There is a lot of talk about the looming recession, or maybe even a depression, that is due any day now. If your financial situation is not that good, it is time to give it a tune-up in the event of an economic slowdown. Based on my experience from the previous recessions and stock market crashes, there are definitely some steps you can take to prepare for a recession. Here are 5 steps to help you prepare.
1. Practice Frugal and Debt-Free Living
I believe being frugal and avoiding debt is the basic foundation of financial success. In general, the whole idea can be distilled down to these 5 tenets:
- Spend Less than You Earn
- Buy Only What You Can Afford — This means you should not get into debt to buy things. Also, you should reduce your reliance on credit cards, and make a habit to pay off your balance in full every month.
- Cut Your Expenses — A good place to start is by setting up a budget. If you don’t budget, a money management tool like Mint.com or Personal Capital can make the process easier.
- Reduce Your Debt — With the exception of your home mortgage, you should actively try to eliminate your debt. A good place to start is learning about Dave Ramsey’s Debt Snowball or read our guide on How to Get Out of Debt Fast.
- Make Every Dollar Counts — Stretch your money and make every dollar count. A good place to start is with 40+ Ways to Save Money, Lower Your Bills, and Cut Expenses.
2. Bear-Proof Your Investment Portfolio
Over the years, I have come to believe that the best long-term investment strategy is to have a great Asset Allocation Plan and leverage a globally diversified investment portfolio consists of low-cost passively-managed ETFs that reflect your risk tolerance level and investment time horizon. This is a strategy that Larry Swedroe advocates, and you can read it in his book: The Only Guide to a Winning Investment Strategy You’ll Ever Need.
There are two main parts of this strategy:
- Have an Asset Allocation Plan – The plan should truthfully reflect your risk tolerance level and investment time horizon. Make sure you can live with the worst-case scenario and that you won’t panic sell. If this means moving your money to lower-risk investments, then do it.
- Diversify — Spread your investment across different asset classes, sectors, countries, and diversify beyond equities.
There are also numerous tactics to prepare your portfolio for a crash and invest during market downturns.
3. Establish an Emergency Plan
If you lose your ability to generate income, do you have enough cash reserve to stay afloat? More importantly, do you have an emergency plan to keep you out of trouble? Here are some good articles to get you started:
- Emergency Fund: Your Safety Net Against Financial Emergencies
- How Big Should an Emergency Fund Be?
- 10 Tips for Surviving on a Limited Budget
4. Protect Your Job
For most people, their job is their biggest source of income. During a recession, the chance of unemployment increases dramatically. Fortunately, there are a few things that you could do to protect your job.
- Networking — If you haven’t done it already, this is a great time to start.
- Get to know your peers and the higher-ups better.
- Take on special projects that expose you to other people outside of your immediate workgroup.
- Join caucus groups, industry groups, and associations.
- Help your company increase profit and revenue
- Help your company reduce expenses
- Make sure your good work gets noticed
- Expand your skillset — Getting a new certification or skill can make one much more marketable.
5. Diversify and Grow Your Alternative Income Streams
Now that you all your bases covered, it’s time to think about different ways to increase your income. If you are reluctant to start building alternative income streams, I’d like you to consider this statement carefully:
Your job is not going to be there forever. You can’t work forever. And you can’t retire until you figure out a way to replace income from your job.
Don’t wait. The best time to start building your alternative income streams is now.
You cannot control the economy, but you can control your finances. There are steps you can take to put you in a better position to withstand an economic crisis. Regardless of the economy, these 5 steps contain responsible and sensible financial management strategies — something that should be practiced daily, and not only during an economic turmoil.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.