Recession-proof your finances
Monday, 9 September 2019
U.S. economists disagree about when we may see the next recession. But economies are cyclical, and a financial downturn is bound to happen eventually.
You don't have to be scared by the potential of a global recession. Instead, you can take some important steps to protect your finances from the negative effects of prolonged economic decline. Here's what to do now to help you sail smoothly through the next period of national or global financial difficulties.
Build an emergency fund
If you don't have an emergency account with enough money to cover at least three months of expenses, now is the time to start (or continue) building it. The key is to sock away as much money as you can into a savings or money market account so that in case of an emergency such as a layoff or an unexpected home or appliance repair, you can manage for a few months without too much worry.
If saving up three months' worth of expenses seems overwhelming, focus on simply saving 10 percent of your monthly or weekly income. If you save $125 each week, you'll have $2,000 saved up within four months. And once the money reaches your savings account, leave it there. Remember, this fund is strictly for emergencies, but it can ensure that you're prepared for a potential recession.
Pay off debt
Spending a portion of every paycheck to cover debt obligations means you have less money available to spend and save. Working now to pay off credit cards or other debts means you'll have more money to set aside for emergencies—and if the economy tanks, you may need credit available just in case.
Focus on paying as much as possible on your debt with the largest balance or the highest interest rate, while paying the minimum payment on other debts. When you've paid off the biggest debt, move to the next largest balance and so on. Getting out of debt, especially high-interest consumer debt, will allow you to face a potential recession with fewer worries — even if your income is reduced, you'll be able to use all of it for savings and current expenses rather than paying off past purchases.
Improve your credit score
If your credit score is lower than ideal, it could be costing you money. Individuals with lower credit scores are often required to pay more for insurance, utility deposits, interest and fees on credit cards or other forms of credit.
Rather than continuing to pay more money, work to improve your score. Getting out of debt can possibly help increase your credit score, as well as paying all bills on time. Avoid applying for new credit and work to get your debt to income ratio to 36 percent or lower. That means if you bring home $10,000 a month, no more than $3,600 of it should be needed for debt payments.
Create additional income streams
Even if you have a hefty emergency fund and could make ends meet for three to six months without earning any additional income, that doesn't mean you'd want to have to use it.
If you really want to recession-proof your finances, seek additional ways of earning income. That may mean starting a side gig, such as driving for Lyft or taking photographs for friends' weddings, aside from your full-time job. It could mean taking on a part-time or seasonal job, or investing in a rental property. When you have more avenues of earning income, it's less damaging if one of them dries up in a recession or economic downturn.
Review your retirement plans
If the economy gets difficult, some employers may offer voluntary early retirement packages to older workers in order to avoid more widespread layoffs. If you're 50 or older, it's a good idea to determine now whether you'd be prepared to take such a deal. Take time to review your retirement account and possibly talk to a financial advisor to determine where you stand. If your retirement account is healthy and your company offers a strong severance package, that could be a viable option for you—especially with the possibility of taking on another job in the near future.
However, if your retirement fund isn't fully funded yet, and you need a significant number of income-earning years to continue preparing for that, you'll know that accepting an early retirement package may not be the best bet for you.
The prospect of a recession can seem scary to anyone, but if you've taken appropriate steps to prepare your finances for a downturn, you can face the future with more confidence.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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