It’s not a matter of if but when the next economic recession will strike. Even though the stock market continues to hit new record highs, those economic dark clouds are right around the corner. If a recession were to happen today, could you financially survive? If not, don’t panic! There’s still time to prepare.
Make An Emergency Fund
The first step you must take to prepare for an economic downturn is building an emergency fund.
At a minimum, you need three months of living expenses set aside into your bank account. If your monthly expenses are $2,500, you need to save up $7,500 in your emergency fund. Why do you need so much money?
In the peak of the 2009 Great Recession (remember that event?), it took the average unemployed worker three months to find a new job. Because many families didn’t have an emergency fund when they lost their jobs, they charged their monthly expenses to their credit cards until their balances were maxed out. Not only did they not have a job, they also had a mountain of credit card debt with sky-high debt.
No wonder why the American Dream is disappearing for many across the country.
Do yourself a favor and start making an emergency fund now. Try to save at least $100 a month until you reach the three-month mark. Remember, try to contribute as much as possible each month to save up as much as possible before the next recession hits. Hopefully, you won’t have to use your emergency stash but you will be glad you did.
You might decide to start a side hustle and use the extra income to build your emergency fund when your regular job’s salary isn’t enough.
Pay Off Your High-Interest Debt
If you currently have a monthly payment and some money in your emergency fund or savings account already, the better option might be paying off your current loans. By eliminating a monthly payment, your monthly expenses automatically drop.
Let’s assume one of your monthly payments is $500. By paying off the balance, your monthly expenses drop from $2,500 to $2,000. And, your three-month emergency fund only needs to be $6,000 instead of $7,500. That’s $1,500 fewer dollars you have to save, plus you’ll pay less in loan interest by making extra payments.
The sooner you get out of debt, the sooner you can begin using your disposable income to build your net worth by earning passive income, saving for large purchases that you might have to make (& borrow money for) in the economic recession, saving for retirement, or building your emergency fund to have six months of living expenses.
Once any personal loans, medical debt, and past due credit card balances are paid off, you might also consider making extra mortgage payments.
Reduce Your Monthly Expenses
If you want to dedicate more money to building an emergency or moving up your debt-free target date, cut your monthly expenses wherever possible.
Here are a few examples:
- Cook your own meals more often
- Stream cable tv
- Switch to a prepaid cell phone plan
- Rent DVDs instead of goign to the theater
- Take a less-expensive vacation
- Pay your bills on-time (no late fees=more money in your pocket)
The possibilities are almost endless, but you get the point. The less you spend on one-time purchases, the more money you can put into your savings, investments, or loan payments to have more money later down the road.
Sell Your Excess Depreciating Assets
If you need to raise cash fast, also consider selling your depreciating assets. When an economic recession hits, the values of many “luxury” items like boats, jet skis, and cars drop in value.
Why?
People who can’t afford the monthly payments, must sell these assets at a discount because they need the money before the next monthly payment is due. Selling your items now, before there’s high supply and low demand, can help improve your chances of earning more money from the sale.
If you have the time and energy, consider selling your vehicles on Craigslist. Trading-in your vehicle almost always results in a lower commission because the dealer needs to leave room to profit. If your car has a Kelley Blue Book value of $10,000, a dealer might only offer $to buy it for $7,000. This gives him some “wiggle room” to negotiate down with a potential buyer who might only be willing to pay $9,500. If so, the dealer still makes $2,500 to feed his family and pay the other additional dealership overhead.
Once you sell your car or other unused property, you can instantly make a lump sum deposit to pay off a loan or build your emergency fund. That way, if you can only save $100 a month because you have little disposable income, you don’t have to “hope” the recession doesn’t land until 5 years from now when you finally have three months of livings expenses saved up.
Be Prepared to Buy Discounted Investments
By having an emergency fund, avoiding debt, and keeping your monthly expenses as low as possible, you are in a perfect position to buy discounted investments when the recession finally hits and stocks come off their record highs. While your standard investment philosophy should be dollar cost averaging, buying additional high-quality investments at a discount can let you boost your net worth when the economy rebounds and the price of stocks, real estate, and other investments rebound.
Let’s take investing for instance. At it’s lowest point, the Dow dipped below 10,000 points. In the current bull market, the Dow has exceeded 24,000 points. If you invested in an index fund during the worst of the Great Recession, your investment would have doubled! That means a $10,000 investment would easily be worth $20,000 and you didn’t have to work for it because it’s all passive income!
Keep a Positive Attitude
Attitude is Everything!
The final step is to keep a positive attitude no matter what! We don’t know when the next economic recession will hit and how bad it might be. It could be on par with the Great Depression of the 1930s (the worst economic downturn in American history) or is could just be a small panic that only takes a few years to recover from.
While even the most financially prepared will feel uncertain at times, remaining positive will help you keep a clear mind to make sound financial decisions. Negativity can affect all areas of your life and cause you to make short-sighted decisions, including giving up on boosting your emergency fund or making extra debt payments because it’s “too hard.”
Recessions usually don’t make life easier, but an optimistic point of view is crucial in good times and bad times.
Summary
While we don’t know when the recession will hit, we know it’s coming. Like you might prepare for a natural disaster or plan for a vacation, take steps now to prepare for an economic downturn. If the financial worst does arrive, you will be prepared and not go into debt like those who didn’t prepare.