a ‘personal recession’.

That might include volunteering for key assignments, boosting your credentials by learning additional skills, joining a committee in a leadership role, being a useful resource for your company by amplifying their content online, and raising profiles (both yours and theirs) by speaking on panels and working with trade associations.

“What’s most valuable is to make sure you really understand what is important to your employer: What metrics are they trying to achieve?” says Lindsey Pollak, author of the career guide Recalculating: Navigate Your Career Through the Changing World of Work. “When you can align your individual contribution to the achievement of those goals, that’s when you prove to be indispensable.”

Which skillsets will make you particularly bulletproof? When LinkedIn analyzed hundreds of thousands of job listings, it found the most in-demand hard skills included software development, project management, data analysis and digital marketing. Brush up on useful skills at sites like LinkedIn’s educational arm (www.linkedin.com/learning/) or Khan Academy (khanacademy.org).

No matter what happens to your current company, there are two critical things to put on your to-do list. First, network like a demon. Not just in your current field, but in adjacent firms and industries as well. After all, that is your “social safety net,” and you would be wise to make it as thickly woven as possible.

Second, develop a side hustle for yourself. That way, if something ever happens to your primary gig, your Plan B can seamlessly transition into Plan A—at least as a stopgap measure, and perhaps as a permanent one. A good resource to start: the website of entrepreneur and author Chris Guillebeau, Side Hustle School (sidehustleschool.com).

“It’s always smart to consider side hustles, consulting, freelancing, and other ways to make money,” says Pollak. “If you are thinking about a potential career change at some point, side hustles and freelance work can also be a way to dip a toe into other career possibilities.”

All this might be strange to think about during a time of rock-bottom unemployment. The rate for May was 3.6%, according to the Bureau of Labor Statistics, with millions of jobs going unfilled. But, as famed networker and author Harvey Mackay likes to say: Dig your well before you’re thirsty. So start digging.

Get covered

Nobody is really fond of insurance, because of the premiums that drain cash from your accounts every month—which can seem especially biting during a recession. But there are hundreds of different land mines that could blow up your financial life, and making sure you have proper insurance coverage is the best way of defusing them before they detonate.

“Insurance is one of those things people don’t like to talk about, but it does something investments can’t,” says Schwab’s Williams. “It helps protect against risks which may or may not occur—but if they do occur, they are extremely expensive.”

Some tips to make you feel more secure in hard times: Boost auto liability coverage beyond required minimums. If you accidentally hit someone with your car, you can very easily be sued into the poorhouse. So consider jacking up liability limits from $300,000 to $500,000, say—and maybe even supplement that with umbrella coverage, where a few hundred bucks a year will buy you another $1 million of financial security.

When it comes to your home, make sure you have enough to coverage to rebuild, and not just enough to cover current market value (which may dip during a recession). And remember that most standard policies don’t even cover flood damage, so in this era of climate change, look for an affordable policy through the National Flood Insurance Program (floodsmart.gov).

Finally, two-thirds of all bankruptcies are tied to medical issues, so pay up for health coverage to avoid catastrophic outcomes. If recession leads to job loss, that life event qualifies you for a special Obamacare enrollment period (healthcare.gov).

Disability coverage, which replaces a portion of income in the event of extended illness or injury, is an underappreciated option, especially in this era of COVID mass illness. It can be pricey if you get it on your own, but surprisingly affordable when offered through your employer—even better, look into some combination of the two.

“Most disability policies cover 60% of income, and there is a tendency to assume that’s enough,” says Principal’s Winston. “But is that really enough? Carrying a personal policy, in addition to the one provided by your employer, could help cover all the costs of a growing family.”

Think of all these steps as a little preventative medicine for your portfolio. Just like exercising and eating well can help stave off more serious health issues down the line, so can these steps help keep your financial life in top shape.

If a full-on recession comes, it comes. But in the meantime, you can sleep well knowing you did everything you could to secure the financial future for you and your family.

.

Leave a Reply

Your email address will not be published. Required fields are marked *